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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