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April 30, 2007: 

The Honorable Bernard Sanders: 
United States Senate: 

Subject: Information on Selected Issues Concerning Banking Activities: 

Dear Senator Sanders: 

This letter responds to your request for information on (1) selected 
federal expenditures, policies, and programs that affect the U.S. 
banking industry and (2) certain banking industry trends. These include 
the savings and loan industry crisis, trade finance, tax policies, and 
profits and executive compensation. Your letter also asked us for 
information on bank fees; as agreed with your staff, we will discuss 
this topic in a separate report. On December 11, 2006, we briefed your 
staff on information gathered during our preliminary work. This letter 
summarizes and updates the information presented at the briefing. 

The U.S. banking industry encompasses different types of federally 
insured depository institutions, including over 8,000 state and 
national banks, over 860 savings and loan associations (known as 
"thrifts"), and nearly 8,700 federally insured credit unions. Five 
federal banking regulatory agencies are collectively responsible for 
supervision of the industry: the Federal Deposit Insurance Corporation 
(FDIC), the Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (the Federal Reserve), the 
Office of Thrift Supervision (OTS), and the National Credit Union 
Administration (NCUA). During the 1980s, many thrifts experienced 
severe financial losses. In response to this crisis, Congress took a 
number of steps, including augmenting the Federal Savings and Loan 
Insurance Corporation's (FSLIC) insurance fund through the issuance of 
bonds and ultimately creating new insurance funds administered by FDIC. 
Congress also established new organizations to resolve the failing 
thrifts, and incentives were offered for financially healthy banks and 
thrifts to take over the troubled ones. These incentives included 
certain tax benefits administered by the Department of the Treasury's 
Internal Revenue Service (IRS). 

Banks engaged in financing international trade may participate in 
programs offered by the Export-Import Bank of the United States (Ex- 
Im), which helps finance exports of goods and services.[Footnote 1] 
Among other things, Ex-Im guarantees loans--including loans made by 
U.S. banks--to private companies engaged in exporting and provides 
credit insurance. 

As discussed with your office, this letter provides information on (1) 
the cost of resolving the savings and loan industry crisis; (2) the 
extent of U.S. banks' use of Ex-Im products, and factors affecting 
banks' use of these products; (3) federal tax deductions, credits, and 
other provisions available to banks and thrifts and their use of 
transactions that IRS has found to be abusive; (4) trends in depository 
institutions' profits and income; and (5) trends in executive 
compensation in the banking industry. This letter summarizes these 
issues; further details can be found in enclosures II through VI. 

To accomplish our first objective, we reviewed relevant past GAO 
reports, obtained and analyzed information from FDIC and the Federal 
Housing Finance Board,[Footnote 2] and interviewed FDIC officials 
regarding costs associated with resolving the savings and loan industry 
crisis that have been identified since 1996.[Footnote 3] For the second 
objective, we obtained and analyzed available data from Ex-Im on the 
trade finance activities of U.S. lenders between 2000 and 2005 and 
interviewed officials from Ex-Im and the federal banking regulators. We 
also interviewed industry representatives and participants about 
changes in trade finance over the past decade and reviewed past GAO 
work on various aspects of Ex-Im. For the third objective, we analyzed 
IRS data on tax deductions and credits claimed by depository 
institutions in 2004--the most recent year for which data were publicly 
available--and used Treasury's tax expenditure list to identify tax 
expenditures available to banks and thrifts.[Footnote 4] We also 
interviewed IRS officials, attended IRS briefings on tax issues 
affecting the banking industry, and reviewed relevant past GAO work. 
For the fourth objective, we analyzed data from FDIC and NCUA on 
profits, retained earnings, and income for depository institutions from 
1996 to 2006. We also interviewed officials from the federal banking 
regulatory agencies about trends in the data and the potential causes 
of these trends. For the last objective, we performed a literature 
search for relevant professional or academic papers, articles, or 
studies on executive compensation in the banking industry. We reviewed 
relevant past GAO work that addressed executive compensation issues in 
the credit union industry and results from a recent survey of community 
banks on compensation issues. We also reviewed congressional testimony 
regarding executive compensation and relevant sections of the Internal 
Revenue Code. We conducted this work from August 2006 to April 2007 in 
Washington, D.C., in accordance with generally accepted government 
auditing standards. See enclosure I for a detailed description of our 
scope and methodology. 

Summary: 

Since 1996, when we reported that the total estimated cost of resolving 
the savings and loan industry crisis was $160.1 billion (equivalent to 
$198 billion in 2006 dollars), there have been limited additional costs 
associated with litigation expenses; however, our 1996 estimates of tax 
benefit costs and the interest expense on certain bonds issued to 
provide financing are consistent with recent FDIC and Federal Housing 
Finance Board data.[Footnote 5] Litigation costs have arisen from cases 
against the government regarding both the use of accounting practices 
by institutions that acquired failing thrifts and the tax benefits 
associated with certain FSLIC-assisted acquisitions. FDIC data indicate 
that since 1996, these cases have resulted in judgments, settlements, 
and related litigation expenses that total $2 billion ($2.1 billion in 
2006 dollars). FDIC's current estimates of realized and future tax 
benefits for institutions that acquired failed thrifts generally 
correspond with our 1996 estimate of $7.5 billion ($9.3 billion in 2006 
dollars) for the total cost of these tax benefits. Specifically, 
according to FDIC, through tax year 2005, acquiring institutions have 
received approximately $6.51 billion in tax benefits and will receive 
an estimated $609.24 million in such benefits in subsequent tax years. 
In addition, while the Gramm-Leach-Bliley Act of 1999 changed the 
method of determining the annual interest amounts the FHL Banks pay on 
certain bonds issued to provide financing to FSLIC, our estimate of the 
total interest expense on these bonds remains unchanged. 

We could not determine the precise extent to which U.S. banks use Ex-Im 
products because Ex-Im records do not specifically distinguish between 
banks and nonbank lenders. However, relatively few U.S. commercial 
banks appear to use Ex-Im products or participate in trade finance. In 
fiscal year 2005 (the most recent year for which Ex-Im could provide 
data), U.S. lenders--including both banks and nonbank lenders-- 
accounted for about $1.8 billion in Ex-Im loan guarantees and over $2 
billion in Ex-Im insurance products. However, U.S. lender participation 
in trade finance, including Ex-Im programs, has generally been 
declining in recent years, and Ex-Im data show that for fiscal years 
2000 through 2005, only about 100 U.S. lenders (both banks and nonbank 
lenders) participated in Ex-Im programs annually. Trade finance 
industry participants noted that most U.S. banks involved in trade 
finance are large, money center banks, along with a limited number of 
regional and small banks. Ex-Im officials and industry participants 
noted that transactions involving Ex-Im products generally result in 
high internal administrative costs and low profit margins for banks. 
However, officials and participants also identified a number of factors 
that might prompt bank use of Ex-Im products, including risk mitigation 
through Ex-Im's loan guarantees and insurance and increased liquidity 
through the sale of certain Ex-Im products in the secondary market. 
Furthermore, Ex-Im officials and industry participants said that using 
Ex-Im products offers U.S. banks the opportunity to develop broader 
relationships with their customers and, in turn, offer them other 
services. 

According to IRS data and officials, banks and thrifts use tax 
deductions, credits, and other provisions that are generally available 
to all corporations. Treasury considers only one tax provision--the 
deduction of excess bad debt reserves--a tax expenditure available 
exclusively to banks and thrifts and estimates revenue losses for this 
tax expenditure at $10 million in 2007. IRS data indicate that the 
largest deductions banks and thrifts took in 2004--the most recent year 
for which data were available--were for business expenses, such as 
interest paid, as well as salaries and wages. The largest tax credits 
banks and thrifts claimed in 2004 were for the general business credit 
and foreign tax credit. To bypass federal corporate income taxation, 
some eligible banks and thrifts also have taken advantage of the option 
to elect Subchapter S tax status (companies that elect this option are 
referred to as S-corporations). Instead of being taxed directly at the 
entity level, an S-corporation's income is passed through to its 
shareholders, who are then taxed (as individuals) on their portion of 
the corporation's income. As of December 2006, 2,356 depository 
institutions, including 31 percent of banks, had elected Subchapter S 
status, according to FDIC data. IRS officials also noted that some 
banks have participated in tax shelters and transactions the IRS 
considers to be abusive. For example, in a January 2007 summary 
judgment decision, a U.S. district court ruled in favor of IRS in 
disallowing over $9 million in tax deductions associated with a bank's 
participation in a certain transaction in 1997 that IRS considered 
abusive.[Footnote 6] 

The profits of U.S. depository institutions have grown over the last 15 
years, accompanied by changes in sources of income. FDIC data indicate 
that in 2006, banks and thrifts reported a total of $146 billion in net 
income, representing an inflation adjusted 7 percent average growth 
rate over the previous 10 years. NCUA data indicate that credit unions, 
which are not-for-profit organizations, reported $6 billion in net 
income in 2006, representing a 3 percent average annual inflation 
adjusted growth rate over the previous 10 years. The industry's growth 
in profits has been accompanied by a gradual shift toward greater 
reliance on noninterest income--investments, fees, and service charges, 
among other things. Since the early 1990s, banks, thrifts, and credit 
unions have all experienced an increase in noninterest income relative 
to net operating revenue. For example, as of 2003, noninterest income 
at banks accounted for 43 percent of net operating revenue, up from 32 
percent in 1990. 

Although publicly available information on executive compensation in 
the banking industry is limited, several studies that we reviewed 
identified an increase in bank executives' compensation over the past 
decade, and some generally attributed the increase to the elimination 
of interstate banking barriers and competitive pressures. Federal 
banking statutes limit executive compensation in certain circumstances-
-for example, the compensation of senior executive officers at 
significantly undercapitalized institutions. The federal statutes also 
place limitations on golden parachute agreements, which generally, 
provide executives with significant benefits in the event that the 
executives' employment is terminated. The federal banking regulators 
routinely collect information about salaries and wages at depository 
institutions, but the information is not specific to the institution's 
executives. 

Agency Comments: 

We provided a draft of this report to OCC and FDIC for comment. We also 
provided selected portions of a draft of this report to officials at 
IRS, the Federal Reserve, OTS, NCUA, the Federal Housing Finance Board, 
and Ex-Im for their technical comments. All of the agencies except the 
Federal Reserve provided technical comments, which we incorporated 
where appropriate. 

