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Director responsibilities		 Understanding Banks
and Bank Regulation		 Practice  
 
Exercise 1

You have just completed a talk at the local high school on banks and their role. It is question-and-answer time and a student asks, “What is a bank?” The student notes that saving and loan institutions and credit unions, among others, provide services similar to those that banks offer. So, what is the difference?

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You might answer like this: The definition of a bank depends on the context in which the term is used. Most often, it refers to a corporation that holds a bank charter, which offers deposits payable upon demand (checking accounts), and has FDIC deposit insurance. Historically, banks have tended to offer a full spectrum of shorter-term loan products (commercial, consumer, agricultural and real estate loans). The services that savings and loans and credit unions offer have traditionally been more limited—savings and loans focused on longer-term home finance and credit unions focused on shorter-term consumer finance, e.g., car loans, home improvement, etc. As our financial system has evolved, distinctions among these institutions’ products and services are not as great as they once were. Thus, the bank’s charter makes it different from other depository institutions.

Exercise 2

Wilford Simms, a director of Insights Bank and Trust, proposes to borrow $50,000 from the bank to buy a new SUV. Wilford has little debt, high net worth and earns a six-figure income from his business and investments. The board is hearing this request because Wilford is a board member. What laws and regulations would you or your fellow directors want to discuss or consider before making the loan? Would you want additional information before you considered Wilford’s request? Should Wilford participate in the discussion as the board deliberates his loan proposal?

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You should consider Regulation O and lending limit regulations as you deliberate Wilford’s loan request. Regulation O pertains to the terms (interest rates, maturity, etc.) insiders receive on loans. As a director, Wilford is an insider and Regulation O would apply to extensions of credit made to him. For Regulation O purposes, you would want to know the loan terms to ensure that Wilford is not receiving terms more generous than other customers of the bank. You would also want to know if he has other debt at the bank because there are limits to the amounts that can be lent under Regulation O.
Lending limit regulations might also apply. Lending limits restrict the total borrowing relationship with borrowers and their related interests (e.g., businesses they own or control). Consequently, you would want to know the current balances on all outstanding loans to Wilford and his family members and affiliates, on loans for which he is a co-signer and on loans which he is a guarantor to ensure the bank stays within limits.
Regarding the board discussion, Wilford should excuse himself from that part of the meeting when his loan is being discussed. Further, he should abstain from any vote relating to his loan.

A bank is a specifically defined, legal entity.
True
 
False
   
Because of states’ rights, banks are only chartered by state governments.
True
 
False
   
It is the charter that a banking authority issues and the deposit insurance that separate banks from other corporations.
True
 
False
   
A national bank is called “national” because it operates in more than one state.
True
 
False
   
Banks operate under an extensive set of laws and regulations because they make loans.
True
 
False
   
In a bottom line, results-oriented world, bank directors’ decisions regarding a bank’s activities and operations needs to focus mainly on the profitability; other matters, although important, are of secondary importance.
True
 
False
Because of their supervisory and regulatory activities, the banking agencies are a valuable resource for bank directors.
True
 
False
A bank’s senior management is ultimately responsible for the bank’s regulatory compliance.
True
 
False
Safe and Sound National Bank operates in four Midwestern states. Who is the bank’s primary supervisor?
Because the bank operates in four different states, it is supervised by each state.
 
Safe and Sound’s primary supervisor is the FDIC.
Safe and Sound’s primary supervisor is the Office of the Comptroller of the Currency
Safe and Sound is a state-member bank; consequently, its primary supervisor is the Federal Reserve System.
An important advantage of the corporate business form is that owners do not have to manage the business on a daily basis. This advantage can also serve as a disadvantage because managers may have different goals than owners.
True
 
False
Corporate governance is a system of checks and balances intended to stop the intrusion of owners into the management of the daily affairs of a bank.
True
 
False
Bank supervisors are neither an internal nor an external player in the bank’s corporate governance system and as such play no role in the governance process.
True
 
False
The board of directors sits on top of a bank’s organization chart and is ultimately responsible for a bank and its successful operation.
True
 
False
Because they are not actively involved in daily management of a bank, outside directors bring an unbiased perspective to decisions regarding the bank and its operations.
True
 
False
A frequently mentioned best governance practice is to have the majority of a board made up of inside directors because these directors are involved in daily operations and can make the best decisions for a bank.
True
 
False
The ultimate governance failure is the closure of a bank.
True
 
False
Reference View
Print This Page
Ten Commandments for Directors
Ageless Advice from a Bank Supervisor
The Balance Sheet
The Income Statement

Minutes from Previous Board Meeting
Common Board Committees
Corporate Governance: Consequences of noncompliance
Corporate Governance: What is Risk?
Corporate Governance: 10 Best Practices
Sample Director Self-Assessment

Your Orientation
A History in Minutes
Your Bank's Supervisor
Board Basics for your Bank
Red Flags for the Board of Directors
Why Boards Have Committees
Your Board's Committees
Supervisory Actions
Your Audit Committee's Charter
Red Flags for your Audit Committee
Spotlight on the Audit Committee

 

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