Bank Directors

More On A Higher Standard For Bank Directors

Kevin LaCroix has some further thoughts on John Gorman’s criticism of the proposal of FRB Governor Daniel Tarullo and certain academics that bank officers and directors should be held to a different (i.e., more stringent) fiduciary standard than officers and directors of other types of corporations. After discussing John Gorman’s criticism of Tarullo’s proposal, LaCroix also discusses recent decisions by a federal district court judge in Georgia and the Georgia Supreme Court, the upshot of which is that while bank officers and directors (in Georgia, at least) are entitled to the protection of the business judgment rule, there may be some basis for holding them liable for ordinary negligence (as opposed to the higher “gross negligence” liability standard that is the “default” standard under FIRREA and the effective standard if the business judgment rule is applied). Kevin is concerned.

It should be emphasized that the academics’ proposal to hold bank directors to a higher standard was limited just to directors of systemically important financial institutions. I share the concerns John Gorman expressed in his American Banker article about this proposal. However, I have additional concerns, which is that there are already theories floating around that bank directors should be held to a different standard than directors of other companies, as shown by Judge Thrash’s remarks in the Buckhead Community Bank case. My concern is that if the idea were accepted that directors of systemically important banks should be held to have expanded fiduciary duties, the idea would quickly expand beyond just systemically important institutions and be applied to many , most, or even all bank directors, without regard to whether or not their institution is systemically important.

This was the same concern I expressed in my earlier post, and it’s comforting to know that other observers share your concern about “trickle down” liability.

Kevin is particularly concerned about the spate of litigation directed against officers and directors of failed banks by the FDIC. The FDIC has been attempting to whittle away the business judgment rule wherever possible. The long-range implications are troubling.

There undoubtedly are meritorious lawsuits filed against bank directors, particularly where there is evidence of self-dealing or complete abdication of responsibility. Just the same, the overall level of litigation aimed at bank directors is both excessive and socially inefficient, particularly with respect to the litigation that so often follows after banks’ failures. So often the failed bank lawsuit allegations consist of little more than scapegoating and hindsight second-guessing. Creating a liability regime that would encourage further litigation and expand the potential liabilities of bank directors would accomplish little except enlarging the litigation burden that prospective directors would have to consider before accepting a seat on a bank board.

There is no question that prospective directors of financial institutions (especially community banks) have to think long and hard about the potential liability before agreeing to accept a board seat. For an increasing number of otherwise qualified candidates, the decision may be that if you don’t have “a dog in the hunt” (a substantial financial investment in the bank), the benefits of being on the board do not outweigh the risks if (God forbid!) “something bad happens.”

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