As agreed with your office, we plan no further distribution of this 
report until 30 days from its issue date unless you publicly release 
its contents sooner. We will then send copies of this report to 
interested congressional committees, the Commissioner of IRS, the 
Chairman of FDIC, the Comptroller of the Currency, the Chairman of the 
Board of Governors of the Federal Reserve System, the Director of OTS, 
the Chairman of NCUA, the Chairman of the Federal Housing Finance 
Board, and the Chairman of Ex-Im. We will also make copies available to 
others on request. In addition, the report will be available at no 
charge on GAO's Web site at http://www.gao.gov. 

If you or your staff have any questions on matters discussed in this 
report or need additional information, please contact me at (202) 512- 
8678 or woodd@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in enclosure VII. 

Sincerely yours, 

Signed by: 

David G. Wood: 
Director, Financial Markets and Community Investment: 

Enclosure I: 

Scope and Methodology: 

To provide information on the estimated total cost of resolving the 
savings and loan industry crisis and estimated future tax benefits, we 
followed the approach for updating the cost estimates presented in our 
audit of the Resolution Trust Corporation's 1995 and 1994 financial 
statements.[Footnote 7] We reviewed our annual audits of the Federal 
Deposit Insurance Corporation's (FDIC) financial statements from 1995 
through 2006 to identify information on litigation against the 
government for breaches of contract regarding (1) the use of 
supervisory goodwill in calculating regulatory capital and (2) tax 
benefits associated with Federal Savings and Loan Insurance Corporation 
(FSLIC) agreements. We also analyzed data from FDIC on expenses 
associated with this litigation, including expense payments made to the 
Department of Justice (DOJ), and adjusted these data for inflation 
using a gross domestic product price index.[Footnote 8] In addition, we 
interviewed FDIC officials about litigation expenses and tax benefits 
and analyzed information from FDIC on tax benefits received and 
estimated future benefits stemming from FSLIC agreements. We also 
examined relevant banking statutes and court rulings. Finally, we 
reviewed our past work to identify information on the interest expense 
of bonds issued to finance the resolution of failed savings and loan 
institutions. We reviewed relevant legislative amendments since 1996 to 
identify changes affecting the interest obligation of those bonds. We 
also obtained information from the Federal Housing Finance Board on the 
interest obligation. 

To determine the extent to which U.S. banks use the Export-Import Bank 
of the United States (Ex-Im) products, we obtained and analyzed 
information from Ex-Im regarding its products used by U.S. lenders. 
Specifically, we analyzed Ex-Im's data on loan guarantees and insurance 
products for fiscal years 2000 through 2005 and reviewed Ex-Im annual 
reports from the same time period. We obtained available information 
from Ex-Im on claim payments to guaranteed lenders and insured parties, 
as well as recoveries, for fiscal years 2002 through 2006, and 
determined the amount of payments made to U.S. lenders. In addition, we 
interviewed officials at the federal banking regulatory agencies, Ex-Im 
officials, and trade finance industry representatives and participants 
about U.S. banks' participation in trade finance, use of Ex-Im 
products, and participation in the secondary market for certain Ex-Im 
products. We also attended Ex-Im's trade financing seminar. To 
determine the reliability of data provided by Ex-Im's data systems, we 
reviewed the reliability assessment of the same Ex-Im systems performed 
for one of our recent reports and confirmed with Ex-Im officials that 
the information obtained remained valid.[Footnote 9] We are confident 
that for purposes of describing Ex-Im product authorization levels and 
the proportion attributable to U.S. lenders in this report, these data 
are similarly reliable. 

To identify tax expenditures available exclusively to depository 
institutions, we reviewed Treasury's list of tax expenditures and 
revenue loss estimates from the President's fiscal year 2008 annual 
budget.[Footnote 10] The Congressional Budget and Impoundment Control 
Act of 1974 defines tax expenditures as revenue losses due to 
provisions of the tax law that allow special exclusions, exemptions, 
and deductions from income or provide special credits, preferential tax 
rates, or deferral of tax liability.[Footnote 11] Tax expenditures are 
revenue losses resulting from tax provisions granting special relief 
for certain kinds of taxpayer behavior or for taxpayers in special 
circumstances. These provisions could, in effect, be viewed as spending 
programs channeled through the tax system and are classified in the 
U.S. budget by budget function. We consulted an official in Treasury's 
Office of Tax Analysis to ensure that we included all of the tax 
expenditures provided exclusively to depository institutions. Also, we 
drew on our past work on economic development tax expenditures to 
provide perspective on banks' use of these provisions.[Footnote 12] To 
identify tax deductions and credits claimed by depository institutions, 
we analyzed publicly available tax data from the IRS Corporation Source 
Book of Statistics of Income.[Footnote 13] We used data from tax year 
2004, the most current year for which the data were available. We 
compared deduction and tax credit amounts and ratios for the industry 
classifications "All Corporations" and "Depository Credit 
Intermediation." To identify Subchapter S-corporation banks and 
thrifts, we analyzed data from the FDIC's Statistics on Depository 
Institutions. We calculated the number and assets of S-corporation 
banks and thrifts for the years 1997 through 2006. We reviewed relevant 
public laws related to changes in S-corporation eligibility. We 
interviewed Internal Revenue Service (IRS) officials to identify (1) 
common tax provisions and strategies used by depository institutions 
and (2) any instances for which depository institutions used tax 
provisions that IRS considered abusive. We also reviewed relevant IRS 
documents and notices as well as a recently decided court case 
involving an abusive tax shelter. 

To evaluate the profits and noninterest income of depository 
institutions, we analyzed aggregate annual call report (banks and 
credit unions) and thrift financial report data provided by FDIC and 
National Credit Union Administration (NCUA) for 1990 through 2006. We 
identified potential causes for trends in the data by interviewing bank 
regulators and reviewing their documents and reports. 

To identify trends in executive compensation in the banking industry, 
we reviewed publicly available research papers from academic 
researchers and various Federal Reserve Banks. We reviewed relevant 
banking regulations that included limits or controls on certain 
executive compensation in the banking industry as well as sections of 
the Internal Revenue Code and Securities and Exchange Commission (SEC) 
regulations regarding limits on the deductibility of and disclosure 
requirements for executive compensation. We also interviewed officials 
at the federal banking regulatory agencies and banking industry 
representatives about executive compensation issues. We did not review 
annual proxy statements of 10-K annual reports or other filings that 
may contain information on executive compensation made by companies 
with securities registered with SEC, because they do not necessarily 
distinguish the salary information of executives associated with a 
company's depository institution from that of executives associated 
with other parts of the organization. 

We conducted this work from August 2006 to April 2007 in Washington, 
D.C., in accordance with generally accepted government auditing 
standards. 

Enclosure II: 

Developments in Costs Associated with Resolving the Savings and Loan 
Crisis Represent Limited Changes to Estimated Total Cost: 

Developments in litigation associated with resolving the savings and 
loan industry crisis resulted in limited changes to the $160.1 billion 
($198 billion in 2006 dollars) total cost we estimated in 
1996.[Footnote 14] In 1996, we determined that these costs, which were 
associated with litigation against the government (called supervisory 
goodwill litigation) regarding contracts with institutions that 
acquired failing thrifts, were uncertain. FDIC data indicate that since 
1997, $1.34 billion ($1.39 billion in 2006 dollars) has been paid for 
judgments and settlements in these cases. FDIC reports that an 
additional $274 million ($276 million in 2006 dollars), has been paid 
in judgments and settlements in separate litigation (called Guarini 
litigation) against the government for breaches of contract regarding 
benefits associated with acquiring institutions' tax benefits. In 
contrast to this change, FDIC's estimates of tax benefits related to 
FSLIC agreements generally correspond with estimates we made in 1996. 
Similarly, while the Gramm-Leach-Bliley Act of 1999 changed the method 
of determining the annual interest amounts the Federal Home Loan Banks 
(FHL Banks) pay on certain bonds issued to provide financing to FSLIC, 
the total annual interest payments made by the FHL Banks and other 
sources correspond with the $2.6 billion in annual expense that we 
reported in 1996. 

Costs Associated with Supervisory Goodwill and Guarini Litigation 
Represent Slight Increases to Total Estimated Costs: 

FDIC data on judgments and settlements associated with litigation that 
arose from cases against the government regarding the use of accounting 
practices by institutions that acquired failing thrifts and tax 
benefits associated with certain FSLIC-assisted acquisitions, represent 
a limited increase to the $160.1 billion ($198 billion in 2006) total 
cost that we estimated in 1996. FDIC data indicate that from 1997 
through January 2007, institutions that acquired failed thrifts were 
paid $1.34 billion ($1.39 billion in 2006 dollars) in judgments and 
settlements have been paid in litigation against the government 
involving the use of favorable accounting treatment for intangibles, 
such as goodwill, in calculating regulatory capital.[Footnote 15] 
Supervisory goodwill is an accounting measure that refers to the excess 
of a purchase price over the fair value of all identifiable assets 
acquired. Upon FSLIC's insolvency, the Federal Home Loan Bank Board 
(FHLBB), the former thrift industry regulator, embarked on a 
forbearance program to induce new investors to purchase or merge with 
failed thrifts. The program not only permitted the acquiring 
institutions to count supervisory goodwill toward their reserve 
requirement, it also allowed acquiring institutions to amortize 
goodwill over many years, up to a 40-year maximum.[Footnote 16] The net 
effect of including supervisory goodwill was avoiding the need for the 
regulator or the failed institution to transfer tangible assets or cash 
to cover the deposit accounts transferred in the transaction. 

Several institutions that had entered into agreements with the 
government that allowed the use of goodwill, which came to be called 
supervisory goodwill, brought suit against the government after 
legislative changes eliminated the use of supervisory goodwill in 
calculating the amounts of capital that regulators require the 
institutions to maintain (referred to as regulatory capital standards 
or requirements). Specifically, in 1989, Congress enacted FIRREA, 
which, among other changes, mandated new regulatory capital accounting 
for depository institutions and provided for the elimination or rapid 
phase-out of the use of supervisory goodwill in calculating the 
regulatory capital of depository institutions.[Footnote 17] FIRREA also 
provided the director of the new thrift industry supervisor, the Office 
of Thrift Supervision (OTS), with the authority to take certain actions 
against institutions not in compliance with the new capital 
standards.[Footnote 18] In 1990, OTS issued guidance indicating that it 
was applying the new capital standards to all savings associations, 
including those that had been operating under previously granted 
capital and accounting forbearances, including supervisory 
goodwill.[Footnote 19] As a result, acquiring institutions that had 
agreements with the government became subject to OTS-imposed sanctions 
under FIRREA for failing to meet the minimum capital requirements. 
Plaintiffs subsequently brought suit against the government alleging 
breach of contract. In United States v. Winstar Corp., the Supreme 
Court held that the government was liable for damages to the acquiring 
institutions for breach of contract.[Footnote 20] In the damages phase 
of the case, over 120 other claimants who had entered into similar 
accounting method agreements with the government, had joined the 
original three plaintiffs as of January 7, 1997, in seeking recovery 
for contract damages.[Footnote 21] According to FDIC, as of December 
31, 2006, there were approximately 26 cases pending against the 
government based on alleged breaches of such agreements. 

