This is the accessible text file for GAO report number GAO-08-233T 
entitled 'Minority Banks: Regulators' Assessments of the Effectiveness 
of Their Support Efforts Have Been Lifted' which was released on 
October 30, 2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Testimony: 

Before the Subcommittee on Oversight and Investigations, Committee on 
Financial Services, U.S. House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

October 30, 2007: 

Minority Banks: 

Regulators' Assessments of the Effectiveness of Their Support Efforts 
Have Been Limited: 

Statement of George A. Scott, Director Financial Markets and Community 
Investment: 

GAO-08-233T: 

GAO Highlights: 

Highlights of GAO-08-233T, a testimony before the Subcommittee on 
Oversight and Investigations, Committee on Financial Services, U.S. 
House of Representatives. 

Why GAO Did This Study: 

Minority banks can play an important role in serving the financial 
needs of historically underserved communities and growing populations 
of minorities. For this reason, the Financial Institutions, Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA) established goals that 
the Federal Deposit Insurance Corporation (FDIC) and the Office of 
Thrift Supervision (OTS) must work toward to preserve and promote such 
institutions (support efforts). While not required to do so by FIRREA, 
the Board of Governors of the Federal Reserve System (Federal Reserve) 
and Office of the Comptroller of the Currency (OCC) have established 
some minority bank support efforts. 

This testimony, based on a 2006 GAO report, discusses the profitability 
of minority banks, regulators’ support and assessment efforts, and the 
views of minority banks on the regulators’ efforts as identified 
through responses from a survey of 149 such institutions. 

What GAO Found: 

GAO reported in 2006 that the profitability of most large minority 
banks (assets greater than $100 million) was nearly equal to that of 
their peers (similarly sized banks) in 2005 and earlier years, 
according to FDIC data. However, many small minority banks and African-
American banks of all sizes were less profitable than their peers. 
GAO’s analysis and other studies identified some possible explanations 
for these differences, including relatively higher loan loss reserves 
and operating expenses and competition from larger banks. 

Bank regulators had adopted differing approaches to supporting minority 
banks, but no agency had regularly and comprehensively assessed the 
effectiveness of its efforts. FDIC—which supervises over half of all 
minority banks—had the most comprehensive support efforts and leads 
interagency efforts. OTS focused on providing technical assistance to 
minority banks. While not required to do so by FIRREA, OCC and the 
Federal Reserve had taken some steps to support minority banks. 
Although FDIC had recently sought to assess the effectiveness of its 
support efforts through various methods, none of the regulators 
comprehensively surveyed minority banks or had developed performance 
measures. Consequently, the regulators were not well positioned to 
assess their support efforts. 

GAO’s survey of minority banks identified potential limitations in the 
regulators’ support efforts that would likely be of significance to 
agency managers and warrant follow-up analysis. Only about one-third of 
survey respondents rated their regulators’ efforts for minority banks 
as very good or good, while 26 percent rated the efforts as fair, 13 
percent as poor or very poor, and 25 percent responded “don’t know” 
(see fig.) Banks regulated by FDIC were more positive about their 
agency’s efforts than banks regulated by other agencies. However, only 
about half of the FDIC-regulated banks and about a quarter of the banks 
regulated by other agencies rated their agency’s efforts as very good 
or good. Although regulators may have emphasized the provision of 
technical assistance to minority banks, less than 30 percent of such 
institutions have used such agency services within the last 3 years and 
therefore may be missing opportunities to address problems that limit 
their operations or financial performance. 

Figure: Minority Banks' Ratings of Support Efforts, by Regulator: 

This figure is a combination bar chart showing minority banks' ratings 
of support efforts, by regulator. 

[See PDF for image] 

Source: GAO. 

[End of figure] 

What GAO Recommends: 

In the 2006 report, GAO recommended that the regulators review the 
effectiveness of their support efforts by such means as (1) surveying 
minority banks and/or (2) establishing performance measures. 

Since the report, all of the regulators have reported taking steps to 
survey or obtain information from minority banks on their support 
efforts. However, it is too soon to evaluate the effectiveness of these 
assessment efforts. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-233T]. For more information, contact 
George Scott at (202) 512-7215 or scottg@gao. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here to discuss the findings of a report that we 
issued last year on the efforts of federal bank regulators to support 
minority banks.[Footnote 1] As described in our report, minority banks 
are a small community within the banking industry, accounting for 2 
percent of all financial institutions and total industry assets. 
Despite their small numbers, minority banks can play an important role 
in serving the financial needs of historically underserved communities, 
such as African-Americans, and growing populations of minorities, such 
as Hispanic-Americans and Asian-Americans. 

For this reason, Section 308 of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA) established goals toward 
which federal regulators must work to preserve and promote such 
institutions.[Footnote 2] For example, the Federal Deposit Insurance 
Corporation (FDIC) and the Office of Thrift Supervision (OTS), in 
consultation with the Department of the Treasury (Treasury), are 
required to provide minority banks with technical assistance and 
training and educational programs and work toward preserving the 
character of minority banks in cases involving mergers or acquisitions 
of these institutions (I will refer to such activities as minority bank 
support efforts in my testimony today).[Footnote 3] While the other 
bank regulators--the Board of Governors of the Federal Reserve System 
(Federal Reserve) and the Office of the Comptroller of the Currency 
(OCC)--are not subject to Section 308 of FIRREA, they also have engaged 
in efforts to support minority banks over the years. 

