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Banks Need Fewer Barriers to Do Their Job Properly

January 11, 1987

Congratulations on John F. Lawrence's column on banking regulation. At the same time, there is one aspect of the overall banking problem, one that is especially prevalent among banks with less than $1 billion in assets, which you failed to mention: the selection and responsibilities of the board of directors.

It is my experience as a consultant to community banks that most of those with the problems so aptly identified in the column arrived there due to large loans approved by the senior loan committee or the loan committee of the board. Both of these bodies consist of board members, because of state and federal banking regulations.

Unfortunately, most of the board members are selected because they are good and trusted friends of the chairman or the president and are not expected to give the top executives a lot of grief at every board meeting.

As the directors of a community bank, many of these board members are meant to be representative of their community, i.e. dentists, brain surgeons, lawyers--anyone so long as they have no proven track record in analyzing and evaluating major bank credits.

It is these very same directors who then turn around and castigate professional bank management when the bank has to write off millions and faces several years of terrible losses as a result of bad loans, most of which are humdingers approved by that very same board.

Yet, it is everyday management, from the executive vice president on down, who must tell loyal and hard-working officers and tellers that pay has been frozen or encourage them to take early retirement in an effort to reduce expenses.

Everyday management also is forced to reduce training and employee development programs, thus reducing employee career opportunities and the quality of customer care. Other services also must be cut in an effort to "turn things around."

But this veritable "Catch-22" will never be resolved until the regulators provide assurance either that only experienced managers are allowed to approve credits or that only individuals with appropriate backgrounds be allowed to represent the shareholders, whether they are the chairman's colleagues or not!


Professor of management

USC Graduate School of Business

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