In addition, FDIC data indicate that from 2002 through April 11, 2007, 
approximately $274 million ($276 million in 2006 dollars) had been paid 
in judgments and settlements in separate litigation regarding tax 
benefits that parallels the supervisory goodwill cases. Like the 
goodwill cases, the tax benefits involve agreements between investors 
and thrift regulators in the context of acquiring failing thrifts. In 
the tax benefit litigation--called Guarini cases, after the legislation 
that established the relevant tax provisions--the plaintiffs entered 
into agreements with FSLIC, providing that the regulators would 
reimburse them for the losses that they sustained when disposing of 
certain assets that they acquired in the transaction. Under provisions 
of the tax law then in existence that were specifically applicable to 
FSLIC, the acquirers could take advantage of the losses and were not 
required to include the FSLIC reimbursement in calculating their 
income.[Footnote 22] A provision of the Omnibus Budget Reconciliation 
Act of 1993--popularly referred to as the "Guarini legislation"-- 
eliminated the tax deductions for these covered losses.[Footnote 23] 
According to FDIC, as of April 2007, all of the Guarini cases have been 
adjudicated and associated payments made; however, additional claims 
for attorney costs are still pending. 

Costs associated with supervisory goodwill and Guarini litigation also 
involve expenses incurred by DOJ. Because the supervisory goodwill and 
Guarini lawsuits are against the United States, DOJ defends the 
government. According to FDIC data, since 1998, approximately $374 
million ($427 million in 2006 dollars) has been paid to DOJ in 
litigation expenses.[Footnote 24] 

Estimated Cost of Tax Benefits and Interest Expense on REFCORP Bonds 
Remain Unchanged: 

FDIC's estimates of the tax benefits received by institutions that 
acquired failing thrifts under certain FSLIC assistance agreements 
generally correspond with the $7.5 billion ($9.3 billion in 2006 
dollars) we estimated in 1996 (including $3.1 billion that had already 
been realized through December 31, 1995). According to FDIC, through 
tax year 2005, institutions that acquired failed thrifts received 
approximately $6.51 billion in tax benefits associated with FSLIC 
assistance agreements, and approximately $609.24 million remain in tax 
year 2006 and future benefits. Tax benefits included treating 
assistance paid to an acquiring institution as nontaxable and, in some 
cases, reducing the tax liability of the acquiring institution by 
carrying over certain tax losses and tax attributes of the troubled 
institutions.[Footnote 25] The effect of these special tax benefits was 
to reduce the amount of FSLIC assistance payments. 

Similarly, our estimates of the interest expense associated with 
certain bonds used to help finance resolution of the savings and loan 
crisis have not changed.[Footnote 26] These bonds were issued by the 
Resolution Financing Corporation (REFCORP) and the Financing 
Corporation (FICO). Congress established REFCORP by the enactment of 
FIRREA in 1989 primarily to provide funds for RTC, which was created 
during the savings and loan crisis as a means of liquidating insolvent 
institutions. Beginning in 1989, REFCORP issued six series of 30-and 40-
year bonds with fixed coupon rates. From the proceeds of these bonds, 
REFCORP purchased a special domestic series of long-term, zero- coupon 
bonds issued by Treasury that are pledged to pay the principal amount 
of the REFCORP bonds. The zero-coupon bonds are the primary source for 
repaying of the principal of the obligations at maturity. FIRREA also 
provided that if REFCORP income from other sources was insufficient to 
pay the interest due on the bonds, the FHL Banks would be required to 
annually contribute up to $300 million. FIRREA further provided that 
the U.S. Treasury would cover any interest shortfall between the total 
interest on REFCORP bonds and the FHL Banks contribution. In 1987, 
Congress also created the FICO as a financing mechanism for FSLIC. FICO 
provided funding for FSLIC-related costs by issuing bonds to the 
public.[Footnote 27] 

Section 607 of the Gramm-Leach-Bliley Act of 1999 (GLBA) revised the 
obligations of the FHL Banks to pay annual interest payments on REFCORP 
bonds, from approximately $300 million annually to 20 percent of the 
FHL Banks' annual net earnings, after deducting certain 
expenses.[Footnote 28] To ensure that the FHL Banks pay their entire 
obligation, GLBA requires the Federal Housing Finance Board, which 
oversees the FHL Banks, to determine annually the extent to which the 
value of their aggregate payments under the 20 percent regime exceeds 
or falls short of an annuity of $300 million per year, commencing on 
the issuance date of the REFCORP bonds and ending on the final 
scheduled maturity date of those bonds.[Footnote 29] According to the 
Federal Housing Finance Board, as of March 2007, the FHL Banks had paid 
approximately $6.2 billion in interest payments on REFCORP bonds. 

REFCORP's 2006 financial statements and reports indicated that $2.6 
billion was paid in interest on REFCORP's long term obligations in 2005 
and 2006. Annual interest expenses will continue through maturity of 
the REFCORP bonds in the years 2019, 2020, 2021, and 2030. 

Enclosure III: 

Relatively Few U.S. Commercial Banks Appear to Use Ex-Im Products or 
Participate in Trade Finance for Various Reasons: 

Because Ex-Im records do not specifically differentiate banks from 
nonbank lenders, we could not determine precisely the extent of bank 
participation in Ex-Im's programs. In fiscal year 2005 (the most recent 
year for which Ex-Im could provide data), U.S. lenders--including both 
banks and nonbank lenders--accounted for about $1.8 billion in loan 
guarantees, $2.4 billion in insurance products, and $1.1 billion in 
working capital guarantees. However, U.S. lender participation in trade 
finance has generally declined in recent years, and some evidence 
suggests that Ex-Im programs are used by relatively few banks. Trade 
finance industry participants noted that most U.S. banks involved in 
trade finance are large, money-center banks, along with a limited 
number of regional and small banks. Ex-Im officials and industry 
participants noted that transactions involving Ex-Im products generally 
result in high internal administrative costs and low profit margins for 
banks compared with other bank product lines. Nevertheless, officials 
and participants identified a number of other factors that might prompt 
banks to use Ex-Im products, including risk mitigation through Ex-Im's 
loan guarantees and insurance, and increased liquidity through the sale 
of certain Ex-Im products in the secondary market. Furthermore, Ex-Im 
officials and industry participants said that using Ex-Im products 
offers U.S. banks the opportunity to develop broader relationships with 
their customers and, in turn, offer them other services. 

Ex-Im's mission is to help U.S. companies create and maintain American 
jobs by financing exports of goods and services and filling gaps in the 
availability of commercial financing for creditworthy export 
transactions.[Footnote 30] Ex-Im also helps American exporters meet 
government-supported financing competition from other countries so that 
American exports can compete for overseas business on the basis of 
price, performance, and service. To accomplish its mission, Ex-Im 
offers a variety of financing instruments, including the following: 

* Loan guarantees and direct loans for buyer financing. Under its loan 
guarantee program, Ex-Im agrees to guarantee loans made by other 
lenders to help buyers in other countries obtain financing to purchase 
U.S. exports. Guarantees are offered to qualified lenders, primarily 
commercial banks. 

* Export credit insurance. This product protects U.S. exporters against 
nonpayment by their customers. Ex-Im provides this insurance either 
directly to exporters, or to banks that in turn, finance U.S. 
exporters. 

* Working capital guarantees for pre-export financing. Ex-Im guarantees 
to working capital lenders making loans to U.S. companies who would 
like to export but need funds to produce or market their goods or 
services for export. 

These guarantees and insurance programs reduce some of the risks 
involved in exporting by insuring against commercial or political 
uncertainty. Given Ex-Im's mission of encouraging U.S. exports, Ex-Im 
officials and trade finance industry representatives and participants 
commented that the role of lenders--including U.S. banks--in 
transactions involving Ex-Im products is that of an intermediary. 

Data Indicate That a Small Number of U.S. Lenders Participate in Ex-Im 
Programs: 

Ex-Im data that we obtained on lenders participating in Ex-Im 
transactions did not specifically differentiate banks from nonbank 
lenders. Further, the data did not consistently provide lender domicile 
information (indicating whether or not the lender was a U.S.- 
headquartered lender) until fiscal year 2000; accordingly, we confined 
our analysis to data for fiscal years 2000 through 2005.[Footnote 31] 
As shown in figure 1, Ex-Im data indicate that a fairly small number of 
U.S. lenders--generally around 100 annually representing both banks and 
nonbank lenders--participated in its programs. Nevertheless, this small 
number of U.S. lenders constituted a majority of Ex-Im's top lenders 
since fiscal year 2000. 

Figure 1: U.S. Percentage of Total Ex-Im Lenders, Fiscal Years 2000- 
2005: 

[See PDF for Image] 

Source: GAO analysis of Ex-Im data. 

[End of figure] 

Ex-Im officials attributed the problems in identifying lenders within 
Ex-Im data primarily to consolidation within the banking industry. They 
noted that in Ex-Im's software systems a lender and its subsidiaries 
could each be coded as individual lenders, making comparisons over time 
difficult. However, according to the officials, Ex-Im is undertaking a 
multiyear program to reengineer and automate its primary business 
processes--including short-and medium-term export insurance and loan 
guarantees--through an online computer system.[Footnote 32] 

Ex-Im data show that while U.S. bank and nonbank lenders represented 
the largest percentage of Ex-Im's top lenders, their participation 
level in terms of lenders and authorizations varied among the products. 
Specifically, participation in the loan guarantee and insurance 
programs significantly declined while the working capital guarantee 
program saw increased participation. Figure 2 provides authorization 
levels for Ex-Im products from fiscal years 2000 through 2005. 

Figure 2: U.S. Participation in Ex-Im's Products, Fiscal Years 2000- 
2005: 

[See PDF for Image] 

Source: GAO analysis of Ex-Im data. 

