Bank and Thrift Regulation:

Improvements Needed In Examination Quality and Regulatory Structure

AFMD-93-15: Published: Feb 16, 1993. Publicly Released: Feb 16, 1993.

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GAO reviewed bank and thrift examinations performed by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), Office of the Comptroller of the Currency, and Office of Thrift Supervision (OTS), focusing on: (1) how well regulators assessed the quality of bank and thrift loan portfolios; and (2) the effectiveness of the institutions' internal control systems.

GAO found that: (1) examinations at 58 randomly selected banks and thrifts were too limited to identify and determine the extent of deficiencies; (2) examination limitations impeded early warning and the opportunity for corrective action; (3) examinations were undermined by such weaknesses as nonrepresentative loan samples, reliance on outdated or incomplete data, lack of a consistent methodology for assessing loan portfolio risks and the adequacy of loss reserves, and insufficient or inconsistent quality control over examinations; (4) extensive flexibility given examiners and a lack of minimum requirements affected the quality of examinations and inspections; (5) the FDIC Improvement Act of 1991 provided structure to strengthen corporate governance and facilitate early warning of safety and soundness problems; and (6) successful implementation of the FDIC Improvement Act and improved examinations are vital to regulatory effectiveness and protection of federal bank insurance funds.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The need for congressional action cannot be determined until regulatory agencies' action is known. FASB statements numbers 114 and 115, issued in May 1993, address fair-value accounting for impaired loans and investment securities. The revised accounting rules are an improvement but do not go far enough in requiring use of fair-value accounting. No action is planned to address related-party transactions. No regulatory action is intended at this time.

    Matter: The Senate and House Banking Committees should urge the regulators to adopt accounting rules for regulatory financial reports that will reflect: (1) the fair value of nonperforming loans and investment securities; and (2) the economic substance of related party transactions when materially different than their legal form. The committees may also wish to urge the Financial Accounting Standards Board (FASB) to adopt such accounting rules. Absent the adoption of such accounting rules by either the regulators or FASB, Congress should consider legislating such requirements for financial reports prepared by banks and thrifts for their respective regulators.

  2. Status: Closed - Implemented

    Comments: FASB statements numbers 114 and 115, issued in May 1993, address fair-value accounting for impaired loans and investment securities. The revised accounting rules are an improvement but do not go far enough in requiring use of fair-value accounting. No action is planned to address related-party transactions. No regulatory action in these areas is intended at this time.

    Matter: The Senate and House Banking Committees should urge the regulators to adopt accounting rules for regulatory financial reports that will reflect: (1) the fair value of nonperforming loans and investment securities; and (2) the economic substance of related party transactions when materially different than their legal form. The committees may also wish to urge the Financial Accounting Standards Board (FASB) to adopt such accounting rules. Absent the adoption of such accounting rules by either the regulators or FASB, Congress should consider legislating such requirements for financial reports prepared by banks and thrifts for their respective regulators.

  3. Status: Closed - Not Implemented

    Comments: On March 4, 1993, the Chairman, House Banking Committee, introduced the Regulatory Consolidation Act of 1993. On that date, the Committee's Ranking Minority Member also introduced legislation to consolidate regulation of the banking industry. During early 1994, several additional or updated proposals for regulatory consolidation were introduced in both the House and Senate. In addition, the Administration put forth a proposal that would create a new agency, the Federal Banking Commission, which would consolidate the supervisory functions of the four existing federal regulatory agencies. GAO testified on the general merits of the various proposals before the Senate Banking Committee in March 1994 (GAO/T-GGD-94-106). No compromise was reached on the various proposals during 1994. As of August 30, 1995, the issue had not been pursued by either the Administration or the 104th Congress.

    Matter: Given the increasing complexities of the banking and thrift industries and the less effective performance of the regulatory system since the 1980s, the House and Senate Banking Committees, in conjunction with the administration, should consider appointing a panel of experts to assess the appropriateness of continuing with present structure and alternatives. GAO suggests the panel include representatives from a cross section of the banking and thrift industries, academia and other interested public institutions, and current and former regulatory officials.

  4. Status: Closed - Not Implemented

    Comments: On March 4, 1993, the Chairman, House Banking Committee, introduced the Regulatory Consolidation Act of 1993. On that date, the Committee's Ranking Minority Member also introduced legislation to consolidate regulation of the banking industry. During early 1994, several additional or updated proposals for regulatory consolidation were introduced in both the House and Senate. In addition, the Administration put forth a proposal that would create a new agency, the Federal Banking Commission, which would consolidate the supervisory functions of the four existing federal regulatory agencies. GAO testified on the general merits of the various proposals before the Senate Banking Committee in March 1994 (GAO/T-GGD-94-106). No compromise was reached on the various proposals during 1994. As of August 30, 1995, the issue had not been pursued by either the Administration or the 104th Congress.

    Matter: Given the increasing complexities of the banking and thrift industries and the less effective performance of the regulatory system since the 1980s, the House and Senate Banking Committees, in conjunction with the administration, should consider appointing a panel of experts to assess the appropriateness of continuing with present structure and alternatives. GAO suggests the panel include representatives from a cross section of the banking and thrift industries, academia and other interested public institutions, and current and former regulatory officials.

  5. Status: Closed - Implemented

    Comments: The regulators have taken various actions in response to the recommendations, although in some cases the actions are not sufficient or fully responsive. However, previous legislation in 1994 to improve the efficiency and effectiveness of the regulators did not pass. As of August 30, 1995, neither the Administration nor the 104th Congress had shown further interest in pursuing this issue.

    Matter: The House and Senate Banking Committees should urge the regulators to adopt the GAO recommendations as minimum standards for full-scope annual examinations to provide a consistent and preventive approach to bank and thrift supervision to help minimize losses to the depository institution insurance funds. Absent adoption of such minimum standards by the regulators, Congress should consider legislating such requirements.

  6. Status: Closed - Implemented

    Comments: The regulators have taken various actions in response to the recommendations, although in some cases the actions are not sufficient or fully responsive. However, previous legislation in 1994 to improve the efficiency and effectiveness of the regulators did not pass. As of August 30, 1995, neither the Administration nor the 104th Congress had shown further interest in pursuing this issue.

    Matter: The House and Senate Banking Committees should urge the regulators to adopt the GAO recommendations as minimum standards for full-scope annual examinations to provide a consistent and preventive approach to bank and thrift supervision to help minimize losses to the depository institution insurance funds. Absent adoption of such minimum standards by the regulators, Congress should consider legislating such requirements.

 

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