Adequate Policies, Procedures and Limits

As a director, you need to ensure the board has established policies to cover significant business activities. Through these policies, the board provides guidance to management on the boundaries or limits of the bank's risk taking.

Policies can be simple or complex, depending on the bank and the nature of its operations. Policies can be communicated verbally or in writing depending on the needs of the bank. Today, most banks put their policies in writing to help lessen misunderstandings.

Each policy takes into account the multiple needs of a bank. For example, the loan policy not only provides guidance and control over the bank's lending function, but also addresses the function's effects on the bank's liquidity position and its market risk.

Although the specifics of policies vary from bank to bank, they generally have features in common. Most start with a statement of objectives followed by sections outlining how these objectives will be met. More specifically these sections address:

• Who is responsible - or lines of authority under the policy.
• What is permitted and not permitted - or limits under the policy.
• When action should be taken and deadlines for completion.

These guidelines assist bank management in devising procedures and implementing systems to meet policy objectives.

Policies must also to take into account the bank's financial strength, the complexity and size of its operation and the expertise, experience and competency of its management and staff. For example, in the case of a bank that has experienced a large amount of loan loss, the board may modify its loan policy to reduce the size of loans that individual loan officers can make. The board may take a similar action in instances where there has been significant staff turnover, as when seasoned loan officers are replaced by less experienced individuals.

These examples also point to the need to periodically review policies. Most boards approve their policies annually. This review entails taking into account internal changes at the bank and external changes to the bank's operating environment; e.g., as inexperienced staff become experienced, risk management tools and business methods improve and the economy improves or deteriorates. These and other changes necessitate that policies be reviewed and renewed to ensure they reflect the bank's changing environment and the board of directors' current tolerance for risk.

For a quick reference guide, you may review and print the Basic Elements of Policies.

The board of directors has responsibility for establishing boundaries or limits on a bank's risk taking.
	True
	False	An important responsibility of the board of directors is to establish limits on a bank's risk taking.

Bank policies are important tools for communicating the board of directors' risk tolerance to a bank's staff.
	True
	False	Bank policies convey the board's tolerance for risk and are an important risk control tool. Among other things, policies set out responsibilities, provide limits and establish time frames for matters covered under the policy.