[End of figure] 

It is important to note that these loan guarantee and insurance 
programs are credit programs, and the amounts shown in the figure do 
not necessarily represent costs to Ex-Im or the U.S. government. Ex- 
Im's loan guarantee and insurance programs essentially reimburse 
guaranteed lenders and insureds in the event of an eligible 
default.[Footnote 33] According to Ex-Im officials, low rates of 
default on its loan guarantees and insurance claims, and a high rate of 
recovery on assets involved in these products, have resulted in 
generally low costs in Ex-Im programs. Figures 3 and 4 illustrate 
claims paid to guaranteed lenders and insureds and recoveries from 
fiscal year 2002 through 2006, respectively.[Footnote 34] 

Figure 3: Ex-Im Claims Paid to Guaranteed Lenders and Insureds, Fiscal 
Years 2002-2006: 

[See PDF for Image] 

Source: GAO analysis of Ex-Im data. 

[End of figure] 

Figure 4: Ex-Im Recoveries, Fiscal Years 2002-2006: 

[See PDF for Image] 

Source: Ex-Im data. 

Note: According to Ex-Im officials, the recovery figures include 
repayments of claims that were rescheduled under the Paris Club, an 
informal group of creditors that meets, as needed, to negotiate debt 
rescheduling and relief efforts for public or publicly guaranteed 
loans, The large amount in fiscal year 2006 was the result of one 
country prepaying its Paris Club debt, which was $592 million of the 
total. 

[End of figure] 

In 2006, Ex-Im's chairman testified before the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs that the overall loss rate 
throughout Ex-Im's history has been less than 2 percent. Further, 
information that we reviewed on Ex-Im's program subsidy rate from 
fiscal year 2001 to fiscal year 2007 indicated a general downward 
trend. 

Although U.S. Banks' Involvement in Trade Finance Appears Limited, 
Banks May Use Ex-Im Products for a Variety of Reasons: 

According to Ex-Im and Office of the Comptroller of the Currency (OCC) 
officials and trade finance industry representatives, U.S. bank 
involvement in trade finance is limited and has generally declined in 
recent years. Nevertheless, they noted several factors that prompt 
continuing bank involvement in trade finance transactions and in Ex-Im 
programs. Ex-Im officials and trade finance industry representatives 
noted that most U.S. banks involved in trade finance are large, money 
center banks, along with a limited number of regional and small banks. 
OCC officials said that only a small group of OCC-supervised banks 
participate in international lending, comprising large banks and some 
institutions located along the U.S. border. According to FDIC 
officials, FDIC supervises fewer than 10 institutions that hold more 
than 25 percent of their capital in trade finance activities. 

Ex-Im officials and trade finance industry representatives and 
participants described several factors that had contributed to a 
decline in U.S. bank participation in trade finance, including the 
industry's continuing consolidation activity and increased competition 
from nonbank lenders and foreign banks. According to Ex-Im officials, 
U.S. bank participation in trade finance has declined over the past 25 
years. Additionally, an OCC official noted that lending survey data 
indicate that the trade finance activities of U.S. banks remained 
relatively stable over the past decade, decreased during the late 
1990s, and increased near the end of 2005.[Footnote 35] A 
representative of a U.S. trade finance industry association said that 
the association membership had decreased by one-half. Ex-Im officials 
and industry experts noted that competition from nonbank entities and 
foreign banks was also a contributing factor to the decline in U.S. 
bank participation in trade finance. Other factors cited included 
capital requirements and competition from foreign banks. One Ex-Im 
official posited that under the Basel Capital Accord, the capital 
requirements for assets involved in emerging markets could have caused 
U.S. banks to move out of medium-and long-term trade financing 
activities into lines of business requiring lower capital.[Footnote 36] 
Furthermore, according to the official, European banks are subject to 
the same requirements but achieve greater operational efficiency in 
trade finance transactions because of the borders of European countries 
are closer and the countries have a much larger volume of trade 
financing. The Ex-Im official also noted that foreign bank 
participation in trade finance also increased as they began providing 
services to corporate customers in the United States through their U.S. 
correspondents. 

Ex-Im officials and industry participants noted that although trade 
finance transactions are associated with relatively high administrative 
costs and low returns, they can also foster relationship banking, help 
mitigate risk, increase liquidity, and thus prompt U.S. bank 
involvement. Ex-Im officials and a trade finance participant 
characterized bank returns on transactions involving Ex-Im products as 
low relative to other business lines and noted that these transactions 
typically involved high labor and administrative costs. Ex-Im officials 
explained that trade finance generally is not the key profit-making 
business line for banks relative to other business lines and, as a 
result, banks approach it as a vehicle for relationship banking--that 
is, as a way to offer additional services to customers. 

Banks also use Ex-Im products to reduce risk associated with 
uncertainty about overseas buyers and increase liquidity through a 
secondary market, according to Ex-Im and trade finance industry 
participants. Ex-Im officials indicated that Ex-Im's guarantees of 
commercial loans to international buyers of U.S. capital goods and 
services protect lenders against nonpayment due to commercial and 
political events. Through these medium-and long-term guarantees, Ex-Im 
covers 100 percent of the loan principal and interest.[Footnote 37] Ex- 
Im officials also indicated that their export credit insurance policies 
limit lenders' exposure to country and credit risks. A trade industry 
participant explained that if a country's creditworthiness is a concern 
or the country has not provided for defaults and other contractual 
disagreements in law, the use of an Ex-Im product can be the deciding 
factor in a bank's willingness to help a new or existing customer. 

Enclosure IV: 

Banks and Thrifts Lower Their Federal Taxes Primarily by Using Tax 
Deductions, Credits, and Other Provisions that Are Generally Available 
to All Corporations: 

According to IRS data and officials, banks and thrifts use tax 
deductions, credits, and other provisions that are generally available 
to all corporations. Treasury considers only one tax provision--the 
deduction of excess bad debt reserves--to be a tax expenditure 
available exclusively to banks and thrifts and estimates revenue losses 
from this tax expenditure at $10 million in 2007. IRS data from 2004-- 
the most recent year with available data--indicate that the largest 
deductions that banks and thrifts took were for business expenses, such 
as interest paid and salaries and wages, while the largest tax credits 
they claimed were the general business credit and foreign tax credit. 
To bypass federal corporate income taxation, some eligible banks and 
thrifts have also taken advantage of the option to become S- 
corporations, which pass their income through to shareholders, who are 
then taxed as individuals on that income. As of December 2006, 2,356 
depository institutions, including 31 percent of banks, had elected 
Subchapter S status, according to FDIC data. IRS officials also noted 
that some banks have participated in tax shelters and transactions the 
IRS considers to be abusive. 

Banks and Thrifts Receive Few Industry Specific Tax Expenditures: 

Like other corporations, banks and thrifts use general corporate tax 
deductions, credits, and other tax provisions to lower their federal 
income taxes. Some of these tax provisions are considered tax 
expenditures. Tax expenditures result in forgone revenue for the 
federal government due to preferential provisions in the tax code, such 
as deductions, credits, and deferral of tax liability. These provisions 
grant special tax relief for certain kinds of taxpayer behavior or for 
taxpayers in special circumstances.[Footnote 38] Both the congressional 
Joint Committee on Taxation and Treasury annually compile lists of tax 
expenditures and estimate their cost. Treasury's estimates are included 
as an informational supplement to the annual federal budget.[Footnote 
39] Tax expenditures are considered exceptions to the normal structure 
of the individual and corporate tax base. Determining whether an 
individual provision should be characterized as a tax expenditure is a 
matter of judgment about what should be included in the income tax 
base. The income tax base includes most corporate deductions for 
general business expenses which reflect costs of earning income. 

In the President's fiscal year 2008 annual budget, Treasury lists only 
one tax expenditure that is available exclusively to banks and thrifts-
-the deduction of excess bad debt reserves.[Footnote 40] Commercial 
banks, mutual savings banks, and savings and loan associations with 
less than $500 million in assets may generally deduct additions to bad 
debt reserves in excess of actually experienced losses. This tax 
expenditure will cost $10 million in revenue losses in 2007, according 
to Treasury's estimates.[Footnote 41] 

In addition to the one tax expenditure available exclusively to banks 
and thrifts, other tax expenditures result when banks invest in certain 
specific activities, including certain school improvements and the 
economic development of low-income communities and economically 
depressed areas. The tax credit for qualified zone academy bonds--whose 
proceeds are used to renovate or improve schools in low-income school 
districts--is available only for banks, insurers, and other 
corporations in the business of lending money.[Footnote 42] Banks also 
use economic development tax expenditures such as the new markets tax 
credit (NMTC) and the empowerment zones and renewal communities (EZ/RC) 
tax benefits.[Footnote 43] As investors in these community development 
projects, banks can claim the tax credits and lower their tax 
liability.[Footnote 44] The communities benefit from the increased 
investment. Banks and other regulated financial institutions made up 38 
percent of total NMTC claimants through 2006 and also accounted for the 
majority of the investment funds. 

Banks and Thrifts Use Tax Deductions and Credits That Are Available to 
All Corporations: 

Like other corporations, banks and thrifts lower their tax liability by 
claiming tax deductions and credits. IRS categorizes banks, thrifts, 
and similar institutions as depository credit intermediation 
corporations. As shown in table 1, IRS data indicate that depository 
credit intermediation corporations represent 0.55 percent of total 
receipts for all corporations and 2.67 percent of total income taxes 
paid by all corporations. These calculations are based on IRS data for 
the 2004 tax year, the most recent year for which data are publicly 
available. 

Table 1: Tax Deductions, Credits, and Payments for Depository Credit 
Intermediation Corporations Compared with All Corporations, 2004. 

All tax returns (with and without net income). 

Total receipts[A]; 
All corporations (Dollars in millions): $22,711,864; 
Depository credit intermediation (Dollars in millions): $125,388; 
Depository credit intermediation as a percentage of all corporations: 
0.55. 

Deductions; 
All corporations (Dollars in millions): -$21,636,156; 
Depository credit intermediation (Dollars in millions): -$108,474; 
Depository credit intermediation as a percentage of all corporations: 
0.50. 

Adjustments[B]; 
All corporations (Dollars in millions): -$218,316; 
Depository credit intermediation (Dollars in millions); +$684; 
Depository credit intermediation as a percentage of all corporations: 
N/A. 

