Bank Lawyer's Blog

Hear No Evil, See No Evil Is Not A Smart Game Plan

After posting recently about the jury verdict in New York against Arab Bank on claims under the Anti-Terrorism Act (ATA) by victims of terrorist violence, I ran across an excellent client alert from Sullivan and Cromwell that discusses a decision by the US Second Circuit Court of Appeals, rendered on the same day as the jury verdict, that involves a lawsuit against National Westminster Bank (previously discussed here), and that sheds some light on the standard of knowledge required by the ATA to hold a bank liable.

On the same day, the U.S. Court of Appeals for the Second Circuit reinstated ATA claims against National Westminster Bank (“NatWest”), holding that to violate the ATA, a defendant need only have knowledge that, or be deliberately indifferent to whether, it provided material support to a terrorist organization, and need not have knowledge of whether that support actually aided terrorist activities. See Weiss v. National Westminster Bank PLC, No. 13-1618- cv.

The client alert discusses both decisions, and gives a good primer on the causes of action that plaintiffs are pursuing against financial institutions that provide "material support" (financial services) to terrorist organizations. The discussion of the appellate court's decision is particularly interesting because the Second Circuit overturned a district court's finding that "there was insufficient evidence of NatWest’s knowledge or suspicion of terror financing, despite its provision of banking services to a nonprofit ('Interpal') that was designated by the U.S. government as a Specially Designated Global Terrorist ('SDGT') for transferring money to Hamas."

The Second Circuit held that Section 2333(a) [of Title 18 of USC] incorporates the knowledge requirement of Section 2339B(a)(1), which, following Holder v. Humanitarian Law Project, 561 U.S. 1, 16-17 (2010), “prohibits the knowing provision of any material support to terrorist organizations without r egard to the types of activities supported.” In other words, “Section 2339B(a)(1) does not require a showing that [the defendant] knew it was providing material support for terrorist activity.”

The Court held that because Hamas is designated as an FTO, to establish liability, plaintiffs were required to show only that NatWest provided material support to Interpal with “actual knowledge that Interpal provided material support to Hamas, or . . . deliberate indifference to whether Interpal provided material support to Hamas.” The Second Circuit concluded that the district court erroneously “focused on NatWest’s employees’ knowledge of Interpal’s terror financing as opposed to their knowledge of Interpal’s financing of a terrorist organization.”

The Second Circuit further found that the district court “gave inappropriate weight” to the determination of certain British authorities—namely, the Charity Commission for England & Wales, the Metropolitan Police Special Branch, and the Bank of England—to condone NatWest’s relationship with Interpal. The Second Circuit noted that the findings of those British authorities relied only on the conclusion that Interpal did not support Hamas’ terrorist activities, not “whether Interpal provided any material support to Hamas, regardless of purpose.” In addition, “[e]ven if the British authorities had investigated whether Interpal provided material support to Hamas for any purpose and had concluded that Interpal had no links to Hamas at all, . . . in the face of contrary findings—in this case by the United States Treasury Department—such views of foreign governments could not support summary judgment.”

The Second Circuit concluded that plaintiffs had presented sufficient evidence to create a triable issue of fact on the question of scienter based on (i) evidence of NatWest’s knowledge of Interpal’s SDGT designation, including that Interpal provided payments to Hamas; (ii) evidence of NatWest’s knowledge of payments from Interpal’s accounts at NatWest to Hamas and other suspected terrorist organizations; (iii) evidence that NatWest “had accounts for people connected to Hamas”; and (iv) testimony from the head of NatWest’s Group Security and Fraud Office that NatWest would terminate a customer relationship for suspected terror financing only if the customer was convicted or if there was clear evidence that the funds were used to directly support terrorist activities."

Although the Second Circuit ordered the district court to consider other grounds for dismissal asserted by NatWest, it's determination that NatWest could not rely on the determination of British authorities to avoid liability under the ATA is, as the authors of the client alert "instructive," Among the "instructions" that all banks, domestic and foreign, who do business in this country is that turning a blind eye to the nature of a customer with potential connections to bad actors is a ticket to substantial jury verdict. While playing the role of the three monkeys is not going to win you any acting awards, it may very well result in some adverse jury awards.

In the cases brought thus far, many of the plaintiffs are Israeli citizens. As I said last week, standing between Israel and its enemies is not likely to be a successful long-term business plan. These lawsuits are just one more front in a multi-front war, a war that one side considers "existential." Banks that are smart will stay out of the line of fire.

