Bank Compensation and Wells Fargo: The End of an Era


compensation-10-21-16.pngOne of the biggest scandals among big banks in years is still unfolding as Bank Director heads into its annual Bank Executive and Board Compensation Conference Oct. 25 to Oct. 26 on Amelia Island, Florida. Wells Fargo & Co. announced last week the immediate retirement of CEO John Stumpf, with Chief Operating Officer Tim Sloan taking on the CEO job, as the board struggled to deal with public outrage over accusations that the bank’s employees had opened more than two million fraudulent accounts on behalf of customers to game aggressive sales goals.

The case raised questions about compensation and governance at the most basic level: What impact did the bank’s incentive package have on employee behavior, if any? What impact did the bank’s sales culture and sales goals have on the behavior of employees? What did the bank’s management know about fraudulent account openings and what did it do to stop it? If management failed to stop the fraudulent activity and benefited financially from it, should compensation be adjusted for those individuals, and if so, by how much?

These are all issues of extreme importance to Wells Fargo’s board, whose independent members are conducting an investigation, but also, to any board. No one wants to have a scandal of this magnitude take place while they serve on a board. If employees are complaining about bad behavior and bad culture, how does your bank handle it? How are you ensuring that complaint patterns from employees and customers are recognized and reported to upper management? Should the board also get these reports? What types of behavior are your incentives and sales goals motivating?

Wells Fargo’s board and now, Tim Sloan, are in the unenviable position of having to change the bank’s consumer banking culture even as they try to assess what went wrong. The pressure is strong to show the public and government officials that it is taking action quickly. Wells Fargo has said that as of Oct. 1, it had ceased all sales goals for branch-level employees and instead will start a new incentive program based on metrics related to customer service and risk management.

Since the sales culture had been very much a part of Wells Fargo’s identity, and higher than average profitability, investors are wondering how this will impact the bank’s financial performance. Keefe, Bruyette & Woods analysts Brian Kleinhanzl and Michael Brown downgraded the stock to market perform and wrote last Friday that “Wells’ management doesn’t know what the consumer bank will look like in the future.”

The stock price has fallen to $45 per share as of Wednesday afternoon from $50 per share at the start of September, before the announcement of a $185 million settlement over the issue with regulators and Los Angeles officials, who had sued the company. Is this the end of an era for Wells Fargo? I think so, as major changes will need to be made.

Community bankers tend to point to scandals like this as a way to differentiate themselves from the big banks. Many of the community banks I know don’t have an aggressive sales culture, let alone sales quotas. It’s also easier to know what’s going on in a small bank than one with more than $1 trillion in assets. Still, many bank boards in the wake of the scandal may be asking questions about their own sales culture, their incentive packages and compliance with company policies and ethical standards. Regulators are certainly asking these types of questions of banks, and I expect this to continue in the wake of the scandal. For more on the topic of culture, and determining your bank’s culture, see Bank Director magazine’s fourth quarter 2015 issue.

When we talk about compensation, we may talk about salaries, stock grants, deferrals and clawbacks. But what we’re really talking about is how to motivate employees to do a good job for the bank. And if you don’t have the culture to match what’s good for the bank and your shareholders, you don’t have much.

The Risk of Doing Nothing


Al Dominick, President & CEO of Bank Director, shares three major areas of risk facing financial institutions today.  This video, filmed during the 2016 Bank Audit & Risk Committees Conference in Chicago, IL, reflects on his time spent with chief financial officers, chief risk officers, general counsel, audit and risk committee members and various executives from leading professional service and advisory firms.

Succeeding With Your Succession Plan


succession--12-2-15.pngOne of the areas of corporate governance that is receiving increasing focus by regulators and investors is succession planning. Succession planning is important at the board and management level and is especially challenging for community banks that do not normally have the bench strength to choose from a wide talent pool. Often the principal challenge is to incentivize potential successors to remain in a subordinate position while at the same time transitioning a CEO to retirement.