Taxable income; 
All corporations (Dollars in millions): $857,392; 
Depository credit intermediation (Dollars in millions): $17,598; 
Depository credit intermediation as a percentage of all corporations: 
2.05. 

Tax rate; 
All corporations (Dollars in millions): =35%; 
Depository credit intermediation (Dollars in millions): 35%; 
Depository credit intermediation as a percentage of all corporations: 
[Empty]. 

Income tax before credits; 
All corporations (Dollars in millions): $299,555; 
Depository credit intermediation (Dollars in millions): $6,197; 
Depository credit intermediation as a percentage of all corporations: 
2.07. 

Tax credits; 
All corporations (Dollars in millions): -$75,120; 
Depository credit intermediation (Dollars in millions): -$200; 
Depository credit intermediation as a percentage of all corporations: 
0.27. 

Total income tax; 
All corporations (Dollars in millions): $224,435; 
Depository credit intermediation (Dollars in millions): $5,997; 
Depository credit intermediation as a percentage of all corporations: 
2.67. 

Source: IRS, Statistics of Income Division, Corporation Source Book of 
Statistics of Income, Publication 1053 (Washington, D.C.: 2004. 

[A] Total receipts equal the amount of gross receipts and other forms 
of positive income before deductions. 

[B] Includes constructive taxable income from related foreign 
corporations, statutory special deductions; excludes Interest on 
government obligations: state and local, applicable S-corporations, 
regulated investment companies, and real estate investment trusts. 

[End of table] 

Deductions claimed by depository credit intermediation corporations 
consist largely of deductions for business expenses.[Footnote 45] As 
shown in table 2, IRS data indicate that in 2004, these corporations 
claimed deductions totaling about $108 billion. The largest deductions 
claimed were for interest paid and salaries and wages. 

Table 2: Depository Credit Intermediation Corporations Deductions, 
2004: 

2004 total receipts and deductions. 

Depository credit intermediation. 

Dollars in thousands. 

Total receipts; 
$125,387,897. 

Deductions: Cost of goods; 
$198,898. 

Deductions: Compensation of officers; 
$2,522,529. 

Deductions: Salaries and wages; 
$19,400,167. 

Deductions: Repairs; 
$1,289,065. 

Deductions: bad debts; 
$3,163,894. 

Deductions: Rent paid on business property; 
$2,116,502. 

Deductions: Taxes paid; 
$3,117,885. 

Deductions: Interest paid; 
$45,422,737. 

Deductions: Charitable contributions; 
$222,564. 

Deductions: Amortization; 
$1,133,415. 

Deductions: Depreciation; 
$4,314,159. 

Deductions: Depletion; 
$2,427. 

Deductions: Advertising; 
$1,316714. 

Deductions: Pension, profit sharing, stock annuity; 
$1,080,607. 

Deductions: Employee benefit programs; 
$2,406,261. 

Deductions: Net loss, noncapital assets; 
$1,437,789. 

Deductions: Other deductions; 
$19,328,600. 

Total deductions; 
$108,474,210. 

Source: IRS, Statistics of Income Division, Corporation Source Book of 
Statistics of Income, Publication 1053 (Washington, D.C.: 2004). 

[End of table] 

As shown in table 3, in 2004, depository credit intermediation 
corporations claimed about $199 million in tax credits, the largest 
being the general business credit (1.5 percent of total income taxes) 
and foreign tax credit (1.1 percent of total income taxes).[Footnote 
46] 

Table 3: Depository Credit Intermediation Corporations Tax Credits, 
2004: 

2004 income tax and credits depository credit intermediation. 

Total income tax before credits; 
$6,196,984. 

Tax credits: Foreign tax credit; 
$65,267. 

Tax credits: Nonconventional source fuel credit; 
$20,718. 

Tax credits: General business credit; 
$95,180. 

Tax credits: Prior year minimum tax credit; 
$17,248. 

Tax Credits: Other tax credits*; 
$1,300. 

Total tax credit; 
$5,997,271. 

Source: IRS, Statistics of Income Division, Corporation Source Book of 
Statistics of Income, Publication 1053 (Washington, D.C.: 2004). 

* Includes qualified zone academy bond credit. 

[End of table] 

Some Banks and Thrifts Bypass Corporate Income Tax by Electing S- 
corporation Status: 

FDIC data indicate that in recent years, an increasing number of banks 
and thrifts have taken advantage of the option to elect Subchapter S 
tax status and therefore bypass federal corporate income tax.[Footnote 
47] Subchapter S tax status, which is available to corporations with 
less than 100 shareholders, is a common corporate tax structure 
appearing in every industrial sector.[Footnote 48] In contrast to 
Subchapter C corporations, which pay taxes as a corporate entity, an S- 
corporation elects to pass through its income to shareholders. 
Corporations that elect Subchapter S status generally are not subject 
to federal corporate-level income tax, as Subchapter C corporations 
are. S-corporation shareholders are taxed at their individual income 
tax rates on their portion of the corporation's taxable income, 
regardless of whether they receive a cash distribution. The net effect 
of electing subchapter S status is to lower the total amount of tax 
assessed on corporate income by avoiding the double taxation of 
corporate dividends, as shown in figure 5. 

Figure 5: Federal Tax Rates of C-and S-Corporations: 

[See PDF for Image] 

Source: GAO analysis. 

[A] Corporate income tax rate on earnings over $18,333,333. 

[B] Maximum tax rate on qualified dividends. Dividends are taxed in the 
year they are distributed. Capital gains are taxed when an individual 
realizes gains from the sale of an asset, such as a corporate stock. 

[C] Maximum individual income tax rate. 

[End of figure] 

As of December 31, 2006, FDIC and IRS data indicate that there were 
2,356 S-corporation banks and thrifts, accounting for less than 1 
percent of the total U.S. S-corporation population (based on 2003 
data).[Footnote 49] As shown in figure 6, the number of S-corporation 
banks and thrifts has grown steadily since 1997, the first year 
financial institutions were allowed to elect Subchapter S 
status.[Footnote 50] 

Figure 6: Number and Assets of Subchapter S Corporations (1996-2006) 
Compared to All FDIC-insured Institutions (Banks and Thrifts): 

[See PDF for Image] 

Source: GAO analysis of FDIC data. 

[End of figure] 

Banks comprise the majority of Subchapter S depository corporations. As 
of 2006, approximately 31 percent of banks have elected S-corporation 
status, compared to 7 percent of thrifts. S-corporation banks and 
thrifts are generally smaller institutions with average assets of $175 
million, but a couple of the largest S-corporation thrifts have over 
$10 billion in assets. 

Some Banks Have Participated in Tax Shelters IRS Views as Abusive: 

According to IRS officials, they have found a number of instances in 
which some banks have participated in tax shelters and transactions 
that they view as abusive.[Footnote 51] Abusive tax shelters are 
generally characterized as transactions that exploit tax code 
provisions and reap unintended tax benefits rather than engage in any 
meaningful economic activity. By their nature, abusive tax shelters are 
varied, complex, and difficult to detect and measure.[Footnote 52] 

IRS officials said that some banks have participated in abusive lease- 
in/lease-out (LILO) transactions along with other tax 
shelters.[Footnote 53] Unlike the traditional lease transactions that 
banks and other companies commonly engage in, a LILO is merely a 
transfer of tax benefits. Figure 7 illustrates a simplified structure 
of a LILO tax shelter. In a LILO transaction, a U.S. taxpayer (i.e., a 
corporation) purportedly leases an asset (such as subway trains, power 
plants, or sewer systems) from a tax-exempt entity, such as a 
municipality or tax exempt organization (shown as A in figure 7). 
Because the taxpayer then leases the asset back to the same entity, the 
use and possession of the asset is, in substance, unaltered by the 
transaction (shown as B in figure 7). The transaction is structured to 
eliminate any risk to the U.S taxpayer or the tax-exempt entity. The 
U.S. taxpayer benefits from the transaction by claiming tax deductions 
for rental payments, transaction costs, and interest income. 

Figure 7: Simplified Structure of a LILO Tax Shelter: 

[See PDF for Image] 

Source: GAO analysis of IRS information. 

[End of figure] 

One bank's participation in a LILO tax shelter was the subject of a 
recently decided court case. The court granted the government's motion 
for a summary judgment, upholding IRS's disallowance of over $9 million 
in tax deductions in one taxable year resulting from one bank's LILO 
transaction. The bank had entered into an $86 million LILO transaction 
with a Swedish pulp mill in 1997 involving the lease and sublease of 
the pulp manufacturing equipment. As a result of the disallowance, the 
bank paid a tax deficiency (including interest) for 1997 in the amount 
of $4.6 million.[Footnote 54] The bank filed a notice of appeal on 
March 1, 2007. 

Enclosure V: 

Recent Growth in Depository Institution Profits Has Been Accompanied by 
Changes in Source of Income: 

Depository institutions have enjoyed strong profits in recent years. In 
2006, banks and thrifts reported a total of $146 billion in net income. 
Credit unions, which are not-for-profit organizations, reported $5.7 
billion in net income in 2006. As shown in figure 8, the profits of 
depository institutions have increased since 1990. Over the past 10 
years, net income has increased by an average annual inflation-adjusted 
growth rate of 7 percent for banks, 8 percent for thrifts, and 3 
percent for credit unions. 

Figure 8: Profits of Depository Institutions: Net Income for Calendar 
Years, 1990-2006: 

[See PDF for Image] 

Source: GAO analysis of FDIC and NCUA data. 

[End of figure] 

One measure of profitability is returns on assets--net income divided 
by assets. Using this measure, banks are generally more profitable than 
thrifts or credit unions. Figure 9 shows how the profitability of these 
institutions has changed since 1990. In 2006, returns on assets were 
1.27 percent for banks, 0.96 percent for thrifts, and 0.81 percent for 
credit unions. 

Figure 9: Profitability of Depository Institutions: Return on Assets 
for Calendar Years 1990-2006: 

[See PDF for Image] 

Source: GAO analysis of FDIC and NCUA data. 

[End of figure] 

According to a Federal Reserve official, the early 1990s (1990-1992) 
were a period of relatively low profitability for the banking industry, 
in part because the industry was adjusting to new regulatory capital 
standards resulting from the Basel Accord. Banks reduced their lending 
activities to meet Basel's new capital requirements. In addition, 
according to OTS, thrifts were starting to recover from the savings and 
loan crisis of the 1980s during the same time period. After 4 straight 
years of losses, the thrift industry posted positive net income in 
1991, and credit unions were largely able to avoid the financial 
turbulence of the early 1990s due to strong growth over the previous 
decade.[Footnote 55] 

Since 1992, depository institutions have enjoyed steady growth in net 
income. Over the past 10 years, average inflation-adjusted annual 
growth rates in net income have been 7 percent for banks, 8 percent for 
thrifts, and 3 percent for credit unions. According to Federal Reserve 
reports, recent profitability is largely attributable to the favorable 
financial and economic conditions of the U.S. economy. 