A New York Jury Says: Arab Bank Liable For Funding Terrorists

The last time we took a look at the civil proceedings in a US District Court in ew York against Jordan's Arab Bank by victims of Hamas terrorist violence, the plaintiffs had survived a motion to dismiss in a "strongly worded" decision by judge Nina Gershon that was a bad omen for the defendant. A mere seven and one-half years later, a jury found against the defendant on liability. A separate trial will be held to determine damages. As The New York Times noted, the decision marks "the first time a bank has ever been held liable in a civil suit under a broad anti-terrorism statute."

The burden of proof in the trial, held at Federal District Court in Brooklyn, was high: The plaintiffs had to prove that the terrorist attacks were indeed conducted by Hamas, and that the bank’s support of Hamas was the “proximate cause” of the events. In addition, the plaintiffs had to demonstrate that their injuries were “reasonably foreseeable” as a consequence of the bank’s acts.

[...]

Several similar lawsuits are pending; one case, filed by victims of terrorist attacks against the National Westminster Bank, was reinstated on Monday by a federal appeals court.

“What this has done is it’s made the effects of American law felt in far-off places, and that is significant,” said Jonathan Schanzer, vice president for research at the Foundation for Defense of Democracies and a former terrorism finance analyst for the Treasury Department. “I don’t think any country, any bank, would want to be cut off from the U.S. financial sector, and they’re going to start thinking very carefully about whether they accept financial transactions” even from people or groups who are not on designated terrorist lists.

That last point is an important one, because some of the organizations that were the bank's "problematic" customers were not on the official terrorist blacklists, and one of the bank's attorneys argued that this is an ominous decision for banks everywhere.

“The proposition that’s being floated here,” he told the jury, is “that private businesses, including banks, are supposed to make up their own lists of terrorists. Imagine, actually, what that would do, if a bank did that.”

The plaintiffs' attorneys countered that the organizations with which the banks did business were so obviously linked to terrorist organizations that denying the connection didn't pass the "straight face" test. Not that anything about the suffering of the plaintiffs is amusing.

The same defendant's lawyer confidently stated that the decision would be overturned on appeal. At the rate this matter has been winding its way through our judicial system, I assume that we'll know whether this prediction is prescient or fallacious sometime right before the turn of the next century.

The comments I made when discussing these types of lawsuits in January 2006 are still pertinent, I think, perhaps even more pertinent because of the recent jury verdict.

• They present huge reputational risk for the defendants.
• "Is the Israeli government financing all or any portion of the litigation, or is this merely another example of a tough, hardcore group of civilians seeking justice and simultaneously taking the fight to the enemy wherever they find them? I don't know; however, if I were a bank, the last thing I'd want to do is get between Israelis and their enemies anymore than I'd want to stand between a speeding eighteen-wheeler and a brick wall. That's just another fact of life, told from the perspective of an Irish-American Catholic kid with no axe to grind."
• "Litigation of this type is long, emotional, and expensive, win or lose. Inasmuch as it's personal, not business, to your foes, the banks involved can pin their ears back and, as they say in Las Vegas, 'get ready to rumble.' If you love protracted litigation, you'll enjoy yourself immensely."

Credit Unions Also Weighed Down By Regulatory Burdens

Recently, a group of credit union executives in Cincinnati sat down with Staff Reporter Steve Watkins of the Cincinnati Business Courier and let him know that when bankers complain about the regulatory burden that is crushing them, credit union executives feel their pain (albeit, in a tax-free kind of way).

A group of Greater Cincinnati credit union executives met with me for lunch on Monday at Palomino to talk about the issues that are affecting them, and the regulatory burden was topic one.

They had just met Monday morning with U.S. Rep. Steve Chabot, a Cincinnati Republican, primarily about the possibility of easing the regulatory burden. Patrick Harris, director of legislative affairs for the Ohio Credit Union League, told me the banking sector has had 180 new rules and regulations foisted upon it by Congress since 2010, following the financial crisis.

This isn’t a banks versus credit unions thing. Most of the changes the credit unions want would also ease burdens on banks, Harris said. They’re things like reducing the need to send out disclosures about privacy policies, as well as the ability of some credit unions to tap the Federal Home Loan Bank for funds. How big of a factor is it? We know how regulatory costs have caused banks like the Bank of Kentucky to sell. And it has $1.9 billion in assets. What chance do credit unions with $20 million or $30 million in assets have to comply with those same rules?