You and other members of the House Financial Services Committee, 
including the Chairman, requested in 2005 that we review the efforts of 
all of the regulators to support minority banks out of concerns about 
the effectiveness of those efforts. We had previously reported in 1993 
that while FDIC and OTS had taken steps to comply with Section 308, 
minority banks had mixed views on the effectiveness of the agencies' 
efforts.[Footnote 4] In particular, minority banks were concerned that 
the regulators did not provide adequate technical assistance, and, more 
generally, that agency safety and soundness examiners did not 
understand the unique challenges that their institutions faced. We 
recommended in the 1993 report that FDIC and OTS periodically survey 
minority banks to assess the effectiveness of their support efforts. 
Given the passage of time between 1993 and 2005, you requested that we 
follow up on minority bank issues and the efforts of all bank 
regulators to support such institutions. 

In my testimony today, I will discuss the key findings of our 2006 
report, which included steps to (1) review the profitability of 
minority banks over time; (2) identify the regulators' minority bank 
support efforts and determine whether the regulators were evaluating 
the effectiveness of those efforts; and (3) obtain the views of 
minority banks on the support efforts and related regulatory issues. 
Additionally, in the last section of this testimony, I will provide a 
brief update on some of the steps the regulators have taken in response 
to recommendations in our 2006 report. 

To address the first objective, we obtained and analyzed financial data 
for minority banks from FDIC for 1995, 2000, and 2005. We also reviewed 
background literature and conducted interviews with minority banks to 
discuss the business environment in which these banks operate. For the 
second objective, we interviewed officials from Treasury, FDIC, the 
Federal Reserve, OCC, and OTS and reviewed regulators' documentation 
addressing their efforts to support minority banks and assess the 
effectiveness of these efforts. We also compared the regulators' 
efforts to our standards for program assessment and performance 
measures and those established in the Government Performance and 
Results Act.[Footnote 5] To address the third objective, we surveyed 
all institutions identified by the banking regulators as minority 
institutions. The Web-based survey, which was conducted from March 
through April 2006, asked about the banks' awareness and use of the 
regulators' minority bank support efforts and also asked the banks to 
rate these efforts. We received 149 survey responses out of a total 
population of 195 minority banks, for a response rate of 76 percent. 
Finally, in preparation for this testimony, we contacted the regulators 
in order to obtain information on any efforts they may have undertaken 
in response to the recommendations in our 2006 report. 

We conducted our work in Washington, D.C., and New York in accordance 
with generally accepted government auditing standards. 

In Brief: 

Our analysis of FDIC data showed that while the profitability of most 
minority banks with assets greater than $100 million nearly equaled the 
profitability of all similarly sized banks (peers), the profitability 
of smaller minority banks and African-American banks of all sizes did 
not.[Footnote 6] Profitability is commonly measured by return on assets 
(ROA), or the ratio of profits to assets, and ROAs are typically 
compared across peer groups to assess performance.[Footnote 7] Many 
small minority banks (those with less than $100 million in assets) had 
ROAs that were substantially lower than those of their peer groups in 
2005 as well as in 1995 and 2000. Moreover, African-American banks of 
all sizes had ROAs that were significantly below those of their peers 
in 2005 as well as in 1995 and 2000 (African-American banks of all 
sizes and other small minority banks account for about half of all 
minority banks). Our analysis of FDIC data identified some possible 
explanations for the relatively low profitability of some small 
minority banks and African-American banks, such as relatively higher 
reserves for potential loan losses and administrative expenses and 
competition from larger banks. Nevertheless, the majority of officials 
from banks across all minority groups were positive about their banks' 
financial outlook, and many saw their minority status as an advantage 
in serving their communities (for example, in providing services in the 
language predominantly used by the minority community). 

The bank regulators have adopted differing approaches to supporting 
minority banks, and, at the time of our review, no agency had assessed 
the effectiveness of its efforts through regular and comprehensive 
surveys of minority banks or outcome-oriented performance 
measures.[Footnote 8] FDIC--which supervises more than half of all 
minority banks--had the most comprehensive program to support minority 
banks and led an interagency group that coordinates such efforts. Among 
other things, FDIC has designated officials in the agency's 
headquarters and regional offices to be responsible for minority bank 
efforts, held periodic conferences for minority banks, and established 
formal policies for annual outreach to the banks it regulates to make 
them aware of available technical assistance. OTS also designated staff 
to be responsible for the agency's efforts to support minority banks, 
developed outreach procedures, and focused its efforts on providing 
technical assistance. OCC and the Federal Reserve, while not required 
to do so by Section 308 of FIRREA, undertook some efforts to support 
minority banks, such as holding occasional conferences for Native 
American banks, and were planning additional efforts. FDIC proactively 
sought to assess the effectiveness of its support efforts; for example, 
it surveyed minority banks. However, these surveys did not address key 
activities, such as the provision of technical assistance, and the 
agency had not established outcome-oriented performance measures for 
its support efforts. Furthermore, none of the other regulators 
comprehensively surveyed minority banks on the effectiveness of their 
support efforts or established outcome-oriented performance measures. 
Consequently, the regulators were not well positioned to assess the 
results of their support efforts or identify areas for improvement. 

Our survey of minority banks identified potential limitations in the 
regulators' support efforts that likely would be of significance to 
agency managers and warrant follow-up analysis. About one-third of 
survey respondents rated their regulators' efforts for minority banks 
as very good or good, while 26 percent rated the efforts as fair, 13 
percent as poor or very poor, and 25 percent responded "do not know." 
FDIC-regulated banks were more positive about their agency's efforts 
than banks that other agencies regulated. However, only about half of 
the FDIC-regulated banks and about a quarter of the banks regulated by 
other agencies rated their agency's efforts as very good or good. 
Although regulators may emphasize the provision of technical assistance 
to minority banks, less than 30 percent of such institutions said they 
had used such agency services within the last 3 years. Therefore, the 
banks may have been missing opportunities to address problems that 
limited their operations or financial performance. As we found in our 
1993 report, some minority bank officials also said that examiners did 
not always understand the challenges that the banks may face in 
providing services in their communities or operating environments. 
Although the bank officials said they did not expect special treatment 
in the examination process, they suggested that examiners needed to 
undergo more training to improve their understanding of minority banks 
and the customer base they serve. 