Integration of the Succession Plan
Corporate governance documents should be reviewed and revised if necessary to identify the appropriate members of the board that will adopt and administer succession guidelines. This is typically the governance committee or the compensation committee. The guidelines should be reviewed by counsel to assure that they do not create unintended expectations or rights that are not consistent with exiting plans and contracts. Employment contracts should be revised to clarify the obligation of senior executives to ensure succession development of identified officers.

It is not uncommon that a specific duty to cooperate and implement the succession of a subordinate according to an agreed upon schedule be made part of the contract. Position descriptions should support and facilitate an evaluation of the candidates’ potential for advancement. Further, term provisions should be revised to contemplate expected retirement dates. Short-term bonus plans are a particularly useful method to incentivize cooperation in the development of subordinate executives. A key metric in determining performance of a senior executive should be his or her skills in mentoring and developing subordinates.

Retaining the Next Generation of Bank Leaders
While the mentoring relationship is key, it is often the case that senior executives who are considered the likely successor for the next level, be it CEO, COO or CFO, are lured away by competitors who can offer more immediate advancement. This is sometimes due to the ambition and impatience of the junior executive but also the resistance of the incumbent. There are a number of legal arrangements that can reduce the risk of this occurring. In general, once a designated successor is identified, that person should be granted unvested stock or cash which will vest fully upon their promotion. This is a critical stage as the CEO and board must work closely together to ensure the candidate is prepared to carry the full responsibility of the senior executive. This could take several years and involves familiarizing the candidate with key customers, regulators and the board.

In the event the candidate is not promoted but an outside candidate is chosen, a succession plan agreement would cause a significant portion of the unvested benefits to vest and the candidate would have a window to determine if he or she would remain with the bank. This should have the effect of causing most candidates to resist any capricious impulses to forego the final laps on the succession track and make it more expensive for competitors to raid key talent. It is also the fair thing to do, as the candidate is not guaranteed that he or she will succeed to the desired position but is being asked to remain loyal and forego outside opportunities at the point in the career path where he or she is most attractive to outside companies. It also should allay any fears concerning the risk that an 11th hour outside candidate will be chosen.

Transitioning Retirement of the Senior Executive
For every CEO who has dragged his or her feet in agreeing to a retirement date, there are boards who refuse to accept the planned retirement date given by the CEO. This is human nature, but good corporate governance demands that specific provisions be put in place that counteract this tendency.

While the succession plan if properly administered should groom a successor who at the proper time is ready to replace the incumbent CEO, there need to be specific provisions that ensure that the incumbent is incentivized to facilitate the transition at that time. It is not unusual to execute a transition and retirement agreement with the CEO. The agreement would amend existing agreements and plans to include, among other things, accelerated cash and stock benefits, a lump sum payout of remaining salary, contract benefits and describe a transitional role for the CEO. It could continue health and welfare benefits. This would be in addition to any retirement benefits.

Conclusion
Succession planning is often neglected until it becomes a serious issue because of a sudden departure of a executive. Boards must work harder to ensure that the bank has a dynamic succession plan in place to meet the competitive challenges of the future.

The Audit Committee: Help Them Help You


audit-committee-11-19-15.pngAn effective audit committee is a critical component of a financial institution’s corporate governance, but such a committee is not the result of an accident. It is formed through a deliberate process that includes appointing qualified individuals, providing adequate resources and offering other appropriate support.

The Right People
Every effective team begins with an effective leader to serve as chairperson. To fill that role for the audit committee, the board must select an independent director who, at a minimum, possesses an understanding of U.S. generally accepted accounting principles and the importance of internal controls. The audit chairperson should have a sense of the pressure points where the institution might be particularly vulnerable to fraud. Often, board members are business owners, managers in other organizations, or educators and will need help to acquire the requisite skill sets to lead or participate on the audit committee.

The Right Resources
With accounting standards, regulatory compliance requirements and risk factors continuing to change at a rapid pace, boards need to commit time and money to keep the chairperson and the audit committee up to speed. New accounting rules revisit some long-standing techniques in order to establish a more transparent level of reporting. Also, the introduction of the Consumer Financial Protection Bureau (CFPB) added complexity to regulatory compliance, and a bank that runs afoul of the new rules could suffer substantial harm to its reputation. In addition, technology and customer demands for access to services through nontraditional channels add risks never contemplated 10 years ago.