“When the small credit unions merge, one of the main reasons is compliance costs,” Cinfed Credit Union CEO Jay Sigler said.

The first thing you'll notice is that they're all sitting down for lunch and a bitch-fest at Palomino. The visual of complaining about the cost of regulations while scarfing down Tuna Puttanesca or Asiago-Almond Crusted Scallops is somewhat incongruous. Maybe the newspaper picked up the tab.

The second thing you'll notice, however, is that the smaller the size of the institution, the more incentive there is to merge. Inasmuch as credit unions, especially smaller credit unions, are sometimes touted as a vehicle most able to offer services to the "underbanked" customers who often might "fall prey" to evildoers like payday lenders, the fact that regulatory burdens are leading many to merge should give banks cold comfort. While the number of competitors may decrease, those who are left standing when the shooting stops are going to be better armed at not only surviving, but competing with commercial banks.

The article also notes that all types of loan demand appears to be relatively flat. While one credit union official observes that business loans are a small part of its portfolio, I think that there will be no let-up in pressure by credit unions for more business loan authority. I also expect that there will be no let-up in counterattacks by commercial bankers, who will continue to demand that if a credit union wants to loan like a bank, it should pay taxes like a bank.

Still, the important point to me is that regulatory burden continues to be a driver of financial industry consolidation across the entire spectrum. In other words, unless there is some serious regulatory relief provided (likely via the US Congress), especially for smaller institutions, the incredibly shrinking financial services industry appears to be ia horror show will continue for some time.

More Adventures In Consumer "Protection"

The CFPB's gossip column (which we've previously blasted) got a recent fisking from George Mason University scholars Hester Peirce and Vera Soliman. They point out several inconvenient truths about The Adjustment Bureau's plan to expand the scope of a public rag sheet where anyone and his second cousin Luigi can anonymously lambaste, in narrative form, any financial business in the Milky Way with unverified snark of various flavors. You know, just like what we like to do here at Bank Lawyer's Blog.

Peirce and Soliman make the following criticisms:

• There is not a market failure that would justify the public database (it's a solution in search of a problem). "There may be a powerful consumer demand for sharing bad experiences, but a private complaint database provider can more effectively satisfy that demand."
• It's a costly enterprise whose purported value does not justify the added expense.
• "By publishing a database of unverified, redacted (to remove personally identifiable information) consumer complaints, the Bureau would entice consumers to rely on incomplete and potentially inaccurate information—exactly the type of practice the Bureau seeks to stop financial firms from engaging in."
• Financial institutions will suffer financial harm from unverified complaints that they cannot effectively rebut, given the ridiculously short response time (15 days) and inability to publicly identify the accuser.
• The Bureau lacks legal authority to establish the database.
• The Bureau's argument that other agencies publish similar databases lacks argumentative "heft." "[B]ad practices at one agency do not justify bad practices at another." Moreover, some of those databases provide protections regarding verifiability that the Bureau's will not.

Based upon the CFPB's initial responses to comments it's received about the proposal, don't expect the CFPB to back down from this bad idea. After all, the CFPB has been fairly clear in recent public pronouncements that while technically it's mandate may be to prevent and remediate "unfair, deceptive or abusive" practices, what really revs its engine is "improving customer service." It's not enough to prevent fraud. The Adjustment Bureau is all about improving the "quality" of customer service. It doesn't believe that the free market can adequately manage that aspect of an agenda that requires that life be hassle free, at least if you're not a financial institution. From that perspective, a government-sponsored consumer gossip column makes all the sense in the world.

MJ Co-Ops: DOA?

Readers may recall the brilliant idea for "cannabis co-ops," hatched by Colorado legislators who, sunshine on their shoulders, were not only crying at the beauty of the concept, but apparently flying at 30,000 feet on a Rocky Mountain High. And, of course, as was the case with the Dude's soiled floor rug, they were looking for a way to "tie the room together."

Notwithstanding that the law passed and was signed by Colorado's ever-optimistic governor Hickenlooper (yes, that's his real name) in June, according to this morning's The Denver Post, the idea has generated as much movement as a convocation of stoners with a sweet tooth and a gross of Hasheys Bars.

