Director’s Responsibility for Compliance

Directors are responsible for providing their banks with a compliance management program that includes preventive, detective and corrective measures to insure compliance with banking laws and regulations.

Preventive measures are those that help prevent violations from occurring, which can include:

  • Policies;
  • procedures;
  • internal controls; and
  • training.

Detective measures are those that identify or notify of undesirable events, such as deliberate or accidental errors or violations of law. Detective measures can include:

  • audits or other operational reviews;
  • active board and management oversight; and
  • risk monitoring and management information systems (MIS).

Corrective measures prescribe actions to take in the event errors or violations are found. They can address specific issues or the conditions that allowed the issue to occur. Corrective measures can include:

  • corrective action plans that assign responsibility for correction to a specific individual or group, with a specific due date for completion, and a requirement for status reports showing progress of corrective action;
  • quality assurance or control processes to identify and correct conditions that led to the error or violation; and
  • information systems that keep problems in the forefront until they are corrected.

A compliance program is necessary, as banking is a heavily regulated industry. There are two main reasons for this. One is that banks offer deposit products insured by the federal government through the FDIC. The other is that banks put these insured funds at risk through the loans and investments they make. Regulations and regulators are necessary in order to protect the depositors’ money as well as the federal deposit insurance fund. Banking laws and regulations, among other things:

  • address matters such as who owns, controls, and manages banks;
  • delineate the services banks can provide;
  • limit the activities in which a bank can engage specify minimum capital levels for a bank;
  • limit the maximum amount of capital invested in bank premises;
  • limit the size of loans to a single borrower and to insiders;
  • require regulatory approval of acquisitions, mergers, and new branch locations;
  • prohibit discriminatory lending; and
  • require uniform disclosures regarding loan and deposit products.

Failure to establish a compliance program can result in directors being held personally liable and perhaps being subjected to monetary penalties or other sanctions. To fulfill this responsibility, you must have a basic understanding of the regulatory framework under which your bank operates and a general knowledge about the rules and regulations to which it must adhere.