During the 1980s and early 1990s more banks failed in the United States than any other time since the Great Depression. Most of these failures occurred because of unwise credit decisions. Although more recent failures have stemmed from fraud and poor internal risk management controls, effectively managing credit risk continues to be of paramount concern for most banks. As a result, bank management and directors spend considerable time and energy identifying, monitoring and managing a bank’s credit risk.

It is not surprising that reports on lending and discussion of these reports figure prominently in most board meetings. This is certainly the case at Insights Bank and Trust where the growth of the “Visions for Success” program is swelling the bank’s loan portfolio.

Many states have laws that require board approval of all loans that exceed a specified percentage of a bank's capital. For Insights Bank and Trust, board approval is required for all loans over 5% of the bank's capital, or $168,800 as of September 30, 1994, the month before this meeting takes place. The Harvard Westerman loan is not only in excess of 5% of Insights Bank and Trust’s capital, but the requested amount also is above the bank’s in-house lending limit. Insights loan policy states that their in-house lending limit will be fifty percent of the bank's legal lending limit.

Many factors can initiate actions by the loan committee or board for approval of a loan. Often it is large loans, simply because of their size and potential capital exposure, and those that present policy exceptions that require action by the bank’s highest lending authority. Do you know the specifics about what requires board approval for lending decisions at your bank?