Because of the nature of the banking industry, there is always the potential for banks to face litigation. Lawsuits can bring a host of repercussions that harm a bank’s viability and growth. Therefore, banks need to implement an array of strategies to minimize and mitigate the risks of a lawsuit. Likewise, financial institutions should develop systems to eliminate potential liability before it becomes an issue.
Banks Risk Reputation and Money Lost in Litigation Suits
Exposure does not only consist of lawsuits against a bank, but is also a factor when legal action is taken against some other party. This may yield a counter-suit, which the bank must then defend against.
Although litigation can pose a risk in a number of areas, lawsuits tend to cause the most damage in terms of compliance and reputation, as when banks are sued for non-compliance with laws or regulations.
How to Minimize the Risk of Litigation
1. The risk of litigation can be minimized by fostering a culture that prizes ethical behavior and by not encouraging associates to take unnecessary risks. Banks must also have systems in place to ensure that all industry regulations are being met.
2. In addition to preventing exposure, banks need to mitigate the effects of legal action. This includes having sufficient capitalization to cover any judgments and managing litigation throughout the process as well as appropriate insurance coverage.
3. Moreover, legal exposure should also be a factor considered in internal and external audits. Examiners should use the established OCC criteria for the level of risk. Some lawsuits can have implications for the entire banking industry, in which case banks should notify the OCC.
Receive a free consultation from our Palm Springs litigation attorneys by calling (760) 322-2275.