Dodd-Frank requires banks and thrifts with more than $10 billion in assets to have a separate risk committee. But what about smaller institutions? There is talk now that having a separate risk committee is a best practice for smaller banks, or will become a regulatory requirement in the future. But should it? Most of a panel of Bank Director legal experts agreed that one-size does not fit all in the rule-making world, and according to many, it is not the asset size of the bank that matters, but rather the complexity.
Should the Federal Reserve lower the threshold for banks that are required to have a standing risk committee of the board below the current floor of $10 billion? If yes, what should the new threshold be and why? If no, why is the current threshold adequate?
No. The operations of smaller banking organizations and community banks with less than $10 billion in assets did not contribute to the financial crisis and were not the focus of reform under Dodd-Frank. Congress was, quite rightly, concerned that such institutions not be treated in the same manner as their larger, more complex cousins. In a number of areas, such as the Durbin Amendment, the authority of the Consumer Financial Protection Bureau, stress testing and Federal Deposit Insurance Corp. deposit insurance reforms, Congress sought to avoid burdening smaller banks with unnecessary additional compliance costs. Accordingly, the decision whether to form a standing risk committee for a smaller bank should continue to be made by each institution based on its own particular situation, complexity and governance structure.
—Lee Meyerson, Simpson Thacher & Bartlett
For most financial institutions, including those at asset totals approaching or even exceeding $10 billion in assets, a specialized risk committee is redundant to the board’s role. After all, job one for every board is oversee management and see that plans are in place to address risk to the financial institution. The nine categories of risk described by the Office of the Comptroller of the Currency is a good place to start. Simply put, directors should be hypersensitive to the institution’s risk profile and sources of risk.
—Peter Weinstock, Hunton Williams
The current rule—coupled with the existing authority of the U.S. bank supervisors to make suggestions and/or require that changes be made on a case-by-case basis—should be adequate. Institutions with less than $10 billion in assets, however, should be accorded appropriate latitude in determining whether or not a standing risk committee of the board is the best means to achieve this imperative. Institutions in this category typically offer less complex products (lending, deposit, foreign exchange) and do not generally pose the same types of systemic risks as large, complex institutions.
—Gregg Rozansky, Shearman Sterling
To some extent this is a moot question because the statutory threshold for publicly-traded Bank Holding Companies is $10 Billion. Every bank should have at least a subcommittee of directors that is responsible for enterprise risk management issues and activities, since managing risk is a basic bank director obligation. The charter and mandate of this subcommittee will vary widely according to bank size and complexity; for small banks, the tasks of this subcommittee won't be onerous. The threshold for a formal standing risk committee otherwise is an arbitrary -- and secondary -- decision in the risk management process; there really is no threshold that absolutely makes sense.
– Charles Horn, Morrison Foerster
Standing risk committees are an important and a useful tool to identify risks, but a regulatory mandate at the $10 billion level seems more than sufficient. Such committees are part of the board of directors, which board is ultimately responsible for the bank’s risk portfolio, and the banks themselves have better knowledge as to when such a standing committee should be required. The asset size of the bank is less important than the degree of complexity of the bank’s business practices. Smaller banks can, and many probably should, establish standing risk committees depending upon their business practices, lending portfolios, loan-to-value characteristics, capital levels, complex investments, credit extensions and hedging activities.
—Doug McClintock, Alston + Bird
To the extent that a smaller bank’s activities are such that a standing risk committee might be appropriate, this can best be decided by the bank’s board or by the bank examiner with direct knowledge of the institution. Requiring all banks to maintain the same risk management systems will only add unnecessary financial burdens on smaller banks and lead to more bank failures. This is not the way to minimize the systemic failures that standing risk committees are intended to avoid. It is important that bank regulators ensure that every bank maintains appropriate risk management systems for its size and business model and otherwise operates in a safe and sound manner. It is not necessary, however, to apply a one-size-fits-all standard from on high.
—John ReVeal, Bryan Cave