To help the audit committee stay current, the board should provide it access to outside training on these and other relevant areas. Boards also can obtain valuable guidance by monitoring the activities at other banks. Their publicized experiences (for example, in alerts from the Office of the Comptroller of the Currency) can serve as a road map of areas that require regular attention from the audit committee. Audit committee members must be intimately familiar not just with their own bank—but also with the banking industry as a whole.

The Right Support
Although it is management’s responsibility to establish processes and controls to manage risk, it is the audit committee’s responsibility to confirm that such processes and controls are established and monitored. The internal audit group, already charged with risk assessment and monitoring, can play an important role in satisfying this responsibility.

As with the audit committee, the success of internal audit hinges on the training and experience of the team members and on the provision of necessary resources. The importance of these elements increases significantly when the bank’s management is responsible for reporting on the design and effectiveness of the internal controls over financial reporting, as is required of publicly traded companies, because management must attest that controls are well-designed and operating effectively and is held responsible if its attestation proves false.

Bear in mind that a bank’s growth often is not mirrored in changes in internal audit. As a result, issues can go unidentified. Even if new issues are appropriately identified, the review cycles will be prolonged if internal audit has insufficient personnel. When the board looks strategically at the organization, it must align the expansion of the business with the risk mitigation process—including internal audit resources. Even the most capable audit committee will prove ineffective without a well-armed internal audit team.

The board also should recognize that its attitude and that of management toward internal audit frequently contributes to its success (or lack thereof). Leadership should address findings on a timely basis, and the board and audit committee should monitor the responsiveness of corrective action, especially for those issues flagged as higher risk. If management is dismissive of findings, and the audit committee or board is disinterested in follow-up, the value of the internal audit role will erode quickly.

The Right Approach
Board members are elected to oversee the activities of their bank, and the audit committee is an integral part of that oversight. It is in the board’s—and the bank’s—best interest to provide both the audit committee and internal audit with the training and resources necessary to execute their responsibilities.

What to Look for in Your Next CEO: Part II


CEO-11-2-15.pngSelecting your bank’s next chief executive officer remains the board’s single most important responsibility. The risk of selecting an underprepared or inadequate leader is high, and can impact the bank’s strategic direction, reputation and ultimately, its viability. As highlighted last month, there are many critical banking industry skills needed in a leader today. In addition, there are intangible competencies and leadership qualities which are equally vital for the success of the CEO and the institution. Here, we emphasize ten leadership competencies and attributes which have proven vital for bank CEOs.

Leadership and Vision
As the late great management guru Peter Drucker famously stated, “management is doing things right; leadership is doing the right things.” CEOs must be able to set the proper course for an institution by outlining the company vision, and inspire employees to follow this mission.

Broad-based Communication Skills and Executive Presence
Every board member should desire these qualities in a CEO, but they can’t be taken for granted. Today’s CEO must communicate through a broader array of channels than ever before, and to a wide audience beyond the bank’s customers, employees and communities. When you add investors and regulators to the mix, the presence and style of communication become increasingly important.

Cultural Agility
The U.S. today is a bigger melting pot than ever. As a result, a bank’s customers and employees have become ever more diverse. A growing number of new businesses are started by women and minorities, so the agility to appreciate a more varied constituency is critical for banks that want to grow.

The Ability to Assess and Attract Top Talent
This may be one of the most underappreciated elements of successful leadership. Stars want to work with stars, and the ability to bring superior talent into the organization has never been more important. Talented employees have become one of the few remaining differentiators between banks.

Adaptable and Flexible
The banking industry continues to evolve rapidly and, at times, dramatically. Adaptability and flexibility are newer traits that successful CEOs must deploy. Technology leads the pack in terms of change, but regulatory focus and customer desires shift as well, and banks need leaders who can respond quickly and effectively.

Strong Execution Skills
While having a current and well-developed strategic plan will always be important, execution is the other side of the coin. The ability to drive the plan forward is the key to enhanced performance, and the variable in successful execution always comes down to managing people.

