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Early this month, the FDIC proposed, by a 3-2 vote, new corporate governance and risk management standards for certain FDIC-regulated institutions. This Mayer Brown publication discusses the history of governance and risk management at state-chartered banks and gives this high-level assessment:

The Proposed Standards would establish extensive and rigid requirements for a wide range of state-chartered banks. Further, they would reverse decades of reliance on state law for establishing governance and oversight obligations. […] The Proposed Standards lean toward a rules-based approach to corporate governance, in contrast to the principles-based approach that is prevalent under state law. Critics will observe that the Proposed Standards are presented as “good corporate governance” without appreciating that what is “good” for one bank may not be “good” for another and that achieving “good corporate governance” results not from uniform regulatory mandates but from default rules that can be tailored and fiduciary duties that can be fit.

The Proposed Standards would require many small, community banks to establish and operate extensive, formal risk management frameworks. The financial cost and time required by the board and management to stand up such programs, build relevant systems, and sustain them would impose a significant burden on affected banks.

The alert states that approximately 60 banks would currently be covered by the standards — that is, “state-chartered nonmember insured banks, state-licensed insured branches of foreign banks, and state savings associations that have $10 billion or more in total assets.” Here’s the memo’s summary of the corporate governance expectations:

The Proposed Standards would address the obligations, composition, duties, and committee structure that the FDIC expects bank boards to satisfy as part of good corporate governance.

Obligations. Covered directors would have a duty to safeguard the interests of the bank and confirm that the bank operates in a safe and sound manner and in compliance with applicable federal and state law. A board, in supervising the bank, should consider the interests of all its stakeholders, including shareholders, depositors, creditors, customers, regulators, and the public.

Composition. Covered boards would be required to consider how the selection of and diversity among board members collectively and individually may best promote effective, independent oversight of bank management and satisfy all legal requirements for outside and independent directors. A bank board should include a majority of outside and independent directors.

Duties. Covered boards would need to (i) set an appropriate tone and establish a responsible, ethical corporate culture; (ii) evaluate and approve a strategic plan; (iii) approve and annually review policies; (iv) establish and annually review a written code of ethics; (v) actively oversee the bank’s activities, including all material risk-taking activities; (vi) exercise independent judgment; (vii) select and appoint qualified executive officers; (viii) establish and adhere to a formal training program; (ix) conduct an annual self-assessment of its effectiveness; and (x) establish and annually review compensation and performance management programs.

Committee Structure. Covered boards would be required to implement an organizational structure to keep directors informed and provide an adequate framework to oversee the bank. At a minimum, a board would need to have an audit committee, compensation committee, trust committee (if it has fiduciary powers), and risk committee. It also should have any other committees that are necessary for the board to perform its duties. Each board committee would need a board-approved written charter outlining its purpose and responsibilities that is reviewed annually.

Finally, the proposed standards relating to risk management largely track the “Heightened Standards” adopted by the OCC in 2014 for larger federally chartered banks but “go into considerably more detail than the Heightened Standards and impose more extensive obligations.” We’re posting the Proposed Standards and related memos in our “Financial Institutions” Practice Area.

– Meredith Ervine