Even with the flurry of international publicity that swirled last spring around the groundbreaking effort — one that theoretically would allow pot businesses to band together and form their own banking entity — there has been lukewarm interest in giving it a try without first knowing it's not a useless effort.

As such, there hasn't been a formal application to the federal agency that would have to approve one.

That "federal agency" is the Federal Reserve.

For now, the Federal Reserve hasn't said one way or the other — probably because there hasn't been a formal application for access to the nation's financial system.

My guess is that the Federal Reserve will channel the spirit of Nancy Reagan and "Just Say No!" On the other hand, it may adopt the response that federal banking regulators have thus far revealed with respect the requests of the governors of Colorado and Washington for regulatory guidance to banks on banking "legitimate" marijuana businesses in their states: The Mount Rushmore Response. This involves impassive staring and no audible sound.

According to cannabis industry representatives, while no applications have been filed yet, they are "seeing some movement" on the cannabis co-op front. Unfortunately, the initial meeting to discuss the first application never got off the ground when chief organizer "Dave" was unable to gain access to the conference room.

Consolidation Does Not Inevitably Lead To De Novos

ICBA chief Cam Fine recently turned optimistic (paid subscription required) about an eventual uptick in de novo charters. However, he doesn't think that wave will break for a few years.

"It may not be as robust as the late '90s, when we had 150 to 200 [new banks] a year, but maybe 50 or 60 a year, particularly by 2020," Fine said. "First in, say 2017, it will be 10 to 15."

The new activity will sprout once the industry players feel the operating environment has leveled off, he said. "The money will come back once we digest [new regulation] and the turmoil gets in the rear view," Fine said, adding that startup capital "will maybe go where there is no local bank."

Based primarily upon what has occurred in the past, Cam's predictions make sense. On the other hand, the past is not always prelude to the future. As we've discussed previously, some of the regulatory agencies, especially the FDIC, have, by their actions and "sub rosa" admissions (if not their public statements), expressed a view that there are simply too many financial institutions in this country to ensure that all prosper, and that reducing the total number of financial institutions is a long-term goal. If that's the view, then unless it changes, I don't see another round of de novo charter approvals, certainly not 50 to 60 a year, being likely.

Of course, I could be wrong. It's happened.

One of the recent trends that those of us in the bank mergers and acquisitions arena have noticed over the past couple of years is the number of deals that have been hung up, and in some cases killed, by fair lending concerns initially raised by fair lending advocates, then taken up by regulators such as the Federal Reserve. Speaking recently with an investment bankers heavily involved in with community bank merger and acquisition transactions, I was struck by how frustrated he and others have become with the Fed's fly-in-the-ointment role in slowing down what many observers think is an inevitable consolidation of the banking industry. A number of affected participants have voiced the view that that the Fed has gazed over the horizon and been concerned by what it sees: fewer banks to regulate, especially among the ranks of smaller Fed member community banks. These observers assert that the Fed is deliberately slowing down, and sometimes killing, deals on the pretext of fair lending concerns, but actually because it's concerned that consolidation might adversely affect the agency itself. With fewer total banks to regulate, the proponents of reducing the number of federal bank regulators to a single agency might gain support.

I suppose that's a plausible view. Certainly, it has had the effect of artificially sustaining a higher number of banks than would be the case if nature took its course. I think it may be simply more likely that the fair lending roadblocks that have been thrown in the way of recent transactions have more to do with the ideological bent of those at the top of the regulatory food chain than they do to with worry about the need to preserve enough of the regulated to justify the existence of the regulator.

Regardless, I think consolidation is a trend that will continue, as does Cam Fine.

"We have 6,300 community banks as of right now," Fine said. "My personal prediction is that… we will be at 4,800 to 5,300 banks" by the end of 2019.

That sounds about right to me. Fair lending or no fair lending, the trend is toward consolidation and I think that is where the industry is headed, whether or not the Fed makes the process more painful. Where I'm more pessimistic than is Cam is in predicting that such consolidation will, as it has in the past, spur a wave of new bank charters. Given the fact that so many of the community banks that failed in the latest downturn were de novo banks, I simply don't see the FDIC agreeing to grant 50 to 60 new bank charters on an annual basis.