Ahead of the Curve on Industry Trends
It’s not enough to know what the current trends are. Standout leaders not only see where the industry is heading, but begin formulating responses to these trends so their bank can stay ahead of the pack.

A Focus on Accountability
There is little room in today’s bank for complacency. In a competitive and cost-conscious environment, many banks seek a leader who can enhance accountability, and recognize and reward individual performance.

Builds a “Culture of Excellence”
Excellence is a habit, as the saying goes. Banks that truly seek to distinguish themselves should cultivate a culture that practices excellence every day. Leaders who understand the need to “raise the bar” to survive and thrive will drive this focus home.

Knows How to Work Constructively With a Board of Directors
One of the quickest ways for a bank CEO to falter is to lose the trust of the board. A successful CEO must appreciate the pressure that directors face, from regulators, investors and communities, and partner with the board to manage the pressures and challenges that the institution is facing almost daily. A truly constructive working relationship benefits everyone.

For banks today, the intangible aspects of effective leadership are as important as the technical skills and industry expertise. While the tangible proficiencies may be more obvious and identifiable on the surface, it is often the attributes, competencies and qualitative elements of leadership that make the difference in the success of truly great CEOs.

Using SaaS to Run a Highly Efficient Board


SaaS-10-28-15.pngHistorically, the preparation of board meeting materials took hours. The organization of board documents was a labor intensive crunch involving several people sifting through, hand collating, binding and manually distributing stacked materials. This process took a tremendous amount of time, and resulted in a significant lag in getting materials to boards, thereby limiting the ability to review materials efficiently. Fortunately, technology has evolved to a point where such marathon sessions are no longer a necessity. By leveraging digital solutions, materials can now be distributed electronically with relative ease and fewer man hours. 

The Convenience
A variety of companies are offering digital board materials, usually as SaaS [Software as a Service], which means the software is delivered remotely via the Internet rather than being purchased and housed on a computer or set of computers. An efficient solution provides a level of convenience to sharing materials that is largely absent from many business processes. You will want to avoid services that pigeonhole technology with proprietary platforms and unnecessary red tape—this does not help the board, and can actually create more problems than it claims to solve.

There are instances where organizations will be sidelined to specific operating systems or specs, but effective offerings will provide wiggle room for platforms and accessibility. Some services are even offering a nearly platform agnostic setup, retrofitting the application to fit with any device worth supporting so directors can access materials from their phone or tablet, regardless of time or location. There are some applications that have circumvented the need for direct Internet access, enabling an access in almost every circumstance.

The implementation must actually save board members the time previously lost to binding and delivery. Any decent SaaS solution will add hours to the boards’ reading time, but some offer to save as much as 95 percent of the time materials once took to create. Simplifying the workflow while delivering a superior product will provide board members with more time to fully understand the materials—thereby translating to a better board meeting.

Of course, all of this is useless if the implementation of the technology opens up debilitating security gaps.

The Security
Banks are responsible for millions of dollars, so it’s understandable that many fear “the cloud,” especially since most news regarding the cloud is rife with breaches. It’s an additional concern that some SaaS products cause more security issues than they solve. As a result, partnering with a product that provides cybersecurity measures is a must.

It‘s immediately essential that data be stored on a dedicated server with thorough encryption. Many solutions will haphazardly toss all data into large servers, but the best products will ensure that data is separated from other clients and accounts. While dedicated servers ensure that information cannot be seen by another organization, encryption converts the data to gibberish, so in the event of a breach hackers would be left with nothing but a mess of letters and numbers.

Having the ability to control individual user access can also add an extra layer of security. In the past materials could be lost, forgotten and delivered to incorrect addresses, revealing materials to damaging elements. The option to digitally deliver materials to recipients eliminates that risk entirely.

Support and The Future
Customer support is key to running an efficient system. Selecting partners that respect your time and understand your business needs is an absolute imperative. A successful implementation must come with 24/7 support. Banks are complicated entities, and the value of having a human being answer the phone is immeasurable. It’s an added incentive if that person is assigned to your account, meaning you know that person and have worked with them in the past. As boards and providers work together, there needs to be mutual respect and consistent communication. Solutions can work with the boards that use their technologies to implement new features, satisfying needs as they arise, and creating bonds that serve to help both businesses thrive.