To allow the regulators to better understand the effectiveness of their 
support efforts, our October 2006 report recommended that the 
regulators review such efforts and, in so doing, consider employing the 
following methods: (1) regularly surveying the minority banks under 
their supervision on all efforts and regulatory areas affecting these 
institutions; or (2) establishing outcome-oriented performance measures 
to evaluate the extent to which their efforts are achieving their 
objectives. Subsequent to the report's issuance, the regulators have 
reported taking steps to better assess or enhance their minority bank 
support efforts. For example, all of the regulators have developed 
surveys or are in the process of consulting with minority banks to 
obtain feedback on their support efforts. I also note that some 
regulators plan to provide additional training to their examiners on 
minority bank issues. These initiatives are positive developments, but 
it is too soon to evaluate their effectiveness. We encourage agency 
officials to ensure that they collect and analyze relevant data and 
take steps to enhance their minority bank support efforts as may be 
warranted. 

Background: 

Many minority banks are located in urban areas and seek to serve 
distressed communities and populations that financial institutions 
traditionally have underserved. For example, after the Civil War, banks 
were established to provide financial services to African-Americans. 
More recently, Asian-American and Hispanic-American banks have been 
established to serve the rapidly growing Asian and Hispanic communities 
in the United States. In our review of regulators' lists of minority 
banks, we identified a total minority bank population of 195 for 2005 
(see table 1). 

Table 1: Number and Percentage of Minority Banks, by Type, 2005: 

Type of minority bank: Asian-American[A]; 
Number of banks: 73; 
Percentage of all minority banks: 37. 

Type of minority bank: African-American; 
Number of banks: 46; 
Percentage of all minority banks: 24. 

Type of minority bank: Hispanic-American; 
Number of banks: 38; 
Percentage of all minority banks: 19. 

Type of minority bank: Native American; 
Number of banks: 20; 
Percentage of all minority banks: 10. 

Type of minority bank: Women-owned; 
Number of banks: 13; 
Percentage of all minority banks: 7. 

Type of minority bank: Other[B]; 
Number of banks: 5; 
Percentage of all minority banks: 3. 

Type of minority bank: Total; 
Number of banks: 195; 
Percentage of all minority banks: 100. 

Source: GAO analysis of Treasury and federal banking regulators' data. 

Note: We identified the total minority bank population by obtaining and 
reviewing the most current lists (available at the time the population 
was compiled) from the federal banking regulators and Treasury. We 
reviewed FDIC and the Federal Reserve's publicly available lists, which 
were current as of September 30, 2005. We also reviewed OCC's list from 
December 31, 2005, Treasury's most recent list from 2004, and OTS's 
from January 2006. 

[A] Asian-American includes individuals of Pacific Island descent. 

[B] The "other" category includes banks considered to have minority 
status that are not covered by the listed minority categories. "Other" 
also includes banks that are owned or managed by more than one minority 
group in accordance with a banking regulator's definition. 

[End of table] 

Table 2 shows that the distribution of minority banks by size is 
similar to the distribution of all banks by size. More than 40 percent 
of all minority banks had assets of less than $100 million. 

Table 2: Percentage of Minority Banks and Total Banking Industry, by 
Asset Size, 2005: 

Asset size: < $100 million; 
Percentage of minority banks: 42; 
Percentage of total banking industry: 44. 

Asset size: $100 million to $300 million; 
Percentage of minority banks: 32; 
Percentage of total banking industry: 33. 

Asset size: $300 million to $500 million; 
Percentage of minority banks: 9; 
Percentage of total banking industry: 9. 

Asset size: $500 million to $1 billion; 
Percentage of minority banks: 7; 
Percentage of total banking industry: 7. 

Asset size: $1 billion to $10 billion; 
Percentage of minority banks: 7; 
Percentage of total banking industry: 6. 

Asset size: > $10 billion; 
Percentage of minority banks: 3; 
Percentage of total banking industry: 1. 

Asset size: Total; 
Percentage of minority banks: 100; 
Percentage of total banking industry: 100. 

Source: GAO analysis of FDIC data. 

[End of table] 

Each federally insured depository institution, including each minority 
bank, has a primary federal regulator. As shown in table 3, FDIC serves 
as the primary federal regulator for more than half of minority banks-
-109 of the 195 banks, or 56 percent--and the Federal Reserve regulates 
the fewest. 

Table 3: Number of Minority Banks, by Regulator, 2005: 

Regulator: FDIC; 
Number of minority banks: 109; 
Percentage: 56. 

Regulator: OCC; 
Number of minority banks: 43; 
Percentage: 22. 

Regulator: OTS; 
Number of minority banks: 22; 
Percentage: 11. 

Regulator: Federal Reserve; 
Number of minority banks: 21; 
Percentage: 11. 

Regulator: Total; 
Number of minority banks: 195; 
Percentage: 100. 

Source: GAO analysis of Treasury and the federal banking regulators' 
data. 

Note: Treasury and the banking regulators have different criteria for 
the banks they consider to be eligible to participate in their minority 
bank efforts. In accordance with our request, in our population of 
minority banks we included any bank considered by at least one 
regulator to be eligible to participate in its efforts. However, in 
some cases minority banks not considered by their primary regulator to 
be minority institutions were considered to be eligible for 
participation in another regulator's efforts. We identified 10 FDIC- 
regulated banks, 4 Federal Reserve-regulated banks, 3 OCC-regulated 
banks, and 1 OTS-regulated bank fitting this description. 