The Stickiness of Browsewrap

A recent client alert from Arent Fox discusses a potential problem for every bank that has a website, which, I assume, means almost every bank. A decision of the US Ninth Circuit Court of Appeals held against Barnes & Noble, which attempted to force a customer to abide by the alternative dispute resolution terms that were contained in B&N's "terms of use" (TOU) that governed the use of its website. Visitors to the website are notified of the existence of the TOU through a highlighted "hyperlink" at the bottom of the website's homepage (you can view B&N's homepage here and scroll to the very bottom of the page, left-hand corner, to see the link). The TOU also appeared, underlined and in different colored font, at the bottom of each web page that the customer used during the check-out process. According to the court, that wasn't sufficient notice of the TOU, at least not sufficient to bind a consumer to the binding arbitration provisions.

It then went on to explain that, in situations where a website owner wishes to bind a user to the terms in a browsewrap agreement, “the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract” and that, in turn, “depends on the design and content of the website and the agreement’s webpage.”

[...]

In fact, the Ninth Circuit explicitly held that making the Terms of Use available for review via a conspicuous hyperlink is insufficient to create constructive notice:

[W]e therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on — without more — is insufficient to give rise to constructive notice. While failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract … the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.

The author of the client alert, Dana Finberg, thinks that the implicit lesson of the decision may be that "browsewrap" TOU agreements may have to adopt many of the features of "clickwrap" TOU agreements (where the customer actually has to give affirmative consent to having read and agreed to the terms by "clicking" a "I Agree" button or via a similar process), "at least as to individual consumers using commercial websites."

Obviously, using a "clickwrap" process, whereby all visitors to a bank's website, before they can use it, must affirmatively consent that they agree to the website's TOU, is the legally safest method of ensuring enforceability. It's also a process designed to discourage customers and potential customers from using the website, which is why most banks and other businesses don't use it (see, as only one example, Chase Bank's website's homepage, where the TOU is buried at the bottom of the page and not even highlighted).

A middle ground might be to draw the reader's attention to the TOU by other means, such as content that explicitly states that the use of the website is subject to the TOU and that draws the reader's attention through size, color, and/or other variations from the other content. At the very least, the business must consider the risks of using browsewrap rather than clickwrap agreements for its TOU, and consider the impact of those risks on the content of the TOU. For example, should binding arbitration provisions ever be contained solely in a TOU that is presented to a consumer solely as a "browsewrap" agreement? What other processes might make sense to ensure the enforceability of such critical terms? Should separate processes be used with respect to agreements with web site users who are not customers and web site users who are customers?

Are we having fun yet?

How Safe Is Too Safe?

Consultant Paul Schaus recently wrote an opinion piece for the American Banker (paid subscription required) in which I think he got the substance right but may have been a little off on some of the "shading." The title of his piece, "When Vendor Management Goes Too Far," and his opening paragraph, give the appearance that banks are taking regulatory guidance on vendor management "too literally" and that banks need to "lighten up--at least a bit." I was concerned when I read these opening sentences, because I thought that one thing banks don't need to do is to blow off regulatory guidance. However, reading on, Paul made some excellent points.

One of those points was that the portion of the guidance on third party relationships (for example, OCC Bulletin 2013-29) that states that banks should reserve in their vendor agreements the right to audit the vendor should be interpreted in the light of the "real world."

But bankers are wrong to think they have an inalienable right to audit under regulatory guidance. The largest bank technology vendors have hundreds or even thousands of bank clients. If every bank client demanded a right to audit and then followed through on visits, vendors would be hosting at least several banks per day, every day. They might as well offer group tours.

It may well be enough for banks to receive and review their vendors' third-party reports as part of their vendor management programs. Banks have the right to refuse to accept those audits, but in that case, I would wonder why the bank is doing business with a particular vendor in the first place.

If the vendor does not have third-party reviews, the bank will need to conduct the audit or retain an independent party to do one. But you definitely don't need to perform a surprise audit and show up at the data center without advance notice. Data centers are secure environments; if you are not on the approved list of visitors, you won't get in.

That advice is spot-on. I expressed the same opinion last week on a panel with an attorney for a major technology vendor, a vendor that would never consider giving each of its thousands of bank clients the right to individually audit the systems and controls of the vendor, for precisely those reasons articulated by Paul. That's why major vendors have an annual SASE 16 audit performed by a nationally recognized auditing firm and make the audit reports available to its customers. On this point, the regulatory guidance simply has to be interpreted in the light of the goal of the requirement in the guidance for having an audit performed, not upon a literal interpretation of the express wording of the guidance. I suppose "fundamentalists" might disagree with me, but I've never been a "guidance-thumper" myself.

