Is there a required number or percentage of outside directors for Illinois state-chartered banks and bank holding companies owning a state-chartered bank?

We are not aware of any Illinois laws requiring a certain number or percentage of directors to be “outside directors” (directors who are not employees or officers of the bank or its affiliates). The Illinois Banking Act requires a particular number of directors — five to twenty-five — without specifying whether any of those directors must be outside directors. 205 ILCS 5/16(2)(a). An Illinois Department of Financial and Professional Regulation (IDFPR) Interpretive Letter confirms that “the Act places no restrictions on the number or proportion of inside directors allowable,” except in cases of the narrow exception discussed below. IDFPR Interpretive Letter 91-30 (November 4, 1991).

There is a narrow exception to this rule for state banks that have been in existence for more than ten years and that have less than $20 million in assets. Subject to the IDFPR’s approval, such banks may have a smaller board, with a minimum of three directors, and at least one of those directors must not be an officer or employee of the bank. 205 ILCS 5/16(2)(b). However, if this exception does not apply to your institution, the requirement to have at least one outside director does not apply to your institution. See IDFPR Interpretive Letter 91-30.

Also, we are not aware of any size or outside director requirements that would apply to a bank holding company, under the Illinois Bank Holding Company Act, the federal Bank Holding Company Act, or Regulation Y.

However, note that federal auditing requirements may require your institution to include some outside directors on its board. The FDIC’s independent audit rules (which apply to all insured depositary institutions with $500 million or more in assets) may necessitate outside directors. Institutions with assets of $1 billion or more must establish independent audit committees composed entirely of outside directors, and all of those outside directors must be independent of bank management. 12 CFR 363.5(a)(1). Institutions with assets of $500 million or more but less than $1 billion must establish audit committees with outside directors, and a majority of those outside directors must be independent of bank management. 12 CFR 363.5(a)(2).

Even if the independent audit rules do not apply to your institution, the federal banking agencies have issued guidance that encourages the use of outside directors. In the Interagency Policy Statement on External Auditing Programs, the banking agencies encourage “the board of directors of each institution that is not otherwise required to do so to establish an audit committee consisting entirely of outside directors. However, if this is impracticable, the board should organize the audit committee so that outside directors constitute a majority of the membership.” See Overview of External Auditing Programs.