The Federal Reserve Expects The Board Of Directors Of Financial Institutions To Be Effective

Foodman CPAs & Advisors

On February 26, 2021, the Federal Reserve issued Supervisory Guidance (SG) for the Board of Directors (BOD) of Domestic Bank and Savings and Loan Holding Companies requiring effective BOD oversight.

The Guidance maintains that the BOD serves a critical role in maintaining a Financial Institution’s safety and soundness, compliance with laws and regulations, and the continued financial and operational strength and resilience of a firm’s consolidated operations.

The SG includes definitions for:

  • Financial strength and resilience: defined as maintaining effective capital and liquidity governance and planning processes, and sufficiency of related positions, to provide for continuity of the consolidated organization (including its critical operations and banking offices) through a range of conditions.
  • Operational strength and resilience: defined as maintaining effective governance and controls to provide for continuity of the consolidated organization (including its critical operations and banking offices) and to promote compliance with laws and regulations, including those related to consumer protection, through a range of conditions.

and provides for 5 Key Attributes of an Effective Board of Directors

  1. Set Clear, Aligned, and Consistent Direction Regarding the Firm’s Strategy and Risk Appetite
    A clear strategy is defined as a firm’s strategic objectives for its businesses while helping to establish and maintain: (a) an effective risk management structure; (b) appropriate processes and resources for strategy implementation, plans, and budgets for each business line and risk management or control function; (c) an effective risk management and control function and (d) provides direction to senior management about how to determine which business opportunities to pursue consistent with the firm’s risk appetite and risk management capacity.
    A clear risk appetite includes sufficient detail to enable the firm’s chief risk officer and its independent risk management function to set firm-wide risk limits. The guidance defines an independent risk management function as one that is responsible for identifying, measuring, aggregating, and reporting risks in a comprehensive and independent manner. Risk limits refers to thresholds that constrain risk-taking so that the level and type of risks assumed remains consistent with the firm-wide risk appetite. Internal risk management sets risk limits in aggregate by concentration and risk type, as well as at more granular levels as appropriate.
  2. Direct Senior Management Regarding the Board’s Information Needs
    An effective BOD directs its senior management team to:
    • Provide directors with information that is sufficient in scope, detail, and analysis to enable the BOD to make sound, well-informed decisions and consider potential risks.
    • Direct senior management to provide it with information that is timely, accurate, and well organized. An effective board also evaluates the sufficiency and quality of information it receives and directs senior management to (a) provide more information, (b) address any concerns regarding the volume, structure, content, or quality of the information it receives, or (c) improve relevant firm processes and practices for the preparation of such information.
  3. Oversee and Hold Senior Management Accountable
    An effective BOD will look into:
    • Drivers, indicators, and trends related to current and emerging risks.
    • Adherence to the board-approved strategy and risk appetite by relevant lines of business.
    • Material or persistent deficiencies in risk management or control practices, whether in policy or in practice.
    • Reports of internal and external complaints, including “whistleblower” reports.
    • Having independent directors who are sufficiently empowered to serve as an effective check against firm executives who sit on the board and senior management.
  4. Support the Independence and Stature of Independent Risk Management and Internal Audit
    An effective risk committee and audit committee engage in:
    • Causes and consequences of material or persistent breaches of the firm’s risk appetite and risk limits.
    • Timeliness of remediation of material or persistent internal audit and supervisory findings.
    • Appropriateness of the annual audit plan.
    • Communicating directly with the chief risk officer on material risk management issues.
    • Overseeing the appropriateness of independent risk management’s budget, staffing, and systems of internal controls.
    • Coordinating with the compliance function.
    • Providing independent risk management with direct and unrestricted access to the risk committee.
  5. Maintain a Capable Board Composition and Governance Structure
    An effective BOD:
    • Considers whether its composition, governance structure, and practices support the firm’s safety and soundness and the ability to promote compliance with laws and regulations.
    • Establishes a process designed to identify and select potential director nominees with a mix of skills, knowledge, experience, and perspectives.
    • Maintains a governance structure capable of overseeing senior management and addressing issues arising from the firm’s size, scope of operations, activities, risk profile, and resolvability.
    • Establishes committees and management-to-committee reporting lines to support effective oversight, timely access to information, and sound decision-making.
    • Has the capacity to engage third-party advisors and consultants, when appropriate, to supplement the board’s knowledge, expertise, and experience and support the board in making sound, well-informed decisions.
    • Evaluates on an ongoing basis its strengths and weaknesses, including the performance of the board committees, particularly the risk, audit, and other key committees.
    • Adapts its structure and practices to address identified weaknesses or deficiencies and as the firm’s asset size, scope of operations, risk profile, and other characteristics change over time.

The SG clearly recommends that a BOD engage third-party advisors and consultants, when appropriate, to supplement the board’s knowledge, expertise, and experience and support the board in making sound, well-informed decisions.

Who is assisting your Financial Institution with its Corporate Governance obligations?

Written by:

Foodman CPAs & Advisors

Foodman CPAs & Advisors on:

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