[End of table] 

The federal regulators primarily focus on ensuring the safety and 
soundness of banks and do so through on-site examinations and other 
means. Regulators may also close banks that are deemed insolvent and 
posing a risk to the Deposit Insurance Fund.[Footnote 9] FDIC is 
responsible for ensuring that the deposits in failed banks are 
protected up to established deposit insurance limits. 

While the regulators' primary focus is bank safety and soundness, laws 
and regulations can identify additional goals and objectives. 
Recognizing the importance of minority banks, Section 308 of FIRREA 
outlined five broad goals toward which FDIC and OTS, in consultation 
with Treasury, are to work to preserve and promote minority banks. 
These goals are: 

* preserving the present number of minority banks; 

* preserving their minority character in cases involving mergers or 
acquisitions of minority banks; 

* providing technical assistance to prevent insolvency of institutions 
that are not currently insolvent; 

* promoting and encouraging the creation of new minority banks; and: 

* providing for training, technical assistance, and education programs. 

Technical assistance is typically defined as one-to-one assistance that 
a regulator may provide to a bank in response to a request. For 
example, a regulator may advise a bank on compliance with a particular 
statute or regulation. Regulators also may provide technical assistance 
to banks that is related to deficiencies identified in safety and 
soundness examinations. In contrast, education programs typically are 
open to all banks regulated by a particular agency or all banks located 
within a regulator's regional office. For example, regulators may offer 
training for banks to review compliance with laws and regulations. 

Large Minority Banks Showed Profitability Close to That of Their Peers, 
but Many Small and African-American Banks Have Been Less Profitable: 

As shown in figure 1, our 2006 report found that, according to FDIC 
data, most minority banks with assets exceeding $100 million had ROAs 
in 2005 that were close to those of their peer groups, while many 
smaller banks had ROAs that were significantly lower than those of 
their peers. Minority banks with more than $100 million in assets 
accounted for 58 percent of all minority banks, while those with less 
than $100 million accounted for 42 percent. Each size category of 
minority banks with more than $100 million in assets had a weighted 
average ROA that was slightly lower than that of its peers, but in each 
case their ROAs exceeded 1 percent.[Footnote 10] By historical banking 
industry standards, an ROA of 1 percent or more generally has been 
considered to indicate an adequate level of profitability. We found 
that profitability of the larger minority, Hispanic-American, Asian- 
American, Native American, and women-owned banks were close to, and in 
some cases exceeded, the profitability of their peers in 2005. 

Figure 1: Percentage of Minority Banks by Size and Average ROA for 
Minority Banks and Peer Groups by Asset Size, 2005: 

This figure is a combination pie and bar chart. The pie chart is 
showing the minority banks by asset size, and the bar chart is showing 
the average ROA for minority banks and peer groups by asset size, in 
2005. The pie chart shows 32% minority banks $100 million-$300 million, 
42% minority banks less than $100 million, 9% minority banks $300 
million-$500 million,7% minority banks $500 million-$1 billion, 7% 
minority banks $1 billion-$10 billion, and 3% minority banks greater 
than $10 billion. The bar chart has asset sizes on the X axis, and ROA 
on the Y axis.   

[See PDF for image] 

Source: GAO. 

[End of figure] 

In contrast, small minority banks (those with assets of less than $100 
million) had an average ROA of 0.4 percent, and their peers had an 
average ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000 
also indicated some similar patterns, with minority banks with assets 
greater than $100 million showing levels of profitability that 
generally were close to those of their peers, or ROAs of about 1 
percent, and minority banks with assets of less than $100 million 
showing greater differences with their peers. 

The profitability of African-American banks generally has been below 
that of their peers in all size categories (see fig. 2).[Footnote 11] 
For example, African-American banks with less than $100 million in 
assets--which constitute 61 percent of all African-American banks--had 
an average ROA of 0.16 percent, while their peers averaged 1.0 percent. 
Our analysis of FDIC data for 2000 and 1995 also found that African- 
American banks of all sizes had lower ROAs than their peers. 

Figure 2: Average ROA of African-American Banks and Peer Banks by Asset 
Size, 2005: 

This figure is a combination bar chart showing the average ROA of 
African-American banks and peer banks by asset size, in 2005. The X 
axis represents dollars in millions, and the Y axis shows ROA. 

[See PDF for image] 

Source: GAO analysis of FDIC data. 

[End of figure] 

Our analysis of 2005 FDIC data also suggests some possible reasons for 
the differences in profitability between some minority banks and their 
peers.[Footnote 12] For example, our analysis of 2005 FDIC data showed 
that African-American banks with assets of less than $300 million-- 
which constitute 87 percent of all African-American banks--had 
significantly higher loan loss reserves as a percentage of their total 
assets than the average for their peers (see fig. 3).[Footnote 13] 
Although having higher loan loss reserves may be necessary for the safe 
and sound operation of any particular bank, they lower bank profits 
because loan loss reserves are counted as expenses. 

Figure 3: Average Loan Loss Reserves as a Percentage of Assets for 
African-American and Peer Banks, 2005: 

This figure is a bar chart showing average loan reserves as a 
percentage of assets for African-American and peer banks, in 2005. The 
X axis represents dollars in millions, and the Y axis represents 
percentage.  

[See PDF for image] 

Source: GAO analysis of FDIC data. 

[End of figure] 

We also found some evidence that higher operating expenses might affect 
the profitability of some minority banks. Operating expenses-- 
expenditures for items such as administrative expenses and salaries-- 
typically are compared to an institution's total earning assets, such 
as loans and investments, to indicate the proportion of earning assets 
that banks spend on operating expenses. As figure 4 indicates, many 
minority banks with less than $100 million in assets had higher 
operating expenses than their peers in 2005. Academic studies we 
reviewed generally reached similar conclusions. 