Noninterest Income Is a Growing Source of Revenue for Depository 
Institutions: 

Depository institutions have gradually shifted toward greater reliance 
on noninterest income, such as service charges and fees. As illustrated 
in figure 10, FDIC and NCUA data indicate that since 1990, banks, 
thrifts, and credit unions have all experienced an increase in 
noninterest income relative to net operating revenue. For banks, 
noninterest income in 2006 accounted for 43 percent of net operating 
revenues, up from 32 percent in 1990. At thrifts and credit unions, 
noninterest income in 2006 accounted for 34 and 31 percent, 
respectively, of net operating revenues, up from about 22 and 15 
percent, respectively, in 1990. 

Figure 10: Noninterest Income as a Percentage of Net Operating Revenue: 

[See PDF for Image] 

Source: GAO analysis of FDIC and NCUA data. 

Note: Net operating revenue equals net interest income plus total 
noninterest income. 

[End of figure] 

According to federal banking regulators, the increase in noninterest 
income is the result of growth in fee-producing banking services and a 
relative decline in net interest income. Net interest margins (the 
difference between what banks incur to obtain funds and what they earn 
through lending) have narrowed over the past decade because of falling 
interest rates on bank loans and rising interest rates on bank 
deposits. Banks collect noninterest income from the sale of 
investments, fees, service charges, and other sources. FDIC reports 
that the largest sources of noninterest income for banks are service 
charges on deposit accounts and other noninterest income (see figure 
11). We were not able to obtain comparable data for thrifts and credit 
unions because they categorize noninterest income sources differently. 

Figure 11: Commercial Banks Noninterest Income: 

[See PDF for Image] 

Source: GAO analysis of FDIC data. 

[End of figure] 

Enclosure VI: 

Limited Information Suggests that Executive Compensation in the Banking 
Industry Has Increased: 

Publicly available information on executive compensation in the banking 
industry is limited. Depository institutions are not required to report 
compensation for chief executive officers (CEO) separately from overall 
compensation for the institution. Banks, thrifts, and credit unions are 
required to provide aggregate information on salaries and employee 
benefits in quarterly filings of call reports (and thrift financial 
reports in the case of thrift institutions).[Footnote 56] However, this 
information is not specific to executives and includes all of an 
institution's officers and employees--for example, temporary help, 
dining room and cafeteria employees, and guards, among others, 
including employees of consolidated subsidiaries. One banking industry 
association, America's Community Bankers (ACB), conducts annual surveys 
of its membership on compensation issues and survey results are 
available for purchase.[Footnote 57] 

Although publicly available data are limited, over the past decade, a 
number of studies that focused on or included information on executive 
compensation in the banking industry noted that compensation at this 
level had increased and that its composition had changed over the past 
decade, especially for CEOs.[Footnote 58] For example, one study 
showed, in part, that from 1992 to 2000 total direct compensation for 
bank CEOs steadily increased and average direct compensation for bank 
CEOs more than doubled.[Footnote 59] A separate study found that prior 
to the enactment of the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 (Riegle-Neal), many bank CEOs had limited 
investment opportunities and, thus, equity-based compensation was not 
typically used to motivate bank CEOs to take on risks that could 
increase shareholders' value.[Footnote 60] However, after the act was 
passed, the equity-based component of CEO compensation increased 
significantly on average for the industry.[Footnote 61] 

Another paper focused on banks that reported compensation data for CEOs 
and at least one additional executive in 1996. This study analyzed the 
components of compensation (base pay, annual bonus, deferred 
compensation, and the value of options granted) at approximately 300 
publicly traded banks. The study found that the structure of 
compensation varied significantly across firms, with firm size being 
the most important explanatory characteristic, and that larger firms 
relied more heavily on annual bonuses, deferred compensation, and 
option-adjusted compensation and less heavily on base pay.[Footnote 62] 

Another study synthesized various research on CEO compensation. For 
example, the study discussed how various papers measured incentives and 
how incentives were determined.[Footnote 63] Another study described 
research that noted that bank CEOs, on average, received less cash 
compensation, were less likely to participate in stock option plans, 
and received a smaller percentage of their compensation in the form of 
options than CEOs in other industries.[Footnote 64] Finally, one paper 
attributed the disparity in compensation to differences between the 
banking industry and other industries, rather than to such factors as 
banks being subject to more stringent regulation and have significantly 
higher leverage.[Footnote 65]  

Two researchers attributed the increase in CEO compensation to the 
elimination of interstate banking barriers and increasingly competitive 
pressures that ultimately affected executive compensation. Before the 
enactment of Riegle-Neal, most banks generally could only branch out 
across state lines if the host state permitted this practice.[Footnote 
66] Additionally, most banks that wanted to branch across state lines 
had to establish a bank holding company and, with certain restrictions, 
acquire or charter a bank in each state in which they wanted to 
operate. One researcher suggested that efforts to hire managerial 
talent after some interstate barriers were removed prior to the 
enactment of Riegle-Neal led to increases in compensation during the 
1980s.[Footnote 67] According to ACB, its 2006 survey of compensation 
and benefits indicated that salary increases at community banks 
continued to be linked to individual performance, with bonuses tied to 
bank performance. 

Federal Banking Statutes Establish Limits on Compensation as Part of 
Safety and Soundness: 

Federal banking statutes limit the compensation of financial 
institution executives in certain circumstances.[Footnote 68] For 
example, Section 2523 of the Comprehensive Thrift and Bank Fraud 
Prosecution and Taxpayer Recovery Act of 1990 provides FDIC with the 
authority to prohibit or limit, by regulation or order, golden 
parachute payments.[Footnote 69] In general, an executive's employment 
contract may include a clause allowing significant compensation if 
employment is terminated, and the benefits can include severance pay, a 
bonus, or stock options. In addition, the Federal Deposit Insurance 
Corporation Improvement Act of 1991 requires the federal banking 
regulatory agencies, among other things, to issue standards prohibiting 
excessive compensation, fees, and benefits as an unsafe and unsound 
practice.[Footnote 70] Furthermore, Prompt Corrective Action (PCA) 
authority provides limitations on executive compensation at certain 
undercapitalized institutions.[Footnote 71] 

Officials of the federal banking regulatory agencies said that the 
agencies had addressed compensation issues indirectly through broader 
informal and formal enforcement actions that included other safety or 
soundness issues. The officials noted that routine bank examinations 
generally do not include a review of executive compensation levels. 
However, they described other ways of addressing compensation issues: 

* OCC officials said that, within the enforcement context, OCC has 
issued formal orders addressing excessive compensation concerns. OCC 
officials said that they had ordered institutions to develop and 
implement appropriate policies to reduce excessive compensation to 
directors and officers and notified institutions, in some instances, 
that paying compensation or fees to some individuals was an unsafe and 
unsound practice and a breach of the individuals' fiduciary duties to 
the bank. 

* Similarly, FDIC officials said that they had addressed compensation 
through informal and formal actions that primarily focused on 
capitalization issues at undercapitalized institutions and placed 
restrictions on future salaries. 

* An OTS official reported that between January 1996 and October 2006, 
the regulator issued at least 65 directives (e.g., cease and desist, 
supervisory agreements, and PCA directives) regarding the executive 
compensation regulations and laws. The official reported that the 
compilation of these directives noted no violations of the directives. 

* A Federal Reserve official said that the Federal Reserve had not 
taken any formal action pursuant to these statutes. Similarly, an NCUA 
official reported that the administration had not taken any formal 
action (e.g., cease and desist order or civil money penalty) against an 
institution based on a violation of laws and regulations regarding 
employees benefits, including executive compensation. 

Enclosure VII: 

GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David G. Wood, (202) 512-8678 or woodd@gao.gov. 

Acknowledgments: 

In addition to the contact named above, Phillip R. Herr, Acting 
Director; Barbara I. Keller, Assistant Director; Emily R. Chalmers; 
Gary Chupka; William W. Colvin; Tonita W. Gillich; Alexandra Martin- 
Arseneau; Linda Rego; MaryLynn Sergent; and Anne O. Stevens made key 
contributions to this report. 

Related GAO Products: 

Tax Compliance: Challenges to Corporate Tax Enforcement and Options to 
Improve Securities Basis Reporting, GAO-06-851T (Washington, D.C.: June 
13, 2006). 

Financial Audit: FDIC Funds' 2005 and 2004 Financial Statements, GAO- 
06-146, (Washington, D.C.: March 2, 2006). 

Export-Import Bank: Changes Would Improve the Reliability of Reporting 
on Small Business Financing, GAO-06-351 (Washington, D.C.: March 3, 
2006). 

Financial Audit: Resolution Trust Corporation's 1995 and 1994 Financial 
Statements, GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996). 

Overseas Investment: The Overseas Private Investment Corporation's 
Investment Funds Program, NSIAD-00-159BR (Washington, D.C.: May 9, 
2000). 

Banking Taxation: Implications of Proposed Revisions Governing S- 
Corporations on Community Banks, GAO/GGD-00-159 (Washington, D.C.: June 
23, 2000). 

(250311): 

FOOTNOTES 

[1] First established by executive order in 1934, Ex-Im currently 
operates as an independent agency of the U.S. government and is the 
official export credit agency of the United States. 

[2] The Federal Housing Finance Board oversees the system of 12 Federal 
Home Loan Banks (FHL Banks), a government-sponsored enterprise that is 
cooperatively owned by member financial institutions, typically 
commercial banks and thrifts. The FHL Banks have a role in financing 
the costs associated with resolving the savings and loan crisis. 

[3] GAO last examined costs associated with resolving the savings and 
loan industry's financial difficulties in a 1996 report, GAO, Financial 
Audit: Resolution Trust Corporation's 1995 and 1994 Financial 
Statements, GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996). 

[4] Tax expenditures result in forgone revenue for the federal 
government due to preferential provisions in the tax code, such as 
deductions and credits. These provisions grant special tax relief for 
certain kinds of behavior by taxpayers or for taxpayers in special 
circumstances. 