Technology can be a double-edged sword in modern business. Sometimes we find it opening up worlds of information with no cost to the user. But in some cases technology can expose sensitive data to thieves, or crash and eliminate months of work with no warning. As banks continue to become more dependent on technology to save time and money, it’s exponentially more important that boards have access to SaaS solutions that save time and money, while keeping information, and the business, safe.

Heightened Standards for Directors: What You Need to Know


directors-10-15-15.pngOn September 2, 2014, the OCC issued guidelines establishing heightened standards for certain institutions with $50 billion in total assets and for “highly complex” institutions, noting that it does not intend to apply the guidelines to community banks. However, the guidelines distill the OCC’s characterization of directors’ responsibilities that apply regardless of asset size. In this regard, the guidelines should be required reading for directors of every bank.

With regard to the role of directors, the OCC did not adopt a higher standard of director liability than the law generally provides (depending upon state of incorporation or chartering). This approach is very different from that espoused by the Federal Reserve Board’s Governor Tarullo in his controversial speech last year. Governor Daniel Tarullo exhorted legislatures to change the standards governing director conduct to impose a duty to meet regulatory and supervisory objectives (not just a duty to their institution and shareholders). The OCC notably bypassed the opportunity to try to extend director obligations beyond statute. Thus, the guidelines need to be read in conjunction with the existing legal framework.

The OCC reformulated what are in many cases age-old principles of director conduct. The guidelines are beneficial to directors in a variety of ways. Notably, the OCC sought to reclarify the divide between director and managerial responsibilities. To understand the significance of such line drawing, directors need to be aware of the regulatory approach to conflating the roles of directors and management since the downturn. Specifically, administrative actions, matters requiring attention and supervisory correspondence, have discussed the directors’ obligations to become further involved in their institutions’ activities in a quasi-managerial tone.

The OCC’s guidelines, however, note that they do not impose managerial responsibilities on boards or suggest the boards must guarantee any particular result. Instead, the OCC notes that the board’s duty is the traditional one of strategy and oversight.

However, there are increasing expectations for directors, particularly in terms of oversight of risk management. First, the OCC expects institutions to establish strategic plans that set forth a risk appetite. The board then must hold management accountable for adhering to the framework established. The guidelines clarify that the board provides active oversight by relying on risk assessments prepared by the departments of risk management and internal audit. Thus, although the board’s active oversight is in reliance on risk assessments, the board still must evaluate whether the risk appetite is being exceeded.

This expectation for oversight of risk tolerance have been seeping down the landscape and has become common practice for banking organizations of over $1 billion. I have seen institutions of $600 million and $700 million in total assets adding chief risk officers and risk committees. Risk assessments have proliferated like kudzu. Whether the guidelines are only expectations generally for the systemic important financial institutions (SIFIs) or not, these principles are becoming mainstream ideas for community banks as well. For SIFIs, the scope and pervasiveness of the risk management and mitigation framework are yet to be fleshed out.

The OCC expects boards to provide a credible challenge to management. Specifically, boards, in reliance on information from independent risk management and internal audit, should question, challenge and, when necessary, oppose decisions to expand the bank’s risk profile beyond its risk appetite.

The guidelines note that boards are not prohibited from engaging third-party experts to assist them. Thus, the OCC keeps open the well-worn ability of directors to rely on others for guidance (although the fiduciary decision-making remains exclusively the province of the board).

Otherwise, the OCC trots out existing basic minimum standards for corporate governance. Specifically, the guidelines provide that boards should conduct annual self-assessments. The guidelines also note that the OCC will review director training to see if it touches on all appropriate areas. Moreover, the guidelines note that directors must dedicate time and energy to reviewing and understanding the key issues affecting their bank. Those expectations are hardly new.