Figure 4: Average Operating Expenses Relative to Earning Assets of 
Banks with Assets Less Than $100 million, 2005: 

This figure is a bar chart showing average operating expenses relative 
to earning assets of banks with assets less than $100 million, in 2005. 
The X axis represents minority banks, and the Y axis represents 
percentage. 

[See PDF for image] 

Source: GAO analysis of FDIC data. 

[End of figure] 

Officials from several minority banks we contacted also described 
aspects of their operating environment, business practices, and 
customer service that could result in higher operating costs. In 
particular, the officials cited the costs associated with providing 
banking services in low-income urban areas or in communities with high 
immigrant populations. Bank officials also told us that they focus on 
fostering strong customer relationships, sometimes providing financial 
literacy services. Consequently, as part of their mission these banks 
spend more time and resources on their customers per transaction than 
other banks. Other minority bank officials said that their customers 
made relatively small deposits and preferred to do business in person 
at bank branch locations rather than through potentially lower-cost 
alternatives, such as over the phone or the Internet. 

Minority bank officials also cited other factors that may have limited 
their profitability. In particular, in response to Community 
Reinvestment Act (CRA) incentives, the officials said that larger banks 
and other financial institutions were increasing competition for 
minority banks' traditional customer base.[Footnote 14] The officials 
said that larger banks could offer loans and other financial services 
at more competitive prices because they could raise funds at lower 
rates and take advantage of operational efficiencies. In addition, 
officials from some African-American and Hispanic banks cited 
attracting and retaining quality staff as a challenge to their 
profitability. 

Despite these challenges, officials from banks across minority groups 
were optimistic about the financial outlook for their institutions. 
When asked in our survey to rate their financial outlook compared to 
those of the past 3 to 5 years, 65 percent said it would be much or 
slightly better; 21 percent thought it would be about the same, and 11 
percent thought it would be slightly or much worse, while 3 percent did 
not know. Officials from minority banks said that their institutions 
had advantages in serving minority communities. For example, officials 
from an Asian-American bank said that the staff's ability to 
communicate in the customers' primary language provided a competitive 
advantage. 

Regulators Adopted Differing Approaches to Supporting Minority Banks, 
but Assessment Efforts Were Limited: 

Our report found that FDIC--which supervises 109 of 195 minority banks-
-had developed the most extensive efforts to support minority banks 
among the banking regulators (see fig. 5). FDIC had also taken the lead 
in coordinating regulators' efforts in support of minority banks, 
including leading a group of all the banking regulators that meets 
semiannually to discuss individual agency initiatives, training and 
outreach events, and each agency's list of minority banks. OTS had 
developed a variety of support programs, including developing a 
minority bank policy statement and staffing support structure. OCC had 
also taken steps to support minority banks, such as developing a policy 
statement. OCC and the Federal Reserve had also hosted events for some 
minority banks. 

Figure 5: Banking Regulators' Efforts to Support Minority Banks, as of 
October 2006: 

This figure is a chart showing banking regulators efforts to support 
minority banks, as of October 2006. 

[See PDF for image] 

Source: GAO. 

[A] FDIC holds conferences for all minority banks on a regular basis. 
OTS, OCC, and the Federal Reserve have hosted occasional events for 
some groups of minority banks. 

[End of figure] 

The following highlights some key support activities discussed in our 
October 2006 report. 

Policy Statements. FDIC, OTS, and OCC all have policy statements that 
outline the agencies' efforts for minority banks. They discuss how the 
regulators identify minority banks, participate in minority bank 
events, provide technical assistance, and work toward preserving the 
character of minority banks during the resolution process. OCC 
officials told us that they developed their policy statement in 2001 
after an interagency meeting of the federal banking regulators on 
minority bank issues. Both FDIC and OTS issued policy statements in 
2002. 

Staffing Structure. FDIC has a national coordinator in Washington, D.C. 
and coordinators in each regional office from its Division of 
Supervision and Consumer Protection to implement the agency's minority 
bank program. Among other responsibilities, the national coordinator 
regularly contacts minority bank trade associations about participation 
in events and other issues, coordinates with other agencies, and 
compiles quarterly reports for the FDIC chairman based on regional 
coordinators' reports on their minority bank activities. Similarly, OTS 
has a national coordinator in its headquarters and supervisory and 
community affairs staff in each region who maintain contact with the 
minority banks that OTS regulates. While OCC and the Federal Reserve 
did not have similar staffing structures, officials from these agencies 
had contacted minority banks among their responsibilities. 

Minority Bank Events and Training. FDIC has taken the lead role in 
sponsoring, hosting, and coordinating events in support of minority 
banks. For example, in August 2006 FDIC sponsored a national conference 
for minority banks in which representatives from OTS, OCC, and the 
Federal Reserve participated. FDIC also has sponsored the Minority 
Bankers Roundtable (MBR) series, which agency officials told us was 
designed to provide insight into the regulatory relationship between 
minority banks and FDIC and explore opportunities for partnerships 
between FDIC and these banks. In 2005, FDIC held six roundtables around 
the country for minority banks supervised by all of the regulators. To 
varying degrees, OTS, OCC, and the Federal Reserve also have held 
events to support minority banks, such as Native American Institutions. 