[5] Where noted, we have adjusted expenditures for inflation and we 
report them in 2006 dollars. 

[6] BB & T Corp. v. United States, 2007 WL 37798, slip opinion, No. 
1:04CV00941 (M.D. N.C. Jan. 4, 2007). A notice of appeal was filed by 
BB & T on March 1, 2007. 

[7] GAO, Financial Audit: Resolution Trust Corporation's 1995 and 1994 
Financial Statements, GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996). 

[8] We used a calendar year, chain-weighted GDP price index. Values 
through 2006 are averages of quarterly indexes from U.S. Department of 
Commerce, Bureau of Economic Analysis, Survey of Current Business, and 
National Income and Product Accounts, as of Jan. 31, 2007. Projections 
for 2007 values are from Congressional Budget Office, The Budget and 
Economic Outlook, (Washington, D.C., 2007). 

[9] GAO, Export-Import Bank: Changes Would Improve the Reliability of 
Reporting on Small Business Financing, GAO-06-351 (Washington, D.C.: 
March 3, 2006). This report found weaknesses in Ex-Im's data systems 
and data for calculating its small business support but concluded that 
the overall data were reliable. 

[10] Office of Management and Budget, Analytical Perspectives, Budget 
of the United States Government, Fiscal Year 2008 (Washington, D.C., 
2007). 

[11] Pub. L. No. 93-334  3, 88 Stat. 297, 299 (July 12, 1974), 
codified at 2 U.S.C.  622(3). 

[12] See GAO, Tax Policy: New Markets Tax Credit Appears to Increase 
Investment by Investors in Low-Income Communities, but Opportunities 
Exist to Better Monitor Compliance, GAO-07-296 (Washington, D.C.: 
Jan.31, 2007) and Empowerment Zone and Enterprise Community Program: 
Improvements Occurred in Communities, but the Effect of the Program Is 
Unclear, GAO-06-727 (Washington D.C.: Sept. 22, 2006). 

[13] IRS, Statistics of Income Division, Corporation Source Book of 
Statistics of Income, Publication 1053 (Washington, D.C.: 2004). 

[14] GAO/AIMD-96-123. We determined that in 1996, approximately $132.1 
billion was provided from taxpayer funding sources and the remaining 
$28.0 billion was provided from industry assessments and other private 
sources. 

[15] The FSLIC Resolution Fund (FRF) is the primary source of payments 
for judgments and settlements in Goodwill litigation. The Financial 
Institutions Reform, Recovery, and Enforcement Act (FIRREA) abolished 
FSLIC after it became insolvent, created the FRF, and transferred the 
assets and liabilities of FSLIC to the FRF on August 8, 1989. Today, 
the FRF consists of two distinct pools of assets and liabilities: one 
composed of the assets and liabilities of FSLIC transferred to the FRF 
upon the dissolution of the FSLIC and the other composed of the 
Resolution Trust Corporation (RTC) assets and liabilities transferred 
upon the dissolution of the RTC. See 12 U.S.C.  1441a(m)(2). The 
assets of one pool are not available to satisfy the obligations of the 
other. On July 22 1998, the DOJ concluded that the FRF is legally 
available to satisfy all judgments and settlements of the supervisory 
goodwill litigation involving supervisory action or assistance 
agreements. The FRF is also authorized to draw from an appropriation 
provided by the Department of Justice Appropriations Act, 2000, Pub. L. 
No. 106-113  110, 113 Stat. 1501, 1501A-20 (Nov. 29, 1999), the funds 
necessary for the payment of judgments and settlements in the Goodwill 
litigation. This appropriation is to remain available until expended. 
DOJ determined that nonperformance of these agreements was a contingent 
liability that was transferred to the FRF on August 9, 1989, upon 
FSLIC's dissolution and advised that the FRF was the appropriate source 
of funds for payment of judgments in the Winstar-related cases. See 22 
Op. Off. Legal Counsel 141, 1998 WL 1180050 (1998). On July 23, 1998, 
the U.S. Department of the Treasury determined, based on DOJ's opinion, 
that the FRF is the appropriate source of funds for payments of any 
such judgments and settlements. 

[16] The financial benefits provided to acquiring institutions 
associated with supervisory goodwill are described in United States v. 
Winstar Corp., 518 U.S. 839, 848-854 (1996). 

[17] Pub. L. No. 101-73  301, 12 U.S.C.  1464(t)(3)(A). 

[18] Although FIRREA significantly altered many aspects of the thrift 
industry, the provision most relevant to this litigation was the 
requirement that OTS "prescribe and maintain uniformly applicable 
capital standards for savings associations" and the phase-out and 
elimination of supervisory goodwill in calculating core capital. 12 
U.S.C.  1464(t). Section 301 of FIRREA provided that failure to 
maintain capital at or above the minimum level could be treated as an 
unsafe or unsound practice and that substantially insufficient capital 
was grounds for appointment of a conservator or receiver. 12 U.S.C.  
1464(d)(2) and (s)(3) (1990). 

[19] OTS, Capital Adequacy: Guidance on the Status of Capital and 
Accounting Forbearances and Capital Instruments Held by a Deposit 
Insurance Fund, Thrift Bulletin No. 38-2 (Jan. 9, 1990). This guidance 
followed an OTS interim final rule establishing uniformly applicable 
capital regulations for savings associations, as required by FIRREA. 54 
Fed. Reg. 46,854 (Nov. 8,1989). 

[20] 518 U.S. 839 (1996). 

[21] Plaintiffs in Winstar-Related Cases v. United States, 37 Fed. Cl. 
174 (1997). 

[22] These agreements allegedly contained the promise of tax deductions 
for losses incurred on the sale of certain thrift assets purchased by 
plaintiffs from FSLIC, although FSLIC provided the plaintiffs with tax- 
exempt reimbursement. 

[23] Pub. L. No. 103-66  13224, 107 Stat. 312 (Aug. 10, 1993). 

[24] The FRF pays the goodwill litigation expenses incurred by DOJ 
based on a memorandum of understanding, dated October 2, 1998, between 
FDIC and DOJ. DOJ returns any unused fiscal year funding to the FRF 
unless special circumstances warrant that these funds be carried over 
and applied against current fiscal year charges. 

[25] The tax benefit agreements are described in Local America Bank of 
Tulsa, v. United States, 52 Fed. Cl. 184, 185 (2002); First Nationwide 
Bank v. United States, 49 Fed. Cl. 750, 751 (2001); and Centex Corp. v. 
United States, 49 Fed Cl. 691, 693 (2001). 

[26] In 1996, we determined that the known interest expense on bonds 
issued to finance FSLIC's costs for savings and loans resolutions 
totaled $111.8 billion ($138.2 billion in 2006 dollars). Specifically, 
we determined that $76.2 billion of the $111.8 billion in total known 
interest expense was paid by the taxpayers. We also estimated that 
Treasury would incur $209 billion in interest expense associated with 
appropriations resulting from legislation enacted to specifically 
address the savings and loan industry crisis. This legislation was 
enacted during a period in which the federal government was financing-
-via deficit spending--a sizable portion of its regular, ongoing 
program activities and operations. We based our estimate of Treasury 
interest expense on various simplifying assumptions, including (1) the 
entire amount of appropriations used to pay direct costs was borrowed 
and (2) appropriations for the FRF and RTC would be financed for 30 
years at 7 percent interest, with no future refinancing. For further 
information, refer to GAO/AIMD-96-123. 

[27] FICO was established by the Federal Savings and Loan Insurance 
Corporation Recapitalization Act of 1987, Pub. L. No. 100-86, tit. III, 
 302, 101 Stat. 552 (Aug. 10, 1987). FICO is a mixed-ownership 
government corporation whose main purpose is to function as a financing 
vehicle for FSLIC. FICO provided funding for FSLIC-related costs by 
issuing $8.2 billion of noncallable, 30-year bonds to the public. The 
annual interest obligation on the FICO bonds will continue through the 
maturity of the bonds in the years 2017 through 2019. We determined 
that the total nominal interest expense over the life of the FICO bonds 
will be $23.8 billion. FDIC acts as collection agent for FICO. The 
Deposit Insurance Funds Act 1996 (DIFA), Pub. L. No. 104-208, div. A, 
tit.II, subtit.G, 110 Stat. 3009-479 (Sept. 30, 1996), authorized FICO 
to assess both Bank Insurance Fund (BIF)-and Savings Association 
Insurance Fund (SAIF)-insured deposits, and require the BIF rate to 
equal one-fifth the SAIF rate through year-end 1999, or until the 
insurance funds are merged, whichever occurs first. Since the first 
quarter of 2000, all FDIC-insured deposits have been assessed at the 
same rate by FICO. Effective March 31, 2006, BIF and SAIF were merged 
into the newly created Deposit Insurance Fund (DIF). 

[28] Pub. L. No. 106-102  607(a), 113 Stat. 1338, (Nov. 12, 1999), 
codified at 12 U.S.C.  1441b(f)(2)(C). In past work, we noted that 
this change minimized the financial obligation on the Federal Home Loan 
Bank System during periods of relatively low profitability but 
increased the total payment when profits increased. See Federal Home 
Loan Bank System: An Overview of Changes and Current Issues Affecting 
the System, GAO/05-489T (Washington, D.C.: April 13, 2005). 

[29] According to REFCORP's December 31, 2006, Report of Independent 
Auditors, interest on REFCORP's long-term obligations is funded in the 
following order, to the maximum extent each is available: (1) interest 
on earnings on REFCORP investments; (2) annually, 20 percent of the FHL 
Banks' net earnings after the deduction for the Affordable Housing 
Program; (3) FRF proceeds from the sale of assets transferred by RTC; 
and (4) Treasury. 

[30] First established in 1934, Ex-Im is the official export credit 
agency of the United States under the authority of the Export-Import 
Bank Act of 1945, as amended, and operates as an independent agency of 
the U.S. government. Ch. 341, 59 Stat. 526 (July 31, 1945) (codified at 
12 U.S.C.  635, 635a, 635b, 635d to 635h, 635i-3, 635i-5 to 535i-9). 

[31] Ex-Im defines a U.S.-domiciled bank or nonbank as one in which the 
global parent is headquartered in the United States. According to Ex- 
Im, in general, a nonbank lender is a financial institution that 
provides banking services without meeting the legal definition of a 
bank (i.e., one that does not hold a banking license). Ex-Im also 
indicated that nonbank institutions frequently act as suppliers of 
loans and credit facilities; however, they are typically not allowed to 
take deposits from the general public and have to find other means of 
funding their operations, such as issuing debt instruments (e.g., Sears 
and American Express). 

