The Twitch You Need to Heed: Post-Crisis Life in the Bank and the Boardroom Emphasizes Need for "Proactive Governance"

Have you got a twitch? Not literally. But if you are a CEO, board member, a risk manager, or a compliance officer, you might be getting twitchy, either directly, or because of someone to whom you report. Amy Downey, U.S. banking and regulatory expert at Wolters Kluwer, quotes a client who described the condition: like my board members and my senior management almost have a Twitter anxiety. I'm constantly getting short messages based on what they're reading in the news. 'Do we offer this product?' and other questions like that. It's a complete change. They want assurance from the Compliance Department that our bank won't be the next headline. The old saw says that just because you're paranoid, doesn't mean that everyone isn't out to get you. David Baris, executive director of the American Association of Bank Directors, puts simply: Boards are expected to be more proactive in risk William Isaac, veteran consultant, former FDIC chairman, and now nonexecutive chairman at Fifth Third Bancorp, diagnoses the condition behind the symptoms: Today the stakes are much higher. you don't get compliance right, you wind up in the penalty box with the regulators and you can't keep your franchise fresh. [ILLUSTRATION OMITTED] Regulatory risk ranks higher than ever, Isaac continues, with the Consumer Financial Protection Bureau behind much, not all, of that rise. Nobody even knows all the questions that they should ask, says Jeremiah Buckley, founding partner at Buckley Sandler LLP. That's because CFPB is making up as they go along. need to look at the whole spectrum of risk today, says Andrew Hove, currently a board member at Great Western Bank and a veteran regional and community bank board member and former FDIC vice-chairman. Nor can you look at risk in silos, without looking across them all. boards and managements--and the people who work for them--are twitchy, they have a right to be. The evolution of banking has taken all players far beyond old job descriptions. Isaac recalls that when he was at FDIC, many of the risks routinely contemplated today didn't exist, or were embryonic. If you paid any attention at all to managing says Isaac, it was difficult to get into serious trouble. Not that there weren't failures, and some big ones, years ago, trouble came in two main flavors, asset risk and liquidity risk, chiefly a matter of endangered core funding. And sometimes even the savviest risk manager couldn't see coming. Isaac recalls the carnage left by Paul Volcker's Federal Reserve campaign against inflation, in the 1980s. Who would have forecast a 21% prime interest rate in their business plan? says Isaac. more recent times, risk management was far from foolproof. Hove notes that the financial crisis saw institutions hurt by investment in iffy securitizations, adds that even community banks invested in more straightforward choices suffered when those instruments got caught in big market ripples. As a result, board members, consultants, and other experts interviewed see the nation's bank directors moving towards a more proactive attitude towards compliance, regulatory risk, indeed, all forms of risk management. It is all-consuming, says Isaac. In days past you could get away with a reactive, uninvolved approach, says Mark Olson, co-chairman at Treliant Risk Advisors, and a former Federal Reserve Board Governor, but now that's pretty dangerous. You can't wait for the examiners to tell you that you've made a mistake, because by then it's too late. The result, says Treliant's other co-chairman, Jo Ann Barefoot, is that bank directors could face spending more than they can afford or risking more than the bank can afford. Handling governance tension So, it's no surprise folks are twittery. …