Bank Insurance Fund:

Additional Reserves and Reforms Needed to Strengthen the Fund

AFMD-90-100: Published: Sep 11, 1990. Publicly Released: Sep 11, 1990.

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GAO: (1) audited the Bank Insurance Fund's financial statements for the years ended December 31, 1989, and 1988; and (2) discussed serious problems facing the banking industry, the Fund's ability to deal with those problems, and reforms to strengthen the Fund.

GAO found that: (1) although the Fund had the resources to handle anticipated bank failures in 1990, its low level of reserves, coupled with a recession, could lead to a level of bank failures that would exhaust the Fund and require taxpayer assistance; (2) the Fund ended 1989 with a net loss of $852 million, which reduced its balance to $13.2 billion; (3) the increasingly risky nature of loan portfolios was the leading cause of problems within the banking industry; (4) 35 banks were in such severe financial condition that they were likely to fail or require assistance within the next year, and about 1,100 banks had serious financial problems; (5) the ratio of the Fund's balance to insured deposits stood at 0.7 percent, the lowest level ever; (6) the Fund was not likely to reach its legislatively required minimum reserve ratio of 1.25 percent until 1995; (7) the Fund was contingently liable for $8 billion of troubled assets held by acquirers of failed banks; and (8) regulators relied on banks' quarterly reports of financial condition, but such reports were not always accurate or comprehensive. GAO also found that the financial statements: (1) presented fairly the Fund's financial position; and (2) did not include the estimated costs of anticipated bank failures, since those costs did not meet the degree of certainty for loss recognition established by accounting principles. GAO believes that adherence to those principles may unduly delay the recognition of losses that could substantially reduce the Fund's balance.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: In November 1990, Congress amended the assessment rate restrictions in FIRREA, giving FDIC more flexibility in setting rates. FDIC used this authority in 1991 to bring in $1 billion in additional revenue to the Fund. The FDIC Improvement Act of 1991 contains provisions for rebuilding the Fund over a 15-year period.

    Matter: Congress should amend the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to give the Chairman, FDIC, the authority to raise rates beyond those provided in FIRREA so that the Bank Insurance Fund achieves the minimum reserve ratio of 1.25 percent designated in FIRREA by 1995.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The FDIC Improvement Act of 1991 requires regulators to conduct full-scope, on-site examinations of insured depository institutions, annually for institutions with total assets equal to or greater than $100 million and once every 18 months for well-capitalized, well-managed institutions with total assets of less than $100 million. The Act provides a transition period through December 31, 1993.

    Recommendation: The Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman, Federal Reserve Board (FRB), and the Comptroller of the Currency (OCC) should annually perform on-site, full-scope examinations of problem banks and large banks.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  2. Status: Closed - Implemented

    Comments: The FDIC Improvement Act of 1991 requires regulators to conduct full-scope, on-site examinations of insured depository institutions, annually for institutions with total assets equal to or greater than $100 million and once every 18 months for well-capitalized, well-managed institutions with total assets of less than $100 million. The Act provides a transition period through December 31, 1993.

    Recommendation: The Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman, Federal Reserve Board (FRB), and the Comptroller of the Currency (OCC) should annually perform on-site, full-scope examinations of problem banks and large banks.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: The FDIC Improvement Act of 1991 requires regulators to conduct full-scope, on-site examinations of insured depository institutions, annually for institutions with total assets equal to or greater than $100 million and once every 18 months for well-capitalized, well-managed institutions with total assets of less than $100 million. The Act provides a transition period through December 31, 1993.

    Recommendation: The Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman, Federal Reserve Board (FRB), and the Comptroller of the Currency (OCC) should annually perform on-site, full-scope examinations of problem banks and large banks.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Not Implemented

    Comments: Treasury's study did not address the reasonableness of reserve levels. In November 1990, Congress amended FIRREA, removing the maximum reserve ratio and requiring FDIC to determine what would be the most appropriate target level for the Fund, provided it achieves a minimum reserve ratio of 1.25 percent of insured deposits.

    Recommendation: The Secretary of the Treasury should ensure that Treasury's study of deposit insurance reform determines the reasonableness of the minimum and maximum reserve ratios designated by FIRREA in light of the banking industry's present condition and the exposure to the Bank Insurance Fund.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: FDIC believes its guidelines are sufficient, however, it has agreed to analyze its collection experience on a quarterly basis in order to evaluate the reasonableness of its loss reserves which are dependent on valid asset appraisals. GAO work being initiated on quarterly sales activity, required under the FDIC Improvement Act of 1991, will continue to monitor appraisal reasonableness.

    Recommendation: The Chairman, FDIC, should revise FDIC guidelines for recorded values of assets held in separate asset pools to include a critical review of the appraisers' underlying assumptions in valuing assets acquired from failed banks or assets maintained in separate asset banks and adjust recorded values, if necessary, to reflect those assets' realistic values in light of their historical experience and current conditions.

    Agency Affected: Federal Deposit Insurance Corporation

  6. Status: Closed - Not Implemented

    Comments: The FDIC Improvement Act of 1991 provides borrowing authority for the Fund, but imposes a limitation on these borrowings. Prior to entering into new commitments or incurring new obligations, the Fund must meet a maximum obligation limitation (MOL) test. Commitments under separate asset pool arrangements are included in a MOL formula that determines the amount of borrowing authority available.

    Recommendation: The Chairman, FDIC, should monitor the use of separate asset pools to ensure the Bank Insurance Fund has cash resources to meet its commitments.

    Agency Affected: Federal Deposit Insurance Corporation

  7. Status: Closed - Not Implemented

    Comments: The Treasury study issued in February 1991 noted that there is no known scientific means of deriving an optimum level for the Fund. The study noted that over time, it might be desirable to return the Fund to the FIRREA target of 1.25 percent of insured deposits and maintain it at that level or higher.

    Recommendation: The Secretary of the Treasury should ensure that Treasury's study of deposit insurance reform determines a reserve ratio target that would protect taxpayers by maintaining the Fund in the event of recession.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: The Treasury study, issued February 1991, outlined the means, other than increased assessments, to reduce the Fund's exposure. Several of these proposals, such as risk-based premiums and restricting insurance coverage, were enacted into law under the FDIC Improvement Act of 1991. Others, such as interstate banking, were not adopted.

    Recommendation: The Secretary of the Treasury should ensure that Treasury's study of deposit insurance reform determines means in addition to premium assessments, such as increased capital levels in banks, that would reduce the Fund's potential liabilities. The results of this study should be reported to Congress in a timely manner.

    Agency Affected: Department of the Treasury

 

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