aabdBanking industry commentators have long contended that aggressive efforts by the FDIC and others to hold bank developers liable is having a chilling effect on the willingness of existing and potential directors to serve on bank boards. An April 2014 American Association of Bank Directors report of a recent survey of banks and savings institutions and entitled “Measuring Bank Director Fear of Personal Liability” (here) provides statistical support for this contention. The report shows that nearly a quarter of the survey respondents have had a director or potential director shun or shy away from board service based on personal liability concerns. 


The AABD survey report is based on eighty survey responses from banking and savings institutions. According to the report, 24.5% of the survey respondents reported that within the past give years, they either had at least one director resign from office out of fear of personal liability; had at least one person offered a position as a director refuse to serve out of fear of personal liability; or had a director  refuse to serve on the Board Loan Committee out of personal liability.  


Fear of personal liability was the first most common reason given for refusing in to accept board director positions. Of those who declined an offer to serve as a bank director, almost half (47.3%) gave personal liability concerns as a reason.  


The report suggests that the fear of personal liability is based on a number of factors, “largely driven by federal banking agency suits, enforcement actions, threat of enforcement actions in reports of examinations, and responsibilities placed on bank directors by laws, regulations, and guidance” that single out bank directors.  The report also notes that “the inability of a bank to obtain sufficient director and officer insurance may also be a factor that exacerbates the fear.”  


The report goes on to identify thirteen separate factors that the AABD believes “contribute to the fear of personal liability that motivates bank directors resignations and others to reject offers to serve as bank directors.”  Among these thirteen factors are such considerations as the “numerous suits filed by the FDIC against directors of failed banks.” The report notes that many of these suits are grounded in simple, not gross negligence. The report objects that “the FDIC is treating directors as if they are experienced loan or credit officers and not unprofessional outside bank directors,” and argues that “Directors who acted in good faith should not be sued.” 


The report also notes that the directors are “always being blamed for banks failures” while at the same time the FDIC’s assessment of board fulfillment of their responsibilities is “based an old and outdated policy statement that ignores the right of bank directors to rely reasonably on the work and opinions of bank management and advisors.”  The report also objects that recent legislative and regulatory changes have overburdened banks and bank directors with regulatory excesses within an enforcement environment that increasingly seeks to impose liability without culpability.  


The report also notes a number of concerns related to D&O insurance. These include the FDIC’s prohibition of insurance for civil money penalties and the FDIC’s efforts to bar insurance that would cover the costs of defending directors against agency administrative actions if the director ultimately loses the case or if the case is settled. The report also notes that the FDIC aggressive pursuit against the former directors and officers of failed banks has led to difficulty obtaining D&O insurance to cover regulatory risks.  


From my perspective, it is a serious concern if qualified persons are unwilling to serve on bank boards for fear of personal liability. Everyone has an interest in banks being able to attract the most qualified individual to serve on the boards. If qualified existing and potential board member are deterred from board service, the oversight expected of bank boards may suffer. The report’s comments about the impact D&O insurance concerns on bank boards is also significant and underscores how important it is for bank boards to obtain and to be able to obtain D&O insurance that provides appropriate levels of director protection.