WASHINGTON — The Federal Deposit Insurance Corp.'s proposed guidelines on corporate governance are problematic and could discourage talent from joining the boards of FDIC-regulated banks, state regulatory advocates and industry experts say.
"I think the sense is that A, it's probably not necessary, and B, it is overreaching, both as to its scope and in that it diminishes the roles of the states in the regulation of their own banks," attorney Gregory Lyons of Debevoise and Plimpton said. "The concern is that the FDIC [guidelines] will make the standards much higher than it would be for a nonbank entity … and that it might discourage qualified people from becoming banking directors and officers, because they're afraid of lawsuits."
The FDIC released proposed guidelines a year ago aimed at strengthening governance and risk at the banks it supervises, the majority of which are state nonmember banks. The guidelines apply to relatively smaller firms — those with $10 billion or more in consolidated assets — which are just a slice of the banks the FDIC supervises. The guidelines were developed at least partially in response to the
One issue for critics of the guidelines are new fiduciary responsibilities that the FDIC is proposing for bank executives. Brandon Milhorn, president and CEO of the Conference of State Bank Supervisors, which represents state regulators, said the new legal liability could make it harder for banks to recruit qualified board members.
"The rule … seeks to establish a whole host of additional fiduciary responsibilities to creditors, customers, depositors, regulators, the public, all based on a vague safety and soundness authority, and all in contravention of most states' corporate fiduciary responsibility laws," Milhorn said. "Who wants to serve on boards that have undefined duties that present undetermined and vague legal risk for the individual board members?"
Generally, corporate directors are shielded from personal liability — from, say, a bank failure due to poor risk management — as long as their decisions are deemed to have been made in good faith under a legal principle known as the business judgment rule. Proponents of the principle say it provides directors with flexibility in their decision-making.
The business judgment rule provides a certain level of flexibility," Lyons said. "This is a fairly well regarded and well known standard for business of care, business duty of care, duty of loyalty and what needs to be done to get that."
Milhorn said the governance guidelines would in many instances preempt such state law. The guidelines subject boards to stricter fiduciary duties by extending their obligations beyond shareholders.
"The fiduciary responsibility rule clouds that framework," he said. "As a board member, how do I balance shareholders' interests versus creditors' interests versus depositors' interests versus the public's interest versus regulators' interests — interests which may all be completely unaligned?"
Consumer advocates like Shayna Olesiuk, director of banking policy at Better Markets, said the proposal is an appropriate response to recent industry turmoil. Olesiuk — who served 23 years at the FDIC — said the 2007-2009 financial crisis and the spring 2023 bank failures proved how damaging inadequate corporate governance can be, both for individual banks and the financial system alike.
"The FDIC's proposed size threshold is appropriate and prudent. As firms grow larger their complexity increases, the damage that their failure can cause to the American public and the financial system increases," Olesiuk said. "Moreover, it would only apply to 57 of the 3,012 banks that the FDIC supervises — those with total assets of $10 billion or more — none [of these] banks are headquartered in rural areas where finding individuals with professional banking experience might be difficult."
The guidelines draw from similar frameworks by the
The FDIC guidelines would apply to a wider number of banks because the agency regulates mostly smaller, state-chartered nonmember banks, whose primary regulation happens at the state level.
"There's a sense … is it really necessary at all given that, the premise is that banks have spent a lot of time on governance over the past several years," Lyons said. "It could be perceived as reducing the direct influence of the state regulators on these banks, even though they are the primary regulator."
When compared to similar standards at other federal agencies, the FDIC guidelines hold bank boards to a higher bar, he said.
"With the Fed's [guidance], they tried to scale it back a bit in light of the concerns of liability risk and so forth and similarly with the OCC, but the FDIC doesn't seem to have gone along with that yet," Lyons said.
"And so it does raise concerns that it could force banks to have a choice at some level of either getting criticized by the agency for having insufficient detail on their board minutes and insufficient documented recognition of issues, accountability and addressing such issues, versus having plaintiff attorneys and others bring claims against the bank, basically looking at their minutes and saying here's a claim we think is appropriate," he said.
The FDIC guidelines, unlike the Fed and OCC standards, are also enforceable, in that the FDIC could force bank boards to submit additional disclosures and plans if they are found to be noncompliant with the guidelines. Milhorn said that's just one of the issues.
"It's not just that they're enforceable; it's that they're micromanaging, process-focused and enforceable," he said. "The combination of the three is an impediment to the evolution of risk management."
Sen. Thom Tillis, R-N.C, alongside a cohort of Senate Banking Committee Republicans,
One of the Republican FDIC board dissenters, Vice Chair Travis Hill, detailed his concerns with the proposal this week
"I think that a number of the expectations that would be put on towards the directors of banks were unrealistic in terms of what we could realistically expect … and incompatibility with state law," Hill said. "I don't know when that will come back to the board and I don't know to what extent comments will be incorporated."
The FDIC board may not be fazed by industry pushback. Lyons said the current FDIC leadership, especially under the Biden administration, has taken a heavy-handed approach to regulating banks, pushing through new regulations in response to the recent turmoil in the banking industry.
"I think they feel as though they've got skills, and they've got expertise that they think they want to convey to these banks … despite Marty Gruenberg's pending departure — whenever that happens — and potentially a change in administration, they've shown no indications of slowing down on their stronger rulemaking proceedings," Lyons said. "It wouldn't surprise me if this is finalized as well."