[32] Ex-Im officials said that the program includes an interface with a 
commercial provider of business credit information that would help 
resolve problems in identifying lenders that have merged or been 
acquired and noted that in June 2006, Ex-Im had implemented the first 
phase of the new online system for insurance products. 

[33] According to Ex-Im, the agency reimburses after default, subject 
to the insured's or guaranteed lender's compliance with terms and 
conditions of the policy or guarantee (e.g., timely filing, proof of 
export) that make the claim eligible for reimbursement. 

[34] These recoveries do not necessarily relate to the claims paid in 
the same year. 

[35] The Country Exposure Report collects information on the 
distribution, by country, of claims on foreigners held by U.S. banks 
and bank holding companies. The Federal Reserve, FDIC, and OCC use the 
data to determine the degree of risk in bank portfolios and the effect 
of adverse developments in particular countries may have on banks or 
the U.S. banking system. 

[36] The Basel Capital Accord (Basel Accord) is an international 
framework for risk-based capital. These risk-based capital 
requirements, which were fully implemented by U.S. regulators by 1992, 
focused on limiting credit risk by requiring certain firms to hold 
capital equal to at least 8 percent of the total value of their risk- 
weighted on-balance sheet assets and off-balance sheet items, after 
adjusting the value of the assets according to certain rules intended 
to reflect their relative risk. 

[37] Repayment terms for Ex-Im's medium-term loan guarantees extend up 
to 5 years and repayment terms for long-term loan guarantees extend 
over 10 years. 

[38] Treasury estimates the one tax expenditure available to credit 
unions--tax exempt status--to cost $1.4 billion in revenue losses in 
2007. 

[39] 31 U.S.C.  1105(a) (16) requires that a list of tax expenditures 
be included in the budget. 

[40] 26 U.S.C.  585 and 593. Bad debt reserves are an account 
maintained by financial institutions and used to offset losses from 
foreclosed or uncollectible loans. 

[41] Office of Management and Budget, Analytical Perspectives, Budget 
of the United States Government, Fiscal Year 2008 (Washington, D.C.: 
2007). 

[42] See 26 U.S. C.  1397E(d)(6). Treasury estimates that the 2007 
revenue losses from the qualified zone academy bond tax credit are $140 
million in aggregate; the share by industry is not available. 

[43] See Tax Policy: New Markets Tax Credit Appears to Increase 
Investment by Investors in Low-Income Communities, but Opportunities 
Exist to Better Monitor Compliance, GAO-07-296 (Washington, D.C.: Jan. 
31, 2007) and Empowerment Zone and Enterprise Community Program: 
Improvements Occurred in Communities, but the Effect of the Program Is 
Unclear, GAO-06-727 (Washington D.C.: Sept. 22, 2006). 

[44] Treasury estimates that 2007 tax revenue losses from the NMTC are 
$210 million from corporate income taxes, with a total revenue loss of 
$810 million (corporate and individual income taxes). The estimated 
2007 revenue losses from the EZ/RC tax benefit are $340 million from 
corporate income taxes, with a total revenue loss of $1.34 billion 
(corporate and individual income taxes). The share by industry is not 
available. 

[45] Deductions for expenses incurred in earning income are considered 
part of the normal tax structure and not tax expenditures. 

[46] The general business credit consists of a combination of 27 
individual credits for such things as research, low-income housing, 
employer-provided child care, and community development. Of these, 26 
are considered tax expenditures. The foreign tax credit provides credit 
against U.S. income tax for income taxes paid to foreign countries or 
U.S. possessions, and this credit is not a tax expenditure. 

[47] Special tax rules for S-corporations are not considered tax 
expenditures by the Joint Committee on Taxation or Treasury because 
they are generally available to any entity that chooses to organize and 
operate in the required manner. 

[48] GAO, Banking Taxation: Implications of Proposed Revisions 
Governing S-Corporations on Community Banks, GAO/GGD-00-159 (Washington 
D.C.: June 23, 2000). 

[49] The most recently available IRS data on the total number of U.S. S-
corporations is for 2003. 

[50] Until 1997, financial institutions were not allowed to elect 
Subchapter S status because of the special methods of accounting for 
bad debts that were available to them for tax purposes. 

[51] IRS issues formal guidance on certain potential tax avoidance 
transactions that are referred to as listed transactions. See 26 U.S.C. 
 6011, 26 C.F.R.  1.6011-4(b)(2). Taxpayers are required to disclose 
their participation in listed transactions. As of March 2007, 31 listed 
transactions have been identified and addressed in formal guidance. 

[52] GAO, Internal Revenue Service: Challenges Remain in Combating 
Abusive Tax Shelters, GAO-04-104T (Washington, D.C.: Oct. 21, 2003). 

[53] IRS describes LILO transactions in Revenue Ruling 2002-69, 2002-2 
C.B. 760, and a related transaction, known as sale-in/lease-out (SILO), 
in IRS Notice 2005-13, 2005-1 C.B. 630. SILO transactions are 
structurally similar to LILO transactions, except that in SILO 
transactions, the U.S. taxpayer purportedly buys the asset from the tax-
exempt entity. Also, in SILO transactions, the taxpayer claims 
depreciation deductions rather than rent expense deductions. According 
to IRS officials, many of the banks that participated in LILO tax 
shelters also participated in SILO transactions. 

[54] BB & T Corp. v. United States, 2007 WL 37798, slip opinion, No. 
1:04CV00941 (M.D. N.C. Jan. 4, 2007). 

[55] GAO, Credit Unions: Reforms for Ensuring Future Soundness, GAO/ 
GGD-91-85 (Washington, D.C.: July 10, 1991). 

[56] FDIC-insured commercial banks, FDIC-supervised savings banks, and 
OCC-supervised noninsured trust companies file consolidated Reports of 
Condition and Income (call reports) as of the close of business on the 
last day of each calendar quarter. Similarly, every federally insured 
savings and loan institution regulated by OTS files a thrift financial 
report on a quarterly basis. The specific reporting requirements depend 
on the size of the institution and whether or not it has any foreign 
offices. The information is extensively used by the banking regulatory 
agencies in their daily offsite bank monitoring activities. Reports of 
Condition and Income data are also used by the public, Congress, state 
banking authorities, researchers, bank rating agencies, and the 
academic community. 

[57] ACB Compensation and Benefits Survey, America's Community Bankers 
(2006). For information on executive compensation issues in the credit 
union industry, including results from an industry survey on staff 
salaries and a pilot program from NCUA that, among other things, 
collected data on credit union executive compensation, see our recent 
report, Credit Unions: Greater Transparency Needed on Who Credit Unions 
Serve and on Senior Executive Compensation Arrangements, GAO-07-29 
(Washington, D.C.: Nov. 30, 2006). 

[58] Our review cites a number of professional studies that date back 
to the1990s. 

[59] Kose John and Yiming Qian, "Incentive Features in CEO Compensation 
in the Banking Industry," FRBNY Economic Policy Review, vol. 9, no. 1 
(2003). The authors measured direct compensation as the sum of salary, 
bonuses, other cash compensation, option grants, and grants of 
restricted stock. Overall findings and conclusions included lower pay- 
performance sensitivity in the banking industry than in the 
manufacturing industry and pay-performance sensitivity of top- 
management compensation in banks might be useful input in pricing FDIC 
insurance premiums and establishing regulatory procedures in the 
banking industry. 

[60] Pub. L. No. 103-328, 108 Stat. 2338 (Sept. 29, 1994) (amended the 
Bank Holding Company Act of 1956, Revised Statues of the United States, 
and the Federal Deposit Insurance Act to permit interstate banking and 
branching). 

[61] Elijah Brewer III, William Curt Hunter and William Jackson III, 
"Deregulation and the Relationship Between Bank CEO Compensation and 
Risk-Taking," Federal Reserve Bank of Chicago Working Paper, WP 2003- 
32, (2003). 

[62] Rebecca S. Demsetz and Marc R. Saidenberg, "Looking Beyond the 
CEO: Executive Compensation at Banks," Federal Reserve Bank of New York 
Staff Report , no. 68, (1999). 

[63] John E. Core, Wayne R. Guay, and David F. Larcker, "Executive 
Equity Compensation And Incentives: A Survey," FRBNY Policy Review, 
vol. 9, no. 1 ( 2003). 

[64] Joel F. Houston and Christopher James, "CEO Compensation and Bank 
Risk: Is Compensation in Banking Structured to Promote Risk Taking?," 
Journal of Monetary Economics vol. 36, no. 2 (1995). 

[65] John and Qian, "Incentive Features." 

[66] Riegle-Neal authorized interstate mergers between affiliated banks 
beginning June 1, 1997, generally without regard to state law unless 
both states had opted out before that date. 

[67] R. Glenn Hubbard and Darius Palia, "Executive Pay and Performance: 
Evidence from the U.S. Banking Industry," Working Paper Number 4704, 
National Bureau of Economic Research, (1994). 

[68] The Internal Revenue Code also establishes limitations on the 
deductibility of executives' compensation at publicly held companies, 
including banking organizations. 26 U.S.C.  162(m). In addition, 
section 403 of the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 
Stat. 745 (July 30, 2002)) requires insiders (defined as officers, 
directors, and 10 percent shareholders) to file with SEC reports of 
their trades before the end of the second business day on which the 
trade occurred. This provision applies to grants of stock options, a 
key form of executive compensation. Before the enactment of Sarbanes- 
Oxley, disclosure of option grants was not required until 45 days after 
the end of the fiscal year. SEC rulemaking and a Financial Accounting 
Standards Board directive contain certain disclosure and accounting 
requirements for executive compensation. 

[69] Pub. L. No. 101-647, tit. XXV,  2523, 104 Stat. 4859, 4868-4870 
(Nov. 29, 1990), 12 U.S.C.  1828(k). 

[70] Pub. L. No. 102-242  132(a), 105 Stat. 2236, 2267-2270 (Dec. 19, 
1991), 12 U.S.C.  1831p-1(c). Among other things, Prompt Corrective 
Action (PCA) requires regulators to prescribe safety and soundness 
standards related to noncapital criteria. According to OCC officials, 
PCA directives are not formal enforcement actions, and most include a 
provision regarding restrictions on future salaries, fees, and 
dividends to prevent a future drain on capital. 

[71] 12 U.S.C.  1831o. 

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