Net Worth Certificate Assistance Programs:

Their Design, Major Differences, and Early Implementation

GGD-85-8: Published: Nov 5, 1984. Publicly Released: Nov 5, 1984.

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GAO reported on the condition of the savings and loan association industry and the programs which the Garn-St. Germain Act established to increase the net worth of qualified institutions.

During 1981 and 1982, federally insured savings and loan associations experienced severe losses; however, in 1983, they returned to profitability because of the sharp decline in interest rates. Nevertheless, the lending institutions remain vulnerable to interest rate fluctuations. The act authorizes banking assistance to offset an institution's losses and entails an exchange of promissory notes and certificates between the lending institutions and the Federal Deposit Insurance Corporation (FDIC) or the Federal Home Loan Bank Board (FHLBB) which are intended to increase the institution's net worth and forestall liquidation or forced mergers. The act gives both FDIC and FHLBB the discretion to design their own programs. The FDIC capital assistance program adheres closely to the act. However, FHLBB designed a program that would provide less assistance to an institution than the FDIC program and reduce the number of eligible institutions. In addition, GAO found that the FHLBB program would qualify a greater number of weak savings and loan institutions because it gives credit for unrealized equity in land, buildings, and capital improvements. Finally, GAO found that both institutions released financial reports in a manner that is not recognized under generally accepted accounting principles. Without proper disclosure, the public could make erroneous business and investment decisions.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FDIC has implemented this recommendation. Additionally, through an interagency council, this recommendation has been implemented by the Federal Reserve Board and the Comptroller of the Currency.

    Recommendation: The Chairmen of FHLBB and FDIC should qualify financial reports and information that are based on regulatory requirements that differ from generally accepted accounting principles. This qualification should notify the public that the financial reports and data depart from and are not intended to be presented in conformity with generally accepted accounting principles.

    Agency Affected: Federal Home Loan Bank Board

  2. Status: Closed - Implemented

    Comments: FHLBB has made arrangements to qualify its financial reports and information given to the public, as recommended in the report.

    Recommendation: The Chairmen of FHLBB and FDIC should qualify financial reports and information that are based on regulatory requirements that differ from generally accepted accounting principles. This qualification should notify the public that the financial reports and data depart from and are not intended to be presented in conformity with generally accepted accounting principles.

    Agency Affected: Federal Deposit Insurance Corporation

 

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