In short, the guidelines represent a mixed bag for bank directors. The OCC’s adherence to the separation between board and managerial responsibilities and directors’ ability to rely on third-party experts is reassuring. The OCC’s discussion of risk management and engaged directors challenging managerial direction are not threatening in themselves. Director concerns lie in the notion that examiners will expect an increasingly elaborate edifice of risk tolerance and assessment. For community banks, the question is how much of this edifice will they need. Thus, it is not the principles that are controversial, but the way in which such principles will be measured that causes concern for director liability.

What to Look for in Your Next CEO: Part I


bank-ceo-10-1-15.pngSelecting a chief executive to lead your institution is a bank board’s single most important responsibility. Everything flows from this decision, including the bank’s strategy, reputation, the ability to attract critical talent, investor and employee confidence and the credibility of the board itself. Selecting an underprepared or inadequate leader—no matter how well liked or how long employed—can quickly send a bank in the wrong direction.

The list of optimal skills required in a bank CEO today could easily include dozens of items. Here we will highlight ten technical skills that we see as “must haves.” Next month, we will highlight ten leadership competencies and attributes which will complement the qualifications below.

Experience Working with Regulators
Regulatory relations were barely on the radar screen for bank leaders a decade ago, unless the bank was in trouble. However, in today’s altered regulatory climate, the ability to forge a positive working relationship with a bank’s varied regulators has become a critical element of success.

Balance Sheet Management Experience
The extended low interest rate environment has put pressure on bank spreads like never before. With interest rate risk and margin pressures on the front burner, CEOs need to understand the construction of their balance sheet, including capital strategy, more deeply than before.

Commercial Credit Skills
You can never have too much credit skill in a bank, in our opinion. Credit quality issues will quickly turn a good bank into an underperformer. The path to the CEO’s desk still goes through the commercial lending area more often than any other area.

Experience with Corporate Governance
Boards are under increased scrutiny from investors, customers, regulators, communities and even employees. CEOs need to appreciate the pressures facing directors (even for privately held and mutual institutions), and respect the ongoing challenges facing the board.

Technology Savvy, Including Evolving Channels
Technology in banking has moved from the back office to the front lines. Understanding how the rapidly shifting technological landscape is impacting the industry—and how to respond in real time—has become a vital ingredient for ongoing success.

A New Perspective on Risk Management
In the good old days, risk meant credit, fraud or simple liability for slip-and-fall accidents. Nowadays, this category has broadened to include cybersecurity, counterparty risk, compliance issues, legal challenges and more. Being able to identify and triage the bank’s risk factors is more important than ever.

Marketing and Social Media Knowledge
As mentioned, technology has become a front-line channel for growth. The integration of social media with technology has changed how many banks must go to market, build brand awareness, drive engagement and respond to customer needs. CEOs need to be plugged into these shifts, even if they are not active themselves on social media.

Exposure to Fee-Based Lines of Business
Given the decline in interest margins, boosting fee revenue appears to be on almost every bank’s strategic planning agenda. Even for banks with a low percentage of fee-driven revenue, CEOs need to explore alternative ways to grow the top line.

Transaction and Integration Experience
Many banks that never previously considered a transaction are now exploring all options, including acquisitions, mergers of equals, branch sales and purchases and fee business acquisitions. Exposure to the transactional arena has become more critical, as has the ability to successfully integrate post-transaction. Otherwise, the value derived from “doing a deal” may not be achieved.

Strategic Planning Skills
Everyone seems to have a plan, but how real and achievable is it? A CEO’s ability to craft a meaningful path forward and drive the plan’s execution has become a differentiator for successful banks.

There is no perfect template of skills which will guarantee success, particularly in the pressure-filled and constantly evolving banking industry. However, finding a CEO with a foundation grounded in these ten industry skills will increase your bank’s odds of surviving and thriving.

Really, What Is Franchise Value?




The concept of building franchise value was core to our Bank Board Growth & Innovation Conference in April. In this session, Fred Cannon, director of research for Keefe, Bruyette & Woods, breaks down franchise value.

Banks with dedicated customer bases enjoy significant advantages over any potential competitors. So how should a bank’s CEO and board think about franchise value—both in current terms and with an eye to the future?

