Handbook for Directors of Financial Institutions

Handbook for Directors of Financial Institutions

Elgar original reference

Edited by Benton E. Gup

Offers advice from existing directors, scholars and regulators about what good directors need to know. The Handbook for Directors of Financial Institutions offers the practitioner and the scholar a comprehensive guide to what it takes to survive and thrive as a director of a financial institution. The authors comprise current directors of banks, credit unions, insurance companies and other organizations, bank regulators, lawyers and academics. They provide unique insights and advice about corporate social responsibility, legal risks, starting a new bank, D & O insurance, sub prime lending, Islamic banking, and other timely issues.

Chapter 5: The Risks of Directing a Financial Institution

Ben S. Branch and Robin Russell

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, law - academic, corporate law and governance, finance and banking law


5 The risks of directing a financial institution Ben S. Branch and Robin Russell WARNING: Serving as a Director of a Financial Institution is Risky to your Economic Health: You may be sued by the FDIC, the SEC, the IRS, Shareholders, Creditors and others. Your indemnification may be worthless. Your D&O insurance coverage may be void or inadequate. Proceed at your own peril. Introduction The banking crisis of the 1980s and the resulting litigation against the officers and directors of the failed banks caused many qualified individuals to become reluctant to serve. This restricted the pool of qualified candidates. In December 1992 the Federal Deposit Insurance Corporation (FDIC) issued a statement “in response to concerns expressed by representatives of the banking industry and others regarding civil damage litigation risks to directors and officers of federally insured banks”1 in which it concluded that “the FDIC will not bring civil suits against directors and officers who fulfill their responsibilities, including the duties of loyalty and care, and who make reasonable business judgments on a fully informed basis and after proper deliberation.” While comforting on the surface, the FDIC’s statement did little more than articulate established corporate governance principals. When the next banking crisis hits (and it will), we anticipate that directors of financial institutions will once again become litigation targets. Because banks operate on thin margins with thin capital, income statements and balance sheets can be quickly devastated by either an economic downturn...

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