Paul also addresses a comment he's heard from a number of banks, that when it comes to vendors (like lovers) "size matters." Again, I agree with Paul that this is not a valid interpretation of the regulatory guidance.

This is not the case. The OCC states that a bank must select "an appropriate third party and understand and control the risk posed by the relationship, consistent with the bank's risk appetite." Vendor management includes determining if the vendor's offering fits the bank's strategy, but the guidance does not dictate vendor size.

When bankers argue that they are wary of selecting a less well-known vendor, I often point out that under that logic, consumers would never entrust their community bank with deposits when they could open an account with Bank of America, Citibank or Wells Fargo. The truth is that bigger is not always better — and the biggest provider may not always be the right fit for a bank's needs.

On the other hand, it's my view that "two guys operating out of their garage" are always going to raise more red flags than one of the well-established Mastodon that occupy the particular "space." If a bank, especially a community bank with less sophisticated vendor management policies, processes and in-house expertise, wants to deviate from the "safe" course and hire "the next Bill Gates" over IBM as its vendor, it needs to be prepared to defend that decision to its examiners, who are not likely to be "cutting edge kind of guys." That may ultimately, as Paul worries, "suck innovation out of the banking industry." However, when it comes to vendor selection, how many community banks want to be the guys at the tip of the spear?

The bottom line is that banks simply must take the regulatory guidance seriously. While "overreacting" and "too literal" interpretations of that guidance can cause problems for some banks that do not need to exist, and Paul's observations are certainly valid on the points that he raises, I think that most banks will continue to opt to err on the side of "stifling innovation" as opposed to defending their choices to questioning examiners.

More On A Higher Standard For Bank Directors

Kevin LaCroix has some further thoughts on John Gorman's criticism of the proposal of FRB Governor Daniel Tarullo and certain academics that bank officers and directors should be held to a different (i.e., more stringent) fiduciary standard than officers and directors of other types of corporations. After discussing John Gorman's criticism of Tarullo's proposal (discussed here), LaCroix also discusses recent decisions by a federal district court judge in Georgia and the Georgia Supreme Court, the upshot of which is that while bank officers and directors (in Georgia, at least) are entitled to the protection of the business judgment rule, there may be some basis for holding them liable for ordinary negligence (as opposed to the higher "gross negligence" liability standard that is the "default" standard under FIRREA and the effective standard if the business judgment rule is applied). Kevin is concerned.

It should be emphasized that the academics’ proposal to hold bank directors to a higher standard was limited just to directors of systemically important financial institutions. I share the concerns John Gorman expressed in his American Banker article about this proposal. However, I have additional concerns, which is that there are already theories floating around that bank directors should be held to a different standard than directors of other companies, as shown by Judge Thrash’s remarks in the Buckhead Community Bank case. My concern is that if the idea were accepted that directors of systemically important banks should be held to have expanded fiduciary duties, the idea would quickly expand beyond just systemically important institutions and be applied to many , most, or even all bank directors, without regard to whether or not their institution is systemically important.

This was the same concern I expressed in my earlier post, and it's comforting to know that other observers share your concern about "trickle down" liability.

Kevin is particularly concerned about the spate of litigation directed against officers and directors of failed banks by the FDIC. The FDIC has been attempting to whittle away the business judgment rule wherever possible. The long-range implications are troubling.

There undoubtedly are meritorious lawsuits filed against bank directors, particularly where there is evidence of self-dealing or complete abdication of responsibility. Just the same, the overall level of litigation aimed at bank directors is both excessive and socially inefficient, particularly with respect to the litigation that so often follows after banks’ failures. So often the failed bank lawsuit allegations consist of little more than scapegoating and hindsight second-guessing. Creating a liability regime that would encourage further litigation and expand the potential liabilities of bank directors would accomplish little except enlarging the litigation burden that prospective directors would have to consider before accepting a seat on a bank board.

There is no question that prospective directors of financial institutions (especially community banks) have to think long and hard about the potential liability before agreeing to accept a board seat. For an increasing number of otherwise qualified candidates, the decision may be that if you don't have "a dog in the hunt" (a substantial financial investment in the bank), the benefits of being on the board do not outweigh the risks if (God forbid!) "something bad happens."