Highlights from this video:

  • Franchise value is measurable
  • The new era is about credit availability
  • Deposits are generating less value
  • Franchise value creates economic value

Presentation slides

Video length: 29 minutes

About the speaker:

Fred Cannon—is director of research at Keefe, Bruyette & Woods, Inc. He joined KBW in 2003. In his dual role as director of research and chief equity strategist, Cannon guides the research efforts at KBW, which provides industry leading research on the financial sector and research coverage on more than 540 financial services firms.

Getting Friendly With Your Regulator


4-27-15-Jack.png“The regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career.” – H. Rodgin Cohen, senior chairman, Sullivan & Cromwell LLP

Six years after the worst financial crisis since the Great depression, bankers and their advisors are still complaining about regulation and the regulators. Cohen, who some people consider to be the dean of U.S. bank attorneys, made that statement back in March at a legal conference. Is the regulatory environment today really that bad? There are really two banking industries in this country—the relative handful of megabanks that Cohen has spent the better part of his career representing, and smaller regional and community banks that make up 99.99 percent of the depository institutions in this country.

There is no question that the megabanks have remained under intense regulatory scrutiny well after the financial crisis ended and the banking industry regained its footing. Overall, the industry is profitable, well capitalized and probably safer than before the crisis. But the regulators, led by the Federal Reserve, have never relaxed their supervision of the country’s largest banks, including the likes of JPMorgan Chase & Co., Bank of America Corp. and Citigroup. If the senior management teams and boards at those institutions are feeling more than a little paranoid, it’s probably for good reason. Joseph Heller, the author of Catch-22, wrote in his novel, “Just because you’re paranoid, doesn’t mean they aren’t after you.” The regulators might not be “out to get” the megabanks, but they clearly see them as a systemic threat to the U.S economy, and for that reason, have kept them on a short leash.

What about the rest of the industry—the other 99.99 percent? Has the regulatory environment improved for smaller banks? Based on comments that I hear at our conferences and elsewhere, I would say it has. The cost of regulatory compliance has increased for all banks, including even the smallest of institutions, in part because there are more regulations, but also because regulations are being enforced more strictly than was the case prior to the crisis.  In an interview that I did in the first quarter 2015 issue of Bank Director magazine with Camden Fine, chief executive officer at the Independent Community Bankers of America, Fine pointed to a general improvement in the level and tone of supervision throughout much of the country. Five years ago, bank examinations were “very harsh and inflexible,” to quote Fine. Now, exams generally seem more reasonable—which is understandable since the industry is in much better shape than it was six years ago.

But the regulatory environment might never be as relaxed as it was prior to the financial crisis. Today, the regulators want to be informed of any major decision, such as a potential acquisition or the launching of a new business line, which could impact the safety and soundness of the bank. You might not have thought that you had a “relationship” with your bank’s regulator, in the same way that you have a relationship with your outside legal counsel, investment banker or any number of consulting firms that management or the board might turn to for advice, but you do. That relationship certainly isn’t consultative in the sense that they won’t necessarily help you fix a problem, although it isn’t entirely authoritarian either, because you’re not necessarily asking permission, for example, to acquire another bank. Based on what I’ve been told by lawyers and investment bankers, regulators might express some concerns about the acquisition you have in mind, and they might even outline some areas of specific concern (like pro-forma capitalization). They might say it would be hard to approve the deal if those issues aren’t addressed, but they probably wouldn’t forbid you from going through with it.

I would say that managing the regulatory relationship is one of the key responsibilities for your bank’s CEO. Kelly King, the chairman and CEO at BB&T Corp., told me during an interview last year that he meets regularly with BB&T’s primary federal regulator—the Federal Deposit Insurance Corp.—and keeps it well appraised of the bank’s acquisition plans, which are key to its overall growth strategy. There is also an important role for the board to play—particularly the nonexecutive chairman or lead director—in maintaining a strong regulatory relationship. Those individuals might want to meet periodically with the bank’s regulator as well to drive home the point that the bank’s independent directors are engaged in the affairs of the bank.

I am sure that many older bank CEOs and directors resent the fact that the regulators have intruded so deeply into the business of the bank, but it’s a fact of life in the post-crisis world of banking—and an important relationship that needs to be carefully managed.