Minority Banks:

Regulators Need to Better Assess Effectiveness of Support Efforts

GAO-07-6: Published: Oct 4, 2006. Publicly Released: Oct 4, 2006.

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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). To evaluate their efforts, as well as those of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, GAO (1) reviewed the profitability of minority banks, (2) identified the regulators' support and assessment efforts, and (3) obtained the views of minority banks on the regulators' efforts. GAO reviewed financial data from FDIC, interviewed regulators, and surveyed all minority banks.

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. 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 have adopted differing approaches to supporting minority banks, but no agency has regularly and comprehensively assessed the effectiveness of its efforts. FDIC--which supervises over half of all minority banks--has the most comprehensive support efforts and leads interagency efforts. OTS focuses on providing technical assistance to minority banks. While not required to do so by Section 308 of FIRREA, OCC and the Federal Reserve have taken some steps to support minority banks and are planning others. Although FDIC has recently sought to assess the effectiveness of its support efforts through various methods, none of the regulators comprehensively surveys minority banks to obtain their views or has developed outcome-oriented performance measures. Consequently, the regulators are 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." 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 emphasize 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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Chairman of the FDIC, the Director of OTS, the Comptroller of the Currency, and the Chairman of the Federal Reserve should regularly review the effectiveness of their minority bank support efforts and related regulatory activities and, as appropriate, assess the need to make changes necessary to better serve such institutions. In conducting such reviews, regulators should consider conducting periodic surveys of such institutions to determine how they view regulators' minority bank support efforts and/or developing outcome-oriented performance measures to assess the progress of their efforts in relation to program goals.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: In response to this recommendation, the Federal Reserve has met with 25 minority and new bankers to obtain their views on a training program that it is developing to assist these banks. According to Federal Reserve officials, the training program is structured to provide banks assistance in key areas such as maintaining shareholder value. A Federal Reserve official has also stated that the agency will continue to meet with minority bankers as the training program is implemented to discuss its effectiveness.

    Recommendation: The Chairman of the FDIC, the Director of OTS, the Comptroller of the Currency, and the Chairman of the Federal Reserve should regularly review the effectiveness of their minority bank support efforts and related regulatory activities and, as appropriate, assess the need to make changes necessary to better serve such institutions. In conducting such reviews, regulators should consider conducting periodic surveys of such institutions to determine how they view regulators' minority bank support efforts and/or developing outcome-oriented performance measures to assess the progress of their efforts in relation to program goals.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: OTS has conducted a series of meetings with minority banks to obtain feedback on the agency's efforts and has instituted a survey of minority owned banks to obtain further suggestions for improving its outreach. OTS will also begin to seek input from minority banks through its Thrift Satisfaction Survey.

    Recommendation: The Chairman of the FDIC, the Director of OTS, the Comptroller of the Currency, and the Chairman of the Federal Reserve should regularly review the effectiveness of their minority bank support efforts and related regulatory activities and, as appropriate, assess the need to make changes necessary to better serve such institutions. In conducting such reviews, regulators should consider conducting periodic surveys of such institutions to determine how they view regulators' minority bank support efforts and/or developing outcome-oriented performance measures to assess the progress of their efforts in relation to program goals.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Implemented

    Comments: OCC has conducted a survey of minority institutions and used the results to provide guidance to staff working with such institutions, such as in providing technical assistance.

    Recommendation: The Chairman of the FDIC, the Director of OTS, the Comptroller of the Currency, and the Chairman of the Federal Reserve should regularly review the effectiveness of their minority bank support efforts and related regulatory activities and, as appropriate, assess the need to make changes necessary to better serve such institutions. In conducting such reviews, regulators should consider conducting periodic surveys of such institutions to determine how they view regulators' minority bank support efforts and/or developing outcome-oriented performance measures to assess the progress of their efforts in relation to program goals.

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

    Status: Closed - Implemented

    Comments: The Federal Deposit Corporation (FDIC) surveyed its minority banks in December 2007. The survey requested feedback on FDIC's minority bank efforts for all minority banks and for input from FDIC-supervised minority banks on their interactions with FDIC staff and on their technical assistance efforts.

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