Last week, Bank Director published a piece titled “77 Percent of Bank Boards Approve Loans. Is That a Mistake?”
In case you didn’t get it from the title of this blog post, I think the answer is absolutely, 100 percent, yes! Bank Directors should not be approving individual loans, and Banks should not be asking their Directors to approve individual loans.
77 percent of executives and directors say their board or a board-level loan committee plays a role in approving credits, according to Bank Director’s 2019 Risk Survey. And Boards of smaller banks are even more likely to be involved in the loan approval process. According to the survey, almost three quarters of banks over $10 billion in assets do not have their directors approve loans, but over 80% of banks under $10 billion in assets continue to have board-approval of certain loans.
These survey results generally conform to our experience. Two weeks ago, Jim McAlpin and I had the pleasure of leading five peer group exchanges on corporate governance at the 2019 Bank Director Bank Board Training Forum. The issue of board approval of loans came up in multiple peer groups, but the reaction and dialogue were radically different based on the size of the institutions involved. In our peer group exchange involving the chairmen and lead directors of larger public institutions, one of the chairman phrased the topic along the lines of “is anyone still having their directors approve individual loans?” Not one director indicated that they continued to do so, and several agreed that having directors vote on loans was a bad practice.
A few hours later, we were leading a peer group exchange of the chairman and lead directors of smaller private institutions. Again, one participant raised the issue. This time the issue was raised in an open manner, with a chairman indicating that they’d heard from various professionals that they should reconsider the practice but so far their board was still asking for approval of individual loans. A majority of the directors in attendance indicated concurrence.
As discussed in the Bank Director story, there are numerous reasons why a board should not be involved in approving individual loans:
- no regulatory obligation or expectation to approve loans (other than Regulation O);
- directors should be focused on bigger picture items, like policies and procedures, strategic planning, and ensuring they have the right management team to implement that strategic plan;
- focusing on individual loans can take the directors’ eyes off the bigger picture;
- the continued ability to provide input on lending practices without undertaking approval authority;
- the lack of director training with regard to underwriting practices (i.e. leave underwriting decisions to the professional bankers); and
- the liability assumed in making individual loan approvals.
We continue to believe that bank boards should move away from the practice of making underwriting decisions on individual credits absent a specific legal requirement in order to enhance board effectiveness, not just to avoid potential liability. Our white paper on Why Your Board Should Stop Approving Individual Loans analyzes what the board’s role should be in overseeing the bank, and why approving individual loans threatens this oversight.