Technical Assistance. All of the federal banking regulators told us 
that they provided their minority banks with technical assistance if 
requested, but only FDIC and OTS have specific procedures for offering 
this assistance. More specifically, FDIC and OTS officials told us that 
they proactively seek to make minority banks aware of such assistance 
through established outreach procedures outside of their customary 
examination and supervision processes. FDIC also has a policy that 
requires its regional coordinators to ensure that examination case 
managers contact minority banks from 90 to 120 days after an 
examination to offer technical assistance in any problem areas that 
were identified during the examination. This policy is unique to 
minority banks. OCC and the Federal Reserve provide technical 
assistance to all of their banks, but had not established outreach 
procedures for all their minority banks outside of the customary 
examination and supervision processes. However, OCC officials told us 
that they were in the process of developing an outreach plan for all 
minority banks regulated by the agency. Federal Reserve officials told 
us that Federal Reserve districts conduct informal outreach to their 
minority banks and consult with other districts on minority bank issues 
as needed. 

Policies to Preserve the Minority Character of Troubled Banks. FDIC has 
developed policies for failing banks that are consistent with FIRREA's 
requirement that the agency work to preserve the minority character of 
minority banks in cases of mergers and acquisitions. For example, FDIC 
maintains a list of qualified minority banks or minority investors that 
may be asked to bid on the assets of troubled minority banks that are 
expected to fail. However, FDIC is required to accept the bids on 
failing banks that pose the lowest expected cost to the Deposit 
Insurance Fund.[Footnote 15] As a result, all bidders, including 
minority bidders, are subject to competition. OTS and OCC have 
developed written policies that describe how the agencies will work 
with FDIC to identify qualified minority banks or investors to acquire 
minority banks that are failing. While the Federal Reserve does not 
have a similar written policy, agency officials say that they also work 
with FDIC to identify qualified minority banks or investors. All four 
agencies also said that they try to assist troubled minority banks 
improve their financial condition before it deteriorates to the point 
that a resolution through FDIC becomes necessary. For example, agencies 
may provide technical assistance in such situations or try to identify 
other minority banks willing to acquire or merge with the troubled 
institutions. 

At the Time of our Report, Regulators Did Not Assess Their Support 
Efforts through Surveys or Performance Measures: 

While FDIC was proactive in assessing its support efforts for minority 
banks, none of the regulators routinely and comprehensively surveyed 
their minority banks on all issues affecting the institutions, nor have 
the regulators established outcome-oriented performance measures. 
Evaluating the effectiveness of federal programs is vitally important 
to manage programs successfully and improve program results. To this 
end, in 1993 Congress enacted the Government Performance and Results 
Act, which instituted a governmentwide requirement that agencies report 
on their results in achieving their agency and program goals. 

As part of its assessment methods, FDIC conducted roundtables and 
surveyed minority banks on aspects of its minority bank efforts. For 
example, in 2005, FDIC requested feedback on its efforts from 
institutions that attended the agency's six MBRs (which approximately 
one-third of minority banks attended). The agency also sent a survey 
letter to all minority banks to seek their feedback on several 
proposals to better serve such institutions, but only 24 minority banks 
responded. The proposals included holding another national minority 
bank conference, instituting a partnership program with universities, 
and developing a minority bank museum exhibition.[Footnote 16] FDIC 
officials said that they used the information gathered from the MBRs 
and the survey to develop recommendations for improving programs and 
developing new initiatives. 

While FDIC had taken steps to assess the effectiveness of its minority 
bank support efforts, we identified some limitations in its approach. 
For example, in FDIC's surveys of minority banks, the agency did not 
solicit feedback on key aspects of its support efforts, such as the 
provision of technical assistance. Moreover, FDIC has not established 
outcome-oriented performance measures to gauge the effectiveness of its 
various support efforts. None of the other regulators had surveyed 
minority banks recently on support efforts or developed performance 
measures. 

By not taking such steps, we concluded that the regulators were not 
well positioned to assess their support efforts or identify areas for 
improvement. Further, the regulators could not take corrective action 
as necessary to provide better support efforts to minority banks. 

Survey of Minority Banks Identified Potential Limitations in 
Regulators' Support Efforts and Other Regulatory Issues: 

Minority bank officials we surveyed identified potential limitations in 
the regulators' efforts to support them and related regulatory issues, 
such as examiners' understanding of issues affecting minority banks, 
which would likely be of significance to agency managers and warrant 
follow-up analysis. Some 36 percent of survey respondents described 
their regulators' efforts as very good or good, 26 percent described 
them as fair, and 13 percent described the efforts as poor or very poor 
(see fig. 6). A relatively large percentage--25 percent--responded "do 
not know" to this question. 

Figure 6: Minority Banks' Ratings of Support Efforts, by Regulator: 

This figure is a combination bar chart showing minority banks' ratings 
of support efforts, by regular. 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Banks' responses varied by regulator, with 45 percent of banks 
regulated by FDIC giving very good or good responses, compared with 
about 25 percent of banks regulated by other agencies. However, more 
than half of FDIC-regulated banks and about three-quarters of the other 
minority banks responded that their regulator's efforts were fair, 
poor, or very poor or responded with a "do not know." In particular, 
banks regulated by OTS gave the highest percentage of poor or very poor 
marks, while banks regulated by the Federal Reserve most often provided 
fair marks. 

Nearly half of minority banks reported that they attended FDIC 
roundtables and conferences designed for minority banks, and about half 
of the 65 respondents that attended these events found them to be 
extremely or very useful (see fig. 7). Almost a third found them to be 
moderately useful, and 17 percent found them to be slightly or not at 
all useful. One participant commented that the information was useful, 
as was the opportunity to meet the regulators. Many banks also 
commented that the events provided a good opportunity to network and 
share ideas with other minority banks. 

Figure 7: Usefulness of FDIC's Roundtables and Conferences, by 
Regulator: 

This figure is a combination bar chart showing usefulness of FDIC's 
roundtables and conferences, by regulator. 

[See PDF for image] 

Source: GAO. 

