Suggestions abound that bank officers and directors -- and even their professional advisers -- should give up and resign in the wake of the 1989 thrift-bailout law, the 1990 Crime Control Act, and the Federal Deposit Insurance Corporation Improvement Act of 1991, among other legal and regulatory developments affecting their oversight roles.

Such counsel of despair obviously is unacceptable to bank managements. Yet the realities that give rise to this counsel of despair cannot be ignored.

These realities must be addressed by carefully identifying the major potential trouble spots in banking and directing management and board attention to those areas.

The most troublesome areas should be watched carefully and, where possible, officers and directors should obtain comfort from professional advisers.

These steps can keep within bounds the risks associated with the new laws, rules and policies. Thus, responsible individuals will be able to continue to serve as officers and directors of banks.

But those officers and directors who are unwilling or unable to undertake the identification and oversight processes should -- I am afraid I have to agree -- resign. Otherwise they risk, at best, their peace of mind and, at worst whatever fortunes they may have.

Danger Spots

It would be nice to be able to identify three areas of potential danger and to suggest that those areas are the only ones with which officers and directors have to be greatly concerned. The list, unfortunately, is longer; but it is not so long as to be totally unmanageable:

* The lending function. Loan policies, decision-making delegation, loan administration.

* Asset/liability management. Interest rate risk, liquidity, use of derivatives.

* Off-balance-sheet risks. Policies, monitoring.

* Related party transactions.

* Violations of law-/compliance.

* Acquisitions/new businesses.

* Internal controls.

* Corporate and regulatory reporting. Reserves for loan losses, valuation issues.

* Takeovers.

* Implementing holding company decisions.

Many of these are areas in which few directors have significant expertise and in which only slightly larger numbers of directors have any real interest.

Far Beyond Fun and Games

Loan administration, management of interest rate risk, compliance, and corporate reporting are not what directors usually consider the fun stuff.

Most directors would rather talk about personnel, marketing, planning, new businesses, and major corporate transactions.

Nevertheless, if directors and officers are to protect themselves, they will have to bring expertise to bear on all of the areas listed above, and perhaps on others that I haven't identified.

In-House Possibilities

In each potential problem area it may be possible to do the substantive job of managing the area entirely with internal bank resources.

Bankers certainly are the experts in such matters as loan policy, asset/liability management, off-balance-sheet risk, and the related issues.

Nevertheless, even on those issues it may be imprudent for management to rely on its own resources to protect itself and its board.

Legal questions arise, for example to the extent the board of directors is entitled to rely on management. And even if board members properly may rely on management, who then is protecting management?

A few years ago we might have said that a diligent manager can protect himself or herself simply by doing the job. Today, unfortunately, that is no longer true, and managers should seek third-party verification in the areas of potential danger.

Reliance Up the Ladder

The new audit committee procedures mandated by the improvement act, as well as this law's new standards for outside auditors -- and the procedures the auditors must follow and the matters upon which they must opine -- should help both management and the board to focus on some of the areas of potential danger.

The new tripwire rules will put the focus on additional areas. But these new rules and regulations also are likely to focus managers' attention upon the degree to which both directors and outside auditors rely on management and its attestations.

Upon whom may management rely? Basically, although senior managers are, as a matter of law, entitled to rely on managers who report to them, in practice the senior manager's duty of inquiry sits alongside the right to rely on line personnel. Often, with 20-20 hindsight, it may negate the reliance defense when a bank has gone up in smoke.

Third-party audits and opinions therefore may well be prudent on any matters that are within the danger area.

Terrors of the Unknown

The subject of compliance with law has become one of the most difficult for officers and directors to deal with because there are so many laws. And most commentators suggest that officers and directors are charged with knowledge of all of them.

As all directors and officers now are aware, violations of law can result in civil money penalties being assessed against all institution-related parties that may have some responsibility in the matter.

Moreover, many commentators also suggest that legal compliance requires board-of-directors oversight. Thus, failure to property oversee can expose senior managers and directors to violations of law that result from acts they didn't even know about, much less approve.

Any officer or director who has read this far must be horrified at the prospect of the fees for consultants, accountants, lawyers, and investment bankers that this prescription implies. (The consultants, accountants, lawyers, and investment bankers who have read this far probably don't share that sense of horror.)

A well-coordinated program will keep costs down, but there will be costs no matter how efficiently a bank's processes are established.

Some of those costs may be recouped by having fewer problems (the zero--defect efficiency argument) and some may be recouped by lower directors' and officers' insurance rates.

But, to the extent that the costs are simply costs, it appears that banks will have to incur them in order to comply with laws and to attract and retain good management and good directors. Mr. Lowy, counsel, to the law firm of Rosenman & Colin, is the author of "High Rollers: Inside the Savings & Loan Debacle" (Praeger Publishers, 1991).

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