Enforcement actions by the Office of the Comptroller of the Currency rose 35% last year. An American Bankerm report correctly attributed the increase to both the recession and tougher regulatory scrutiny and suggested that the number of actions will now decline given the improve health of the industry.

However, focusing on the number of actions as a gauge of regulatory toughness obscures the more subtle fact that the thrust of bank supervision and regulation is changing.

Recent enforcement orders clearly reflect the regulators' emphasis on improving management practices. In addition to requiring the obvious, such as correcting regulatory violations and strengthening loan-underwriting policies, the orders also often call for an evaluation of management and overhaul of management and management practices.

Focusing on the Process

The management emphasis follows from so-called process-focused examinations. Increasingly, examiners are as interested in how a bank is managing its problems as in the problems themselves.

For example, not only do loss-reserve levels need to be adequate, but the process used to determine provisions for losses is also of primary importance.

This shift was confirmed in testimony before Congress last year when Stephen Steinbrink, then acting comptroller of the currency, stressed that OCC examiners are looking less at individual loans and more at management policies and practices.

Several general themes recur in recent regulatory orders, providing insight into the agencies' expectations regarding management practices.

A common requirement is to strengthen the board's oversight of management. While directors can clearly be too involved, there is a risk, in the wake of the Federal Deposit Insurance Corporation Improvement Act, of having too little involvement.

A bank must review information routinely presented to its board for comprehensiveness and clarity. The bank must ask itself if the board can really monitor the important trends of the bank from its monthly reports, or if the data are too detailed for a focus on major issues.

Boards, as someone once said, sometimes receive too much data and not enough information.

What to Review

Major policies and procedures should be reviewed by the board at least annually.

There are often disagreements as to what is of sufficient importance to be brought to the board for review. For example, examiners sometimes suggest that lending-procedure manuals as well as lending policies be reviewed by the board.

Board members need not review detailed operating procedures. However, some policies that are often contained in procedures manuals - loan-to-value ratios for example - should be periodically reviewed.

The board also needsto ensure that there is a strong, independent loan-review function. The board should be an integral part of the process, much as it is in the audit process.

Updating Policies

Management should review and update all policies with primary focus on lending, investment, and asset-liability management policies. Each policy should be comprehensive - it should cover all areas appropriate to the institution's operations.

For example, an interest rate risk policy should do more than indicate the need to minimize or reduce rate risk. It should specify how risk will be measured, provide target levels of risk, and provide general guidance on how the risk will be managed.

Policies must be easy to use and understand. Formats should be consistent. They should also be "modular," so that when there are changes, sections can be extracted and revised.

It is also a good idea to provide periodic training sessions on the policies, particularly in the lending area.

At the Heart of Problems

It is clear from the content of recent orders that regulators believe weak management practices are often at the heart of an institution's difficulties.

Most orders include a requirement that the board obtain an independent evaluation of its management team or certain members of management.

In addition, there are clear indications in these orders of the specific areas in which the agencies believe management practices are weak.

We suggest tha management review and evaluate.

* Clarity of the organizational structure, lines of authority, and accountabilities.

* Adequacy of job descriptions.

* Adequacy of the performance evaluation process.

* Compensation, hiring, and recruiting practices.

* Adequacy of staffing, particularly in critical areas such as loan administration, loan review, and workouts.

How much importance do the regulators place on these kinds of issues? As an independent consultant, we were required by a regulatory order to determine the reason an institution was in a weakened condition.

Rather than requiring a financial analysis, the order instructed us to evaluate the preceding list of management practices.

The management focus in enforcement and regulation will accelerate as a result of the FDIC Improvement Act's emphasis on safety and soundness.

The agencies must adopt standards for safety and soundness by Dec. 31, for a variety of areas relating to operaions and management, including internal controls, audit systems, loan documentation, credit underwriting, and interest rate risk.

A notice of proposed rulemaking, issued by the agencies last summer, indicated that these standards will probably be flexible and broadly written.

Moreover, Congress believes that unsafe and unsound practices are leading indicators of financial problems.

This combination of broadly written regulation and congressional interest means that the agencies will be increasingly concerned about management practices and processes.

The subjective judgments of regulators about how banks and thrifts are managed necessarily becomes increasingly important. Managements, therefore, will have to take a good, hard look at themselves.

Mr. Chalker is a senior vice president of BEI Golembe Inc., Atlanta, a bank and thrift consulting firm.

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