In the 1990s, any sensible bank director must be concerned about his or her potential liability.

The subject has become like the weather - everybody talks about it, but (almost) nobody does anything about it.

Director and officer liability insurance helps. But with today's policy exclusions, it doesn't provide very extensive coverage.

That's especially true when a bank fails and the director most needs coverage.

It Can Happen to You

Of course, most banks don't fail, and your bank won't. But astonishingly, in each of the last 10 years almost 1% of U.S. banks have.

That means 10% of the banks operating in the early 1980s have failed. So viewed historically, failure is not so remote a possibility.

Most people believe that the failed banks were weak institutions with flawed lending programs -- that they were under capitalized, made too many loans to insiders, paid up for deposits, grew too fast, and so on.

Those things were true of many banks that failed, but not of all. Many failed banks had once been well capitalized; regional collapses did them in.

As their directors could tell you, it doesn't do a lot of good to being worrying about the potential liability consequences of a failure after the signs of distress have appeared.

The protective steps must be taken - as a matter of routine - when the bank is healthy. With these precautions, flawed decisions that lead to failure will be less likely to bring lawsuits or liabilities, too.

Escaping Blame

Mistakes do not lead to liability if they are made in good faith by properly informed directors who did not violate the law. In most such cases, mistakes do not even lead to lawsuits.

What needs to be done to protect directors, therefore, is quite simple: Make sure that their independence is firmly established, and that they are properly informed.

If independent directors have the facts and know the law, their business decisions will generally be protected.

Even the recent spate of lawsuits by regulators alleging liability for negligence are based on the theory that the directors did not fully inform themselves or were not independent.

Needless to say, protecting directors by making certain that they are perceived as independent and informed has costs. But these need to be large.

And the process may also have benefits. It is at least possible that better-informed directors will help to make better policies, and it is at least theoretically possible that the process of informing directors better will help bankers to manage better.

Here are five steps that would make your director's independence clear and their informed status apparent:

* Encourage them periodically to attend conferences for bank directors. Although perhaps not all directors will benefit from a conference's substance, most will benefit greatly. And regardless of substance, such attendance will further the appearance of both independence and knowledgeability. * Have a consultant review the information package routinely sent to directors and, if necessary, modify it to provide more complete information.

* Have a consultant identify the key risk areas in your bank and make a presentation to directors about them.

* Use consultants periodically to review loan policies and procedures. Most failures result from bad loans, and you cannot always make perfect lending decisions. But you can protect directors by making certain that your policies are legally sufficient and in line with peer-group practices. (If they diverge, you will want to make certain that the differences are intentional.)

* Provide independent outside counsel for your directors. This will establish their appearance of independence and will give them a sounding board when they need help.

The costs of these procedures need not be large. In the context of overall banking compliance, they may even be small. But the protection that they provide will be significant.

Outside Lawyers

A further word on independent counsel: It is far better for directors to consult with them than with bank counsel.

One reason is the independence issue. Another is that communications with independent counsel are privileged in many situations where communications with bank counsel would not be.

Furthermore, "large" banks will effectively be required to have independent counsel for some directors, because access to such counsel will be required for their audit committees. The proposed definition for "large" in this case is a bank with more than $500 million in assets.

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