As is painfully evident, these are very difficult times for financial institutions. From the federal bailout of Bear Stearns and the government seizure of Fannie Mae and Freddie Mac, to the closures of IndyMac and Washington Mutual, the financial services industry is witnessing unprecedented turmoil. In the commercial banking industry, credit and investment losses have combined to wreak havoc. At June 30, 2008, there were 117 institutions on the FDIC's "problem list," the largest number since 2003. Already this year, 12 insured depository institutions have failed and, according to recent remarks by FDIC Chairman Sheila Bair, more will fail and others will go on the problem list.
In this environment, directors of financial institutions need to review and consider their own risks and exposures. In the past, directors of institutions that have experienced financial difficulties have found themselves the targets of lawsuits and enforcement proceedings brought by state and federal regulatory authorities. These directors have been subjected to class action lawsuits, civil money penalty awards, and cease and desist orders resulting in substantial monetary losses.
Because circumstances in the financial services industry are changing rapidly, institutions that appear sound today may begin to experience difficulties without much advance warning. To be prepared for such possibilities, directors should consider conducting a thorough and complete assessment now, even if their institution appears insulated from the growing turmoil in the industry.