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Red Bee Principal Christine Edwards writes:

“Today’s financial institution director oversight challenges are caused by the aftermath of several recent bank failures, resulting in the FDIC stepping in to make depositors whole.

In light of this environment, what are some key areas that directors should focus on to successfully carry out their oversight duties?

First, consider liquidity.  Does the institution have sufficient liquid assets to ride out investor uncertainty regarding the safety and soundness of the financial system?  And if key parts of that liquidity rely on lines of credit from quasi governmental sources, has the institution considered what might happen if all banks attempt to tap those lines at once?  How stable are core deposits?  To what extent does the institution rely on brokered deposits, and how stable are they?  Are there any other areas of potential weakness given today’s environment?

Second, what is the reputation of the financial institution?  Does it have the reputation for having successfully weathered difficult storms, a diversified business mix, a respected management team, strong ratings on its debt and good relations with its regulators?  Or is its business model highly specialized, dependent on outdated market conditions, or skirting the edges of regulatory boundaries?  In times of market turmoil, a good reputation and diversified business model may be important factors to consider in assessing whether depositors and investors will lose confidence in the institution.

Third, how clearly does management focus on external challenges and candidly assess what those challenges may mean to the institution?  Or does management consider that the external environment has little to do with its business?  Has the CEO discussed these market conditions with the board either in a regular or special meeting? Key areas for directors to understand are what is happening in the environment, why is it happening, and how it might impact the strategies of your company’s business model?

Finally, as a director, have you requested management keep you apprised of key changes to the environment and specified how often you believe those communications should be?  Clarifying that you want to be informed and kept apprised of the environment and how management is reacting is a key request and should be unequivocal with management.”