Recently, some state-chartered banks have been given notice by their bonding company (insurer) that their blanket bond coverage will be cancelled. The reasons for the cancellation may or may not be given to the bank concurrently with notice of cancellation. Reasons the insurer has given for cancellation include:

1. Failure of the bank to comply with the insurer's request to strengthen audit programs and procedures and to establish formal policies for loans, conflicts of interest, investments, directors' reports, and cash controls;

2. Substantial overall loss experienced by the insurer;

3. Increased number of claims or size of claims by the bank;

4. An overall increase in the number of internal loss claims.

Section 221 of the Banking Code of 1969 provides as follows:

"(1) The Board of Directors shall require every employee concerned in the handling of monies, accounts or securities of the bank, who can be bonded, to be bonded by a surety company authorized to do business in this state in such an amount as shall be determined by them. The bank shall pay for any surety bonds required of its employees.

(2) The Commissioner shall require every bank to provide reasonable protection and indemnity against burglary, defalcation and other reasonably required insurable losses. Whenever a bank refuses to comply with such requirement, the Commissioner may contract for the protection and indemnity and charge the same to the bank. If the charge is not paid, the Commissioner may collect the same in an action instituted by the Attorney General."

We hereby request that you notify the Bureau immediately if you receive a notice of cancellation from your insurer. We also request that you inform the Bureau if your bank is experiencing difficulty in obtaining a renewal of your present insurance so that we may assist to the extent possible.

This bulletin should be made a part of the official minutes of the Board of Directors.

Signed:	Richard J. Francis, Commissioner
Dated:	December 8, 1976