State Laws and Regulations That Govern 5-percent lending limit on loans to bank officers and employees.1 In In one state that responded to our survey, various provisions of its banking laws are written broadly, but the implementation of the banking laws is stringent. On the basis of our survey and interview with the Virginia Banking Commissioner, we found that most of the state's banking laws about insiders are written to allow for the judgment and interpretation of the banking commissioner. For example, the Virginia banking provision on the aggregate lending on insider loans allows the commissioner to set the aggregate lending rate at an amount that is "not... excessive." In many cases, the commissioner has set the limit more stringently than that set by Regulation O. State Bank Similar to federal examinations of banks, state examinations of Some state banking agencies include a very detailed review for insider activity in every examination. According to officials in the Florida, Massachusetts, and North Carolina state banking agencies, a review for insider activity is included in every examination. Their examination procedures consist of the examination of the banks' loan portfolios for 'Percentages are of the bank's unimpaired capital and unimpaired surplus funds. State Laws and Regulations That Govern insider lending and the compliance of insider lending with applicable state and federal banking laws. According to banking officials in two states, the scope of their A Few State Our review of failed and open banks revealed that insider problems are indicative of management problems in banks. According to officials in state banking departments, the effectiveness of bank management is important and plays a vital role in the overall financial health of banks. A few states have included in their bank examinations an additional module to independently evaluate bank management. Many officials we spoke with in the state banking departments believe an independent evaluation of bank management is important because it often provides information on aspects of banks' overall operation, financial performance, and condition. For example, officials in Minnesota's banking department evaluate bank management because they believe weak and ineffective management tends to be the single most significant reason for bank failures. Because of their belief in the fundamental importance of management, officials in the Texas banking department implemented and incorporated into their bank examinations a management evaluation program that assesses the management of state-chartered banks. The Texas management evaluation program evaluates management's performance in five functional areas of bank operations: (1) lending and credit administration, (2) investments, (3) asset-liability and funds management, (4) audit and operations, and (5) planning and budgeting. Each area is reviewed and evaluated on the following five components: policies, procedures, internal controls, performance, and prospects. A numeric rating of 1 to 5, with 1 being excellent and 5 being totally unacceptable, is given to each functional area based on the review of the five components. An overall management rating is then derived on the basis of the relative rankings given each of the five functional areas. On the basis of the overall State Laws and Regulations That Govern management rating, appropriate comments are provided on the strengths, weaknesses, future plans, and recommendations for each of the five areas. Texas officials told us they feel strongly that this program has reduced the number of bank failures due to managerial incompetence, director neglect, and insider abuse. Appendix VI Training Opportunities for Bank Directors We interviewed federal and state regulatory agencies and some bank trade Federal and State Federal bank regulators do not have extensive training programs for bank FDIC, the Federal Reserve, and occ provide to bank directors a handbook State Regulatory Agency Some state bank regulatory agencies we reviewed also sponsor training programs. Three of the 13 state banking departments we reviewed offer seminars, workshops, and discussion forums for bank directors. For example, the North Carolina and Ohio state banking departments have sponsored annual banking conferences for directors. The conferences sponsored by North Carolina included such topics as directors' duties and responsibilities, effective bank management, and proper board oversight. Training Opportunities for Bank Directors Banking Trade Director Certificate The banking trade associations and other industry groups, such as the providers of directors and officers liability insurance and law firms, have provided training opportunities designed mainly for bank managers. More recently, however, those in the banking industry have provided some training specifically for bank directors. In addition, the trade associations also provide journals, informational pamphlets, and other written materials to directors to keep them informed and knowledgeable about various banking subjects. In October 1992, the American Association of Bank Directors (AABD) established an educational foundation to promote the professional development of bank and thrift directors. The foundation offers a director certificate training program through the completion of continuing education requirements. Directors who complete a 6-hour core education program and participate in an annual 6-hour supplemental educational program receive certificates from the foundation. AABD officials believe the certificate program will enhance directors' ability to fulfill their oversight responsibilities. |