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5000 - Statements of Policy
{{4-30-97 p.5369}}
Statement Concerning the Responsibilities of Bank Directors and
Officers
The Federal Deposit Insurance Corporation is issuing this 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.
Duties of Directors and Officers
Service as a director or officer of a federally insured bank
represents an important business assignment that carries with it
commensurate duties and
responsibilities. 1
Banks need to be able to attract and to retain experienced and
conscientious directors and officers. When an institution becomes
troubled, it is especially important that it have the benefit of the
advice and direction of people whose experience and talents enable them
to exercise sound and prudent judgment.
Directors and officers of banks have obligations to discharge duties
owed to their institution and to the shareholders and creditors of
their institutions, and to comply with federal and state statutes,
rules and regulations. Similar to the responsibilities owed by
directors and officers of all business corporations, these duties
include the duties of loyalty and care.
The duty of loyalty requires directors and officers to administer
the affairs of the bank with candor, personal honesty and integrity.
They are prohibited from advancing their own personal or business
interests, or those of others, at the expense of the bank.
The duty of care requires directors and officers to act as prudent
and diligent business persons in conducting the affairs of the bank.
This means that directors are responsible for selecting, monitoring,
and evaluating competent management; establishing business strategies
and policies; monitoring and assessing the progress of business
operations; establishing and monitoring adherence to policies and
procedures required by statute, regulation, and principles of safety
and soundness; and for making business decisions on the basis of fully
informed and meaningful deliberation.
Officers are responsible for running the day to day operations of
the institution in compliance with applicable laws, rules, regulations
and the principles of safety and soundness. This responsibility
includes implementing appropriate policies and business objectives.
Directors must require and management must provide the directors
with timely and ample information to discharge board responsibilities.
Directors also are responsible for requiring management to respond
promptly to supervisory criticism. Open and honest communication
between the board and management of the bank and the regulators is
extremely important.
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.
Procedures Followed to Institute Civil Lawsuits
Lawsuits brought by the FDIC against former directors and officers
of failed banks are instituted on the basis of detailed investigations
conducted by the FDIC. Suits are not brought lightly or in haste.
The filing of such lawsuits is authorized only after a rigorous
review of the factual circumstances surrounding the failure of the
bank. In addition to review by senior FDIC supervisory and legal staff,
all lawsuits against former directors and officers require final
approval by the FDIC Board of Directors or designee.
{{4-30-97 p.5370}}
In most cases, the FDIC attempts to alert proposed defendants in
advance of filing lawsuits in order to permit them to respond to
proposed charges informally and to discuss the prospect of prefiling
disposition or settlement of the proposed claims.
The FDIC brings suits only where they are believed to be sound on
the merits and likely to be cost effective. On that basis, where
investigations have been completed, the FDIC has brought suit (or
settled claims) against former directors and officers with respect to
24% of the banks that have failed since 1985.
Nature of Suits Filed
The FDIC's lawsuits are premised on the established legal principles
that govern the conduct of directors and officers. Lawsuits against
former directors and officers of failed banks result from a
demonstrated failure to satisfy the duties of loyalty and care. Most
suits involve evidence falling into at least one of the following
categories:
• Cases where the director or officer engaged in
dishonest conduct or approved or condoned abusive transactions with
insiders.
• Cases where a director or officer was responsible for
the failure of an institution to adhere to applicable laws and
regulations, its own policies or an agreement with a supervisory
authority, or where the director or officer otherwise participated in a
safety or soundness violation.
• Cases where directors failed to establish proper
underwriting policies and to monitor adherence thereto, or approved
loans that they knew or had reason to know were improperly
underwritten, or, in the case of outside directors, where the board
failed to heed warnings from regulators or professional advisors, or
where officers either failed to adhere to such policies or otherwise
engaged in improper extensions of credit. Examples of improper
underwriting have included lending to a borrower without obtaining
adequate financial information, where the collateral was obviously
inadequate, or where the borrower clearly lacked the ability to pay.
One factor considered in determining whether to bring an action
against a director is the distinction between inside and outside
directors. An inside director is generally an officer of the
institution, or a member of a control group. An inside director
generally has greater knowledge of and direct day to day responsibility
for the management of the institution.
By contrast, an outside director usually has no connection to the
bank other than his directorship and, perhaps, is a small or nominal
shareholder. Outside directors generally do not participate in the
conduct of the day to day business operations of the institution. The
most common suits brought against outside directors either involve
insider abuse or situations where the directors failed to heed warnings
from regulators, accountants, attorneys or others that there was a
significant problem in the bank which required correction. In the
latter instance, if the directors fail to take steps to implement
corrective measures, and the problem continued, the directors may be
held liable for losses incurred after the warnings were given.
[Source: FDIC Financial Institution Letter (FIL--87--92) dated
December 3, 1992]
[The page following this is 5373.]
1The regulatory agencies and others have produced guides that
provide useful advice on ways directors can meet their duties to their
institutions. These include the Pocket Guide for Directors
(FDIC, 1988), The Director's Book (OCC, 1987), and
FHLBB, Memorandum No. R 62, reprinted at 52 Fed. Reg. 22,682 (1987).
See also The Director's Guide: The Role and Responsibilities of a
Savings Institution Director (FHLB--SF, 1988). Go Back to Text
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