August 19, 2023 / VOLUME NO. 275

Blurred Vision

How can a board be effective if directors aren’t clear about their responsibilities? Unfortunately, too many aren’t effective, according to Bank Director’s 2023 Governance Best Practices Survey

Thirty-one percent of responding board members and CEOs revealed that the role of the director hasn’t been clearly defined at their bank. It’s a particularly pernicious problem for smaller institutions below $5 billion in assets. 

Compared to their peers, those directors are more likely to indicate that their board has been less effective or even ineffective in executing critical responsibilities, like establishing a succession plan for the CEO, providing credible challenge to management and meeting the board’s fiduciary obligations to shareholders. 

And those boards also appear to be less successful at risk oversight, including monitoring risk across the enterprise, setting the bank’s risk appetite and monitoring asset/liability risks. How will those banks fare through a changing environment? 

In its 2023 Risk Review released early this week, the Federal Deposit Insurance Corp. laid out a difficult road ahead for banks, while noting the industry’s resiliency.

Loan growth looks anemic as demand cools and institutions tighten their belts. Asset quality metrics remain healthy, but that’s not expected to continue as borrowers bear the brunt of higher interest rates. While liquidity ratios remain above pre-pandemic levels, community banks increased their reliance on wholesale funding. “Banks could find managing [net interest margin] more difficult in 2023 should interest rates remain elevated or continue to rise amid increasing competition for deposits,” wrote the FDIC. Depositors seeking stability and yield promise to pressure funding costs. 

Cyberattacks continue to rise as hackers target third-party providers. And the frequency of severe weather events, as evidenced by the recent, tragic wildfire in Maui, continued to climb in 2022 and into 2023. The FDIC noted that risk management practices around climate-related financial risk — and regulators’ understanding of them — continue to evolve.

The fact that the risks facing the industry remain broad and complex isn’t new. But if directors don’t truly understand their role, how can they successfully do their job?

• Emily McCormick, vice president of editorial & research for Bank Director

Governance and risk are on the agenda at Bank Director’s 2023 Bank Board Training Forum, Sept. 11-12 in Nashville, Tennessee. Bank Services members can access our Board Structure Guidelines for more information on the director’s role.

2023 RankingBanking: The Best Banks Played Defense

Find out which banks topped our annual ranking and how the best deliver consistent performance in Bank Director’s special report.

“A bank is a leveraged company. It’s a leveraged, balance sheet business, and the actual capital that you have matters.”

— Irene Oh, East West Bancorp

• Emily McCormick, vice president of research & editorial for Bank Director

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