Beware of the ‘One Man Banks’

When the definitive history of the Great Recession is written, the authors  will owe a debt of thanks to the Federal Deposit Insurance Corporation’s Office of the Inspector General (FDIC OIG).

OIG’s role is to act as an independent reviewer of FDIC efforts to maintain the stability of the US banking system. In carrying out this task, the OIG also maintains a series of in-depth reports on the causes of recent bank failures.

These documents tell the story of the Great Recession’s effect on the US community bank sector, one bank failure at a time and are available on the OIG’s website.

Something is fishy, however, in a recent FDIC OIG report on the collapse of Florida Community Bank according to this story from the Naples, FL News.

One of the causes for failure according to the report is a phenomenon that the OIG calls the “One Man Bank.”

The FDIC defines a “One Man Bank” as an institution “where the principal officer and stockholder dominates virtually all phases of the bank’s policies and operations. Often this situation stems from the personality of the principal officer or ownership control, and it is usually abetted by an apathetic Board.”

How can a single CEO come to dominate the bank’s decision-making so thoroughly? According to the OIG report, “This development is facilitated by the fact that directors are very often nominated by bank officers to whom they feel indebted for the honor, even though stockholders elect them. Over the years, an officer can influence the election of a sufficient number of directors so that the officer is ultimately able to dominate the Board and the affairs of the bank.”

You don’t need a PhD in forensic accounting to understand how a One Man Bank can become a recipe for financial disaster.

A rubber-stamp board of directors whose members feels obligated to back the CEO, no matter what, is an accident waiting to happen.

The OIG report on the failure of Florida Community Bank presents its failure as a prime example of the perils of the One Man Bank, noting that:

“As early as 1992, examiners noted that the [bank’s] CEO retained control over much of the bank’s operations, seemed reluctant to delegate responsibility to other officers, and appeared to have a disregard for written policies and documentation.

“At that time, he originated 80 percent to 90 percent of the loans, wrote most of the bank’s policies, conducted a majority of in-house appraisals and outside appraisal reviews, and managed the bank’s daily affairs.”

In a nutshell, over time, the lack of oversight over the CEO’s decisions (particularly regarding new loans) resulted in Florida Community Bank accumulating imprudent levels of exposure to commercial real estate. When the Great Recession hit, the knocks to the commercial real estate
market wrecked Florida Community’s balance sheet.

The OIG report begs some questions.

Of the 259 US bank failures over the last two years, how many small community bank failures can be blamed on the One Man Bank phenomenon?

And how many more One Man Banks will fail before the Great Recession ends?

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