SOURCE: American Association of Bank Directors

American Association of Bank Directors

February 05, 2013 08:40 ET

American Association of Bank Directors Questions Material Loss Reviews' Claims That Bank Directors Always to Blame for Bank Failures

WASHINGTON, DC--(Marketwire - Feb 5, 2013) - The American Association of Bank Directors (AABD) has issued a Summary Report analyzing the Material Loss Reviews (MLRs) conducted by the Office of Inspectors General of the FDIC, Federal Reserve Board and the Department of Treasury, noting that many of the Material Loss Reviews are flawed and cannot be relied on. In reviewing a sample of MLRs of failed banks, AABD found one constant throughout -- the bank failure was always determined to be the fault of the failed bank's board of directors.

"The AABD review found that the sampled MLRs were so flawed in their methodology and assumptions as to render their findings unreliable," noted David Baris, AABD's Executive Director.

Federal law requires the appropriate Office of Inspector General among the federal banking agencies to ascertain why a failed bank's problems resulted in material loss to the Deposit Insurance Fund. The performance audits by the IG offices must "...obtain sufficient, appropriate evidence to provide a reasonable basis for its finding and conclusions based on its audit objectives."

"It appears the MLRs only tell one side of the story," Baris said. "The Inspectors General interviewed representatives of the banking agencies in charge of the failed banks and let them comment on the draft report, but the former directors and executive officers of the bank were not afforded the same courtesy."

Baris further noted, "Many of the MLRs we reviewed seem to suggest that the worsening of the economy, in some cases residential real estate prices falling by more than 50 percent, was a condition, not a cause of the bank failure. This defies logic."

"In most of the banks that ultimately failed, the bank examiners considered management and the bank to be highly or satisfactorily rated at least up to two years prior to failure, after many of the loans that caused the losses had been underwritten. It wasn't until loan losses mounted that examiners concluded that bank directors and management were to blame for deficient loan underwriting and loan administration. The MLRs assume that the later assessment of the board and management is correct and the earlier assessment is incorrect without substantiating that assumption."

According to AABD, the accuracy of the MLRs is important for many reasons. The banking agencies rely on the MLR findings to formulate policy and rules, and the FDIC considers the findings to help decide whether to sue former directors of failed banks. Congress relies on their accuracy in its legislative and investigative duties. 

"MLRs are public; the reputation of the board and management of the failed bank also is at stake," Baris added.

The AABD issued a series of recommendations to the Inspectors General, including inviting directors and executive officers to review the documents on which the IG office is relying, to be interviewed, and to comment on the draft report; reflecting the comments of the directors and officers in the final report; and posting comments from former directors and officers on already issued MLRs.

Founded in 1989, the non-profit American Association of Bank Directors (AABD) is the only trade group in the United States solely devoted to bank directors and their information, education, and advocacy needs. Visit AABD online at: http://www.aabd.org.

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