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Bies Addresses ICBA on Corporate Governance

MAY 23, 2003


Bies Addresses ICBA On Corporate Governance

During her address to community banks at the ICBA Joint Committee Meetings, Federal Reserve Governor Susan Schmidt Bies addressed the issues of corporate governance and the lessons of Arthur Andersen. Bies made it clear that the Federal Reserve is not going to apply the requirements of Sarbanes-Oxley to small, closely-held banks. However, she suggested several measures that community banks could take to improve their corporate governance. These included annual evaluations by managers of the risks in their banking products and the processes by which they sell them and having boards and audit committees annually evaluate the quality of their auditors. Banks, she said, should only hire auditors who have experience auditing financial institutions and who are familiar with their unique accounting and legal issues.

Bies cautioned community bankers to heed the lessons of last year's corporate governance scandals. She noted that when it comes to the cross-selling of banking products, many banks adopt a relationship management model similar to Arthur Andersen's. In that model, the partner who served as the relationship manager also signed off on accounting policy and was compensated by how much revenue was generated by the client. Bies advised bankers that the more they try to cross-sell, the more they should try to implement adequate internal controls to ensure the integrity of their organizations.

Bies is also concerned about some of the current automated loan underwriting systems that banks are using. She noted that the current models were developed since the 1990-91 recession and that they have never been stress-tested, particularly during a business-led recession.

In response to a question about Wal-Mart offering banking services as an ILC, Bies spoke strongly in favor of keeping banking and commerce separate. Citing the recent story that Japan had just agreed to bail out its fifth largest bank, she said that one of the reasons for the bank's collapse was due to the cross shareholdings that exist between commerce and banking in Japan. Because of the separation of commerce and banking in America, she said, banks have continued to be healthy despite the slowdown in the economy.

After Bies spoke, members of ICBA's Regulation Review Committee met with representatives from the FDIC who again reassured bankers that the requirements of Sarbanes-Oxley would not be applied to banks with assets less than $500 million that are not public companies.