Table Of ContentThe Bank
Director's
Handbook
The Board Member's Guide to
Banking & Bank Management
Benton E. Gup, Ph.D.
The University of Alabama Tuscaloosa, Alabama
A BankLine Publication
IRWIN
Professional Publishing®
Chicago London Singapore
The Bank Director's Handbook : The Board
title: Member's Guide to Banking and Bank
Management Bankline Publication
author: Gup, Benton E.
publisher: Irwin Professional Publishing
isbn10 | asin: 1557387923
print isbn13: 9781557387929
ebook isbn13: 9780071388474
language: English
subject Bank management--Handbooks, manuals, etc,
Banks and banking--United States--Handbooks,
manuals, etc.
publication date: 1996
lcc: HG1615.G868 1996eb
ddc: 332.1/068
Bank management--Handbooks, manuals, etc,
subject: Banks and banking--United States--Handbooks,
manuals, etc.
A BankLine Publication
IRWIN
Professional Publishing®
¢ Richard D. Irwin, a Times Mirror Higher Education Group, Inc. company,
1996
All rights reserved. No part of this publication may be reproduced, stored in a
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Library of Congress Cataloging-in-Publication Data
Gup, Benton E.
The bank director's handbook : the board member's guide to banking
and bank management / Benton E. Gup.
p. cm.
Includes index.
ISBN 1-55738-792-3
1. Bank managementHandbooks, manuals, etc. 2. Banks and
bankingUnited StatesHandbooks, manuals, etc. I. Title.
HG1615.G868 1996
332.1'068dc20
95-45384
Printed in the United States of America
1 2 3 4 5 6 7 8 9 0 BS 2 1 0 9 8 7 6 5
The Bank
Director's
Handbook
The Board Member's Guide to
Banking & Bank Management
To Jean, Lincoln, Andrew, Jeremy, and Carol
Page vii
Preface
Most bank directors are successful people. They have excelled in their own
fields, such as business, law, medicine, sports, or public service. They have
dealt with banks as borrowers and lenders. However, they may not understand
banking to the degree that is required of them as bank directors. Banking is a
dynamic, complex, and regulated industry.
Banking is dynamic because banks are consolidating through mergers,
acquisitions, and failures. The number of commercial banks in the United
States declined from 14,147 in 1985 to about 10,000 banks in 1995. Some
experts predict the number of banks will decline to about 3,000 or fewer in
the years to come. Banking is dynamic because banks are offering new
products to complete with nonbanking firms that offer financial services.
Mutual funds, cash management services, and derivative products such as
caps, collars, and floors are a few examples of new products. Banking is
dynamic because of changes in technology. They are just beginning to do
retail business on the internetthe worldwide communications network.
Banking is complex for a number of reasons: much technical knowledge is
required to understand financial instruments such as collateralized mortgage
obligations, swaps, futures, and forwards. Banking is complex because of the
securitization of loans. Securitized home mortgage loans, for example, have
lower risk-based capital requirements than other home mortgage loans. It is
complex because of lender liability. Banks are being sued by borrowers who
claim that banks loaned them too much money and by others who claim that
the banks lent them too little.
Finally, banks are regulated by federal and state banking authorities. Many
bankers would argue that they are overregulated. Moreover, compliance with
the Community Reinvestment Act, the Home Mortgage Disclosure Act, the
Truth in Lending Act, the Right of Privacy Act, and dozens of other acts is
excessively costly and counterproductive.
Bank directors are expected to be familiar with all these issues and more. This
book is designed to help fill that information gap. It provides
Page viii
an overview of selected topics that directors need to know in 11 chapters that
deal with the following subjects:
1. Legal duties of directors.
2. Strategic planning.
3. Marketing strategies.
4. Analyzing banks' financial statements.
5. Bank capital.
6. Asset/liability management.
7. Managing derivatives risk.
8. Credit and lending.
9. Fraud and insider abuse.
10. Internal controls and auditing.
11. Mergers and acquisitions.
Other features include special sections titled "Think about This" found in
most of the chapters and appendixes concerning loan policies and the FDIC's
Red Flags warning lists for fraud.
Special thanks are due to J. Barry Mason and Gay Evans. Dr. J. Barry Mason,
Dean of the College of Commerce and Business Administration, University of
Alabama, wrote Chapter 3: Developing Bank Marketing Strategy. Dean
Mason is the author of several leading marketing texts, and has published
more than 100 articles on marketing. Gay Evans, Managing Director of
Banker's Trust International, PLC (London), wrote Chapter 7: Managing
Derivatives Risk. This chapter was first presented as a paper at the Federal
Reserve Bank of Chicago's Bank Structure Conference in May 1995.
Benton Gup
Page ix
Contents
Chapter One BANK DIRECTORS' DUTIES 1
Accountability of Directors to Shareholders, 1
Strong Boards, Strong Banks; Weak Boards, Weak Banks, 3
The Responsibilities of Boards of Directors, 5
Duty of Care, 6
Business Judgment Rule, 7
Duty of Loyalty, 8
Typical Committees, 10
Executive Committee, 10
Audit Committee, 11
Asset/Liability Committee, 11
Investment Committee, 12
Loan Committee, 12
Trust Committee, 12
Personnel Committee, 13
Practices Deemed Unsafe or Unsound, 13
The SERVE Principle, 15
Conclusion, 16
Chapter Two STRATEGIC MANAGEMENT 17
What Is Strategic Management? 17
Strategic Management Defined, 17
What Strategic Management Is Not, 18