[End of figure] 

While FDIC and OTS emphasized technical services as key components of 
their efforts to support minority banks, less than 30 percent of the 
institutions they regulate reported using such assistance within the 
last 3 years (see fig. 8). Minority banks regulated by OCC and the 
Federal Reserve reported similarly low usage of technical assistance 
services. However, of the few banks that used technical assistance--41-
-the majority rated the assistance provided as extremely or very 
useful.[Footnote 17] Further, although small minority banks and African-
American banks of all sizes have consistently faced financial 
challenges and might benefit from certain types of assistance, the 
banks also reported low rates of usage of the agencies' technical 
assistance. While our survey did not address the reasons that 
relatively few minority banks appear to use the technical assistance 
and banking regulators cannot compel banks under their supervision to 
make use of offered technical assistance, the potential exists that 
many such institutions may be missing opportunities to learn how to 
correct problems that limit their operational and financial 
performance. 

Figure 8: Minority Banks' Use of Technical Assistance, by Regulator: 

This figure is a combination bar chart showing the minority banks' use 
of technical assistance, by regulator. 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Survey Respondents Expressed Concerns about the Examination Process and 
a Provision of CRA Designed to Assist Minority Banks: 

More than 80 percent of the minority banks we surveyed responded that 
their regulators did a very good or good job of administering 
examinations, and almost 90 percent felt that they had very good or 
good relationships with their regulator. However, as in our 1993 
report, some minority bank officials said in both survey responses and 
interviews that examiners did not always understand the challenges the 
banks faced in providing services in their particular communities. 
Twenty-one percent of survey respondents mentioned this issue when 
asked for suggestions about how regulators could improve their efforts 
to support minority banks, and several minority banks that we 
interviewed elaborated on this topic. 

The bank officials said that examiners tended to treat minority banks 
like any other bank when they conducted examinations and thought such 
comparisons were not appropriate. For example, some bank officials 
whose institutions serve immigrant communities said that their 
customers tended to do business in cash and carried a significant 
amount of cash because banking services were not widely available or 
trusted in the customers' home countries. Bank officials said that 
examiners sometimes commented negatively on the practice of customers 
doing business in cash or placed the bank under increased scrutiny 
relative to the Bank Secrecy Act's requirements for cash 
transactions.[Footnote 18] While the bank officials said that they did 
not expect preferential treatment in the examination process, several 
suggested that examiners undergo additional training so that they could 
better understand minority banks and the communities that these 
institutions served. FDIC has conducted such training for its 
examiners. In 2004, FDIC invited the president of a minority bank to 
speak to about 500 FDIC examiners on the uniqueness of minority banks 
and the examination process. FDIC officials later reported that the 
examiners found the discussion helpful. 

Many survey respondents also said that a CRA provision that was 
designed to assist their institutions was not effectively achieving 
this goal. The provision allows bank regulators conducting CRA 
examinations to give consideration to banks that assist minority banks 
through capital investment, loan participation, and other ventures that 
help meet the credit needs of local communities. Despite this 
provision, only 18 percent of survey respondents said that CRA had--to 
a very great or great extent--encouraged other institutions to invest 
in or form partnerships with their institutions, while more than half 
said that CRA encouraged such activities to some, little, or no extent 
(see fig. 9). Some minority bankers attributed their view that the CRA 
provision has not been effective, in part, to a lack of clarity in 
interagency guidance on the act's implementation. They said that the 
interagency guidance should be clarified to assure banks that they will 
receive CRA consideration in making investments in minority banks. 

Figure 9: Minority Banks' Evaluation of the Extent to Which CRA Has 
Encouraged Partnerships with Other Institutions: 

This figure is a bar chart showing minority banks' evaluation of the 
extent to which CRA has encouraged partnerships with other 
institutions. 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Regulators Recently Have Taken Steps to Assess and Enhance Their 
Minority Bank Support Efforts, but It Is Too Soon to Assess Their 
Effectiveness: 

Our 2006 report recommended that the bank regulators regularly review 
the effectiveness of their minority bank support efforts and related 
regulatory activities and, as appropriate, make changes necessary to 
better serve such institutions. In conducting such reviews, we 
recommended that the regulators consider conducting periodic surveys of 
minority banks or developing outcome-oriented performance measures for 
their support efforts. In conducting such reviews, we also suggested 
that the regulators focus on the overall views of minority banks about 
support efforts, the usage and effectiveness of technical assistance 
(particularly assistance provided to small minority and African- 
American banks), and the level of training provided to agency examiners 
on minority banks and their operating environments. 

Over the past year, bank regulatory officials we contacted identified 
several steps that they have initiated to assess the effectiveness of 
their minority bank support efforts or to enhance such support efforts. 
They include the following actions: 

* A Federal Reserve official told us that the agency has established a 
working group that is developing a pilot training program for minority 
banks and new banks. The official said that three training modules have 
been drafted for different phases of a bank's life, including starting 
a bank, operating a bank during its first 5 years of existence, and 
bank expansion. The official said that the program will be piloted 
throughout the U.S. beginning in early November 2007. Throughout the 
course of developing, drafting, and piloting the program, Federal 
Reserve officials said they have, and will continue to, consult with 
minority bankers to obtain feedback on the effort. 

* An OCC official said that the agency recently sent a survey to 
minority banks on its education, outreach, and technical assistance 
efforts that should be completed by the end of October. OCC also plans 
to follow up this survey with a series of focus groups. In addition, 
the official said OCC just completed an internal survey of certain 
officials involved in supervising minority institutions, and plans to 
review the results of the two surveys and focus groups to improve its 
minority bank support efforts. 

* FDIC officials told us that the agency has developed a survey to 
obtain feedback on the agency's minority bank support efforts. They 
estimate that the survey will be sent out to all minority institutions 
(not just those minority banks FDIC supervises) in mid-December 2007. 

