The role of bank directors has grown in complexity. In addition to selecting and retaining competent management, monitoring operations and overseeing the bank’s performance, bank directors are encouraged to be more involved with regulatory oversight. Follow these best practices to enhance board regulatory oversight.
1. Set the tone.
According to Andrew Olszowy, Consumer Compliance Examinations Manager for the Federal Reserve Bank of Boston, “The most effective compliance risk management programs are proactive and driven by the board of directors. By engaging the compliance function, the board establishes the expectation that compliance is a priority, thereby establishing a ‘culture of compliance’.”
2. Define the board’s responsibilities.
Articulate and document the specific responsibilities, scope and duties of the board. They should be consistent with regulatory requirements and risk management policies.
3. Be familiar with regulatory agencies.
Do your homework. Come prepared to board meetings and be fully aware of the regulatory agencies and requirements the bank must satisfy. Understand how regulatory agencies oversee and view the bank.
4. Conduct a board self-assessment.
Evaluate the board performance and effectiveness. Peer review is an important element in achieving board oversight.
5. Understand the bank’s lending parameters.
Do research to know which lending parameters currently apply to the bank and how those parameters compare to the bank’s competitors.
6. Discuss risks with senior executives.
Develop formal guidelines with management for communicating, reporting and escalating risks. Schedule regular meetings with management and review the bank’s risk management policies.
7. Consider creating a risk oversight committee.
Form a risk oversight committee to establish risk as a bank’s focus. The formation of this committee does not relieve the directors of their responsibilities, but proactively addresses risk. The decision to form a risk oversight committee may depend on the size and complexity of the bank’s operations, the board members’ expertise and the number of current board committees.
8. Evaluate directors’ skills and competencies.
Document the skill-sets required of the board of directors, which may include financial literacy, knowledge of the banking industry, objectivity and knowledge of the community. In addition, board members may be required to have expertise in risk, or designate a “risk expert.”
9. Stay informed.
Follow industry trends and regulatory developments, attend regular meetings, review
meeting materials, auditor’s findings, recommendations and supervisory communications. The regulatory environment changes rapidly for financial institutions; it’s critical that directors stay informed. Seek regular training and education.
10. Understand the bank’s risk appetite.
Work closely with compliance management to understand and address risk. When a regulatory issue develops, ask questions: What is the change and why was it adopted? How does it affect our financial institution? What is the risk of noncompliance? What is the cost of compliance? Do we have a plan to implement the change?
Source: Consumer Compliance Outlook: Third Quarter 2009
