Treasury Tax and Loan Accounts:

Changes in Collateral Practices Could Reduce the Federal Government's Risk of Loss

AFMD-92-54: Published: Sep 14, 1992. Publicly Released: Sep 14, 1992.

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GAO reviewed internal controls over Treasury Tax and Loan (TT&L) account deposits, focusing on whether: (1) Federal Reserve Banks adequately review pledged securities before accepting them as collateral; (2) the banks properly value the collateral; (3) the banks monitor TT&L collateral to ensure that it does not diminish in value; and (4) Treasury's TT&L account collateral valuation method places enough emphasis on a security's inherent risk.

GAO found that: (1) Federal Reserve Banks did not always timely or thoroughly review securities before accepting them as collateral, resulting in unallowable and undocumented securities being pledged as collateral; (2) the banks' review procedures varied widely; (3) because Treasury does not require consistent valuation of similar securities or specific procedures to value certain securities, banks have valued them differently; (4) banks' monitoring of collateral was ineffective because their automated systems contained inaccurate data, and other problems reduced their monitoring ability; and (5) the banks have taken corrective action on specific problems, and one was continuing to develop an information system to help value and monitor definitive securities. GAO also found that Treasury's prescribed method for valuing collateral did not adequately consider the riskiness of securities, was administratively difficult, and had evolved into a formula-based process.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In early 1993, the Treasury and Federal Reserve met and determined ways to share information. Treasury plans to issue these procedures as part of the TFM directives.

    Recommendation: To help ensure that TT&L accounts are secured by sufficient collateral to protect the government's interests, the Secretary of the Treasury should direct the Federal Reserve Banks to share information on effective TT&L account collateral review, valuation, and monitoring practices.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: System design was modified to accommodate this recommendation. Additional procedures include: frequent periodic review of collateral for "bank risk" situations, and confirmation of all off-site collateral premises on a semi-annual basis.

    Recommendation: To help ensure that TT&L accounts are secured by sufficient collateral to protect the government's interests, the Secretary of the Treasury should direct the Federal Reserve Banks to perform monthly collateral assessments, which would include verifying the accuracy of records used to monitor collateral and confirming the location of securities pledged as collateral.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: As directed by Treasury, the Federal Reserve will use a market value system that provides a more exact number by utilizing tools such as market and financial service information.

    Recommendation: To help ensure that TT&L accounts are secured by sufficient collateral to protect the government's interests, the Secretary of the Treasury should direct the Federal Reserve Banks to estimate the market value for Treasury and federal agency securities pledged as TT&L account collateral by comparing the securities' stated interest rates and maturity dates to the current market interest rate for comparable securities.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: The Federal Reserve, under Treasury's direction, has contracted to obtain this information for its use. All FRB will be able to capture market prices for securities.

    Recommendation: To help ensure that TT&L accounts are secured by sufficient collateral to protect the government's interests, the Secretary of the Treasury should direct the Federal Reserve Banks to use automated information from security rating services to determine the market value of those securities for which such information is available.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: In accordance with Treasury guidelines, the TFM has changed to reflect recommendation.

    Recommendation: To help ensure that TT&L accounts are secured by sufficient collateral to protect the government's interests, the Secretary of the Treasury should direct the Federal Reserve Banks to review, before acceptance, securities offered as collateral, accept depositories' securities as collateral before its being reviewed only when circumstances indicate that delayed review is prudent and warranted; and reject collateral when bank reviews show that pledged securities are not allowable or adequately documented.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: Implementation of this recommendation is in final stages of review by the Federal Reserve Subcommittee responsible for this area. This subcommittee is responsible for ensuring that the Treasury directive is properly incorporated in Federal Reserve Bank policies and procedures.

    Recommendation: The Secretary of the Treasury should direct the Chairman, Board of Governors of the Federal Reserve System, to implement a revised TT&L account collateral valuation method that would increase the focus on the risk associated with the collateral. In revising its prescribed method, Treasury should consider adopting a method that uses market values for securities in functional areas that include Treasury and other federal agencies' securities, securities rated by rating services, and all other securities. Along with adopting these functional areas, Treasury should develop collateral percentages for securities rated by rating services that are based on the risk ranking assigned by the services, and a uniform methodology for rating other types of securities.

    Agency Affected: Department of the Treasury

 

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