* An OTS official told us that the agency will send out a survey to the 
minority banks the agency supervises on its efforts in the next couple 
weeks and that it has also conducted a series of roundtables with 
minority banks in the past year. 

The federal banking agencies have also taken some steps to address 
other issues raised in our report. For example, Federal Reserve and 
FDIC officials told us that that the agencies will provide additional 
training on minority bank issues to their examiners. In addition, in 
July 2007 the federal banking agencies published a CRA Interagency 
Notice that requested comments on nine new "Questions and Answers" 
about community reinvestment.[Footnote 19] One question covers how 
majority banks may engage in and receive positive CRA consideration for 
activities conducted with minority institutions. An OCC official said 
that the comments on the proposed "Q and As" are under review. 

While the regulators' recent efforts to assess and enhance their 
minority bank support efforts and other activities are encouraging, it 
is too soon to assess their effectiveness. For example, the Federal 
Reserve's pilot training program for minority and new banks is not 
scheduled to begin until later this year. Further, the other 
regulators' efforts to survey minority banks on support efforts 
generally also are at an early stage. We encourage agency officials to 
ensure that they collect and analyze relevant data and take steps to 
enhance their minority bank support efforts as warranted. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
address any questions that you or subcommittee members may have. 

GAO Contacts: 

For further information about this testimony, please contact George A. 
Scott on (202) 512-7215 or at scottg@gao.gov. 

Staff Acknowledgments: 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this statement. Individuals 
making key contributions include Wesley M. Phillips, Assistant 
Director; Allison Abrams; Kevin Averyt; and Barbara Roesmann. 

Footnotes: 

[1] GAO, Minority Banks: Regulators Need to Better Assess Effectiveness 
of Support Efforts, GAO-07-6 (Washington, D.C.: Oct. 4, 2006). The term 
"minority banks" refers to all depository institutions--including 
thrifts--that are considered minority-or women-owned by the Department 
of the Treasury and the federal banking regulators--the Federal Deposit 
Insurance Corporation, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, and the Office 
of Thrift Supervision. 

[2] FIRREA, Pub. L. No. 101-73, § 308, 103 Stat. 183, 353 (1989). 

[3] While Treasury convened interagency panels on minority bank issues 
in the early 1990s, department officials said it no longer does so. 
According to Treasury officials, the FIRREA consulting requirement is 
open to some interpretation and the general view within the department 
was that ongoing consultations were not required. However, Treasury 
officials said that they do discuss minority bank issues with the 
regulators as the need arises. 

[4] GAO, Minority-Owned Financial Institutions: Status of Federal 
Efforts to Preserve Minority Ownership, GAO/GGD-94-1 (Washington, D.C.: 
Nov. 3, 1993). 

[5] Government Performance and Results Act of 1993, Pub. L. No. 103-62, 
§7, 107 Stat. 285, 292, (codified at 39 U.S.C. § 2801(1)). 

[6] The FDIC definition for peer groups includes all institutions of a 
similar asset size, including minority and nonminority institutions. 

[7] Examples of assets include loans and securities. 

[8] Outcome-oriented performance measures assess the results of a 
program against its intended purposes. 

[9] FDIC administers the fund, which provides deposit insurance for 
banks and thrifts. 

[10] A weighted average is a variation on a simple average. Weighted 
averages take into account banks' asset size instead of counting each 
bank as an equal unit. 

[11] In 2005, African-American banks did not occupy all asset size 
categories. The largest African-American banks had less than $1 billion 
in assets; thus, they did not populate in the two largest size 
categories: $1 billion to $10 billion and greater than $10 billion. 

[12] While our review offers possible explanations for lower levels of 
profitability among some minority banks, it does not attempt to fully 
explain the differences among various minority groups or sizes of 
minority banks. 

[13] The term "loan loss reserves" refers to the allowance each bank 
must maintain to absorb estimated credit losses associated with its 
loan and lease portfolio. 

[14] Section 807 of the Community Reinvestment Act of 1977 requires the 
federal banking regulators in connection with their examination of each 
institution they supervise to assess the institution's record of 
meeting the credit needs of the entire community it serves, including 
moderate-and low-income neighborhoods. Pub. L. No. 95-128, § 807, 91 
Stat. 1147 (codified as amended at 12 U.S.C. § 2906). 

[15] Section 13(c) of the Federal Deposit Insurance Act (codified at 12 
U.S.C. § 1823(c)), as amended in 1991, prohibits FDIC from engaging in 
the assisted resolution of any failed depository institution unless 
FDIC determines that the total amount of expenditures and obligations 
it would incur in doing so would represent the least costly 
alternative. 

[16] The museum exhibition would have traced the history of minority 
banks in the United States. However, after conducting additional 
research on this proposal, FDIC decided not to pursue the project, in 
part because of limited interest from some minority banks. 

[17] The survey did find that minority banks that FDIC and OTS 
regulated were more aware of the agencies' technical assistance 
outreach efforts than institutions that OCC and the Federal Reserve 
regulated. This finding is consistent with the fact that FDIC and OTS 
have formalized technical assistance outreach efforts, while the other 
regulators do not. 

[18] The body of law commonly referred to as the Bank Secrecy Act (BSA) 
is codified at 31 U.S.C. §§ 5311-5322 and 12 U.S.C. §§ 1829b and 1951- 
1959. 

[19] Community Reinvestment Act; Interagency Questions and Answers 
Regarding Community Investment, 72 Fed. Reg. 37922 (notice and request 
for comment Jul. 11, 2007). 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, DC 20548: 

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548: 

Public Affairs: 

Susan Becker, Acting Manager, BeckerS@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548: