We are having our annual banking conference this Monday, Tuesday and Wednesday. As such, the article in this section of the publication revisits an educational piece that we ran a few years ago. We will return again on Thursday and Friday of this week with fresh material, but in the meantime, please enjoy this blast from the past as you enjoy your morning coffee.
There are certain things in life that we are embarrassed about. The fact that it took mankind 128 years to figure out to produce a ketchup bottle that can stand upside down is one.
Ketchup first gained popularity during the recession of 1875 as a poor man's sauce (as horseradish was for the elite). That recession was caused by a run on banks that started after a collapse of real estate prices led to a rash of bad loans.
The problem then, as it is today, was that in many banks the board of directors approves the largest loans. In a majority of community banks, officers and/or the loan committee can approve loans up to some threshold, with the board approving anything above this number.
Similar to the traditional ketchup bottle, this makes no sense. Consider that in most community banks, the board is comprised mainly with a group of non-bankers. This group has the approval to make the bank's riskiest loans, while the professionals of the loan committee are relegated to lower approval status.
This tradition, combined with the fact that the board usually follows management's recommendations on most of the credits, only results in giving regulators and shareholders another set of warm bodies to punish should loan quality turn south.
The board, as with all facets of bank management, should act as a check and balance mechanism to ensure the safety, soundness and profitability of an institution. Assuming management has given the directors the tools and education to accomplish this task effectively, that makes perfect sense.
A board should also set and monitor policies, procedures and limits for bank management to follow. In addition, the board should approve and oversee bank activity.
The board should change management, limits or policies, but not approve individual loans. While talking about the "Jones" deal is interesting, a dentist is probably better providing guidance when a filling might be needed than the value of debt coverage or loan to value. A board that extends beyond this introduces the very risk that they are seeking to eliminate - namely poor loan judgment.
If part-timers override the decisions of full-time professionals, trouble invariably follows.