The position of bank director has been eliminated. It has been replaced by a new job, still called bank director, whose duties and accountability dwarf the old one.

If this assertion is true - and recent events have forced us to ponder it - there are a number of corollaries.

Since Congress didn't repeal the laws of supply and demand, the price paid to holders of the new directors' jobs will have to change with the supply.

Furthermore, shareholders and management must get comfortable with more intrusive directors. Candidates for the job must understand that meeting its obligations cannot be done with casual or sporadic effort.

A Major Shift

The policies regulators have adopted to guide their enforcement and litigation efforts against directors, changes in statutes and regulations, and an occasional court decision have made the responsibilities of directors very real, not honorific. In that sense, we are witness to a major shift in standards of bank management - in the current vernacular, a paradigm shift.

The Federal Deposit Insurance Corporation Improvement Act of 1991 is most readily cited as the statutory change that has expanded the scope of directors' responsibilities.

Independent directors who are members of the audit committee have assumed responsibilities that are not only complex and difficult, but are akin to managing the bank.

Other parts of FDICIA, such as prompt corrective action against undercapitalized banks and standards for safety and soundness, have placed directors, as well as regulators, in the position of dealing with issues that have traditionally been management's province, and that at best were reviewed by directors and regulators.

Other Factors

Directors of undercapitalized institutions may be peremptorily dismissed by the regulators. Limitations on resolution techniques of the FDIC may prompt more lawsuits by uninsured depositors.

FDICIA is not the only cause. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 expanded the responsibility of directors in the insider lending area, and appears to have set a strict director-liability standard for non-culpable actions.

The Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 limited the ability of directors to be indemnified for expenses they incur in defending lawsuits against them as directors.

In the last dozen years or so, Congress has passed major banking laws at a rate greater than one a year, laws such as the Garn-St Germain Act, Monetary Control Act, Change in Bank Control Act, Depository Institutions Deregulation Act, etc.

All have added to the scope of statutes and regulations determining legal and illegal actions by the banks and, by extension, the bank directors.

Held Responsible

Courts have concluded, although not yet unanimously, that violating certain statutes does not require a showing of culpability on the part of directors.

In other words, notwithstanding that the most diligent effort on the part of a director did not or could not have shown an insider loan to be a violation of Regulation O, a director may be in violation of that provision if the loan turns out to be illegal.

Courts have also said that the assets of defendants (defendants in the most notorious case were attorneys, but they as easily could have been directors) may be frozen and made unavailable to defendants upon motion of a regulatory agency in many cases.

When combined with the inability of advance indemnification payments under the proposed regulations of the "fraud" act, the right to defend oneself may turn out to be illusory.

Actions on the Rise

Regulatory agencies have responded enthusiastically to the new legislation and to the vigor of Congress expressed in hearings on these issues. Enforcement actions against all institution-affiliated parties (including directors) are up, as are the amounts sought in civil money penalties.

The FDIC appears to bring suit against directors in about one-fourth of bank failures, i.e., hundreds of directors of failed banks have been sued in recent years.

Because insurance carriers have inserted clauses in directors' and officers' insurance policies, excluding coverage for suits brought by regulators upon the failure of an institution, the FDIC general counsel is reported to have concluded that the agency may have to target just those directors with sufficient net worth to make lawsuits cost-effective.

It may also bring more actions against other institution-affiliated parties who do not yet have such exclusionary clauses in their liability policies.

Obstacles Mount

The net worth of directors is more exposed than before; the means to defend themselves could be placed beyond their reach; they may be held liable for violations they did not discover; the scope of laws for which they have an accountable oversight responsibility has expanded exponentially; the amount of time they must spend at director activities has increased, and the possibility of conflict with senior management is up dramatically.

The American Banker has reported that three out of four banks under $1 billion of assets are having trouble finding qualified directors willing to serve.

Even some of the best-managed larger banks are finding it difficult to replace and retain directors. Many are arguing that the ramifications go beyond the boardroom, and that the directors who remain are reacting by denying all but the very best credits.

Moving Toward Managing

The transformation of the director's job is not yet fully defined, but in meeting what appears to be their growing obligations, they must stretch very close to managing the bank.

Obviously, this violates the old rule that directors direct, and managers manage. New directors might direct and hire management, while management and directors manage, and directors monitor.

Some banks are in step with these changes. Their directors are paid well, they know when they accept the position that they are expected to spend considerable time at their jobs, management has accepted the fact that the directors are not rubber stamps, and a working arrangement in the new environment has been developed.

Other banks, perhaps most, have not changed.

Perhaps with the passage of time, and as the painful congressional votes on thrift-bailout funding fade into history, the situation will return to the status quo ante. But don't count on it.

Mr. Barnett, a former chairman of the Federal Deposit Insurance Corp., is a partner in the Washington law firm of Barnett & Sivon.

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