Official or Not, Community Banks Face Heightened Expectations Too

When it comes to regulations, community banks would do well to abide by the Boy Scout motto: be prepared.

The Office of the Comptroller of the Currency in September published final guidelines setting minimum standards for the risk governance frameworks of OCC-regulated banks with over $50 billion in assets. Under the guidelines, boards of large banks are expected to "actively oversee" their institution's risk-taking and "question, challenge and, when necessary, oppose" recommendations and decisions made by senior management that could cause the bank to exceed its board-approved risk appetite.

The OCC explicitly states that the guidelines do not apply to community banks. Institutions with less than $50 billion in assets will only have to abide by them if the OCC determines that a particular bank's operations are highly complex or otherwise present a heightened risk. I do not question the sincerity of the OCC's assertion-but community banks and their boards are not off the hook.

My experience as both internal and external legal counsel to banks over more than four decades leads me to suspect that when the OCC and other examiners review the risk management performance and governance practices of community banks and their directors, their expectations will be significantly influenced by the minimum standards for large banks set forth in the guidelines. That is, examiners will not require community banks to meet the new requirements. But they are likely to expect that a well-managed community bank's board will have incorporated into its risk management oversight the guidelines' fundamental principles, in a manner downsized and tailored to reflect the community bank's more modest size and decreased level of complexity.

Accordingly, boards of community banks and their counsel would be well-served by a review of the guidelines prior to their bank's next regulatory examination. They should consider whether scaled-down versions of certain aspects of the guidelines would strengthen the risk management governance of their institution and potentially lead to superior evaluations of board oversight by bank examiners.

Here, to begin the discussion, are six questions derived from the guidelines that should prompt a useful discussion among community bank boards:

• Active Board Oversight. Does each director have a sufficient understanding of the bank's risk-taking activities to oversee and approve the bank's risk-taking limits and when appropriate, "credibly challenge" the recommendations and decisions of senior management? 
• Resource Allocation and Stature. Has the board taken steps to see that the risk management, internal audit and loan review officers at the bank (or the independent third-party providers of those services) have been allocated sufficient resources to carry out their respective responsibilities and to see that those independent functions have appropriately high organizational stature?
• Director Education. Do all directors receive formal, ongoing training that takes into account a director's knowledge and experience and that reflects the risk profile, products and services and compliance requirements of the bank? 
• Accountability. Does the board need to take additional steps to more effectively hold managers accountable for failing to meet their risk management and compliance responsibilities?
• Self-Assessment. Does the board conduct an annual self-assessment that identifies opportunities for improvement and, importantly, does that assessment lead to specific changes that are tracked, measured and evaluated?
• Documentation. Since only documented actions tend to carry significant weight with bank examiners, should the minutes of board and board committee meetings include more detailed descriptions of issues discussed and differing views expressed before actions are adopted?

Answering these questions should help banks analyze and discuss the guidelines' governance principles and practices in a meaningful way. This will send a strong message to a bank supervisory agency that the bank board has a robust governance culture and process.
Eric Fischer is a senior fellow at Boston University's Center for Finance, Law and Policy whose research focuses on bank corporate governance, board composition and director education matters. He recently retired as a partner from Goodwin Procter LLP's banking practice.