Troubled Financial Institutions:

Solutions to the Thrift Industry Problem

GGD-89-47: Published: Feb 21, 1989. Publicly Released: Feb 21, 1989.

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In response to a congressional request, GAO discussed: (1) the benefits and disadvantages of merging the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC); and (2) actions needed to restore the deposit system's financial health.

GAO believes that: (1) the current strategy for resolving insolvent institutions is costly and does not consider the total cost to the government of resolving insolvent thrifts; (2) to help restore the deposit insurance system to financial health and prevent repetition of the savings and loan crisis, FSLIC should take control of insolvent thrifts until they can be effectively rehabilitated, merged, or liquidated; (3) FSLIC should be separated from the Federal Home Loan Bank Board (FHLBB) and reorganized to allow it to impose higher capital requirements and compel other reforms; (4) FSLIC should isolate unhealthy thrifts so that they cannot compete with adequately funded institutions; (5) the thrift industry should bear as much of the cost of resolving the savings and loan crisis as possible; (6) if Congress decides that the rest of the deposit industry should pay the remaining cost, it should spread that burden as evenly as possible to avoid placing certain industry sectors at a competitive disadvantage; and (7) a merger of FDIC and FSLIC would merely divert needed FDIC resources to cover FSLIC costs.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) established an independent insurance agency.

    Matter: To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should disengage FSLIC from the FHLBB and create an independent insurance function for the thrift industry that has adequate supervisory resources.

  2. Status: Closed - Implemented

    Comments: FIRREA provided for such authority.

    Matter: To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should enhance the ability of both an independent FSLIC and FDIC to place stringent controls on improperly operated or undercapitalized institutions and to withdraw insurance from such institutions.

  3. Status: Closed - Implemented

    Comments: FIRREA provided for such authority.

    Matter: To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should provide FDIC and FSLIC with the authority to raise assessments as needed to be able to withdraw insurance costs, over and above whatever special arrangements are worked out for solving the current FSLIC crisis.

  4. Status: Closed - Implemented

    Comments: FIRREA improved consistency in some areas by strengthening enforcement provisions. Treasury and GAO issued reports recommending reforms in the banking system.

    Matter: To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should direct appropriate agencies to establish consistency in regulation and supervision of banks and thrifts in matters that have a material effect on the government's exposure to deposit insurance losses.

  5. Status: Closed - Implemented

    Comments: FIRREA required studies by Treasury and GAO on this issue were issued in March 1991. Both reports contain reform proposals, GAO-GGD-91-26.

    Matter: Congress and the deposit insurance agencies, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented.

  6. Status: Closed - Implemented

    Comments: FIRREA provided for such funds.

    Matter: Congress should adopt a funding plan that can provide at least $85 billion to pay for insurance losses and to restore the FSLIC reserve.

  7. Status: Closed - Implemented

    Comments: FIRREA provided for such funds.

    Matter: Congress should seek funds from the thrift industry through creation of good-company and bad-company funds under an independent FSLIC. The good-company fund reserves should be established through capital contributions by thrifts.

  8. Status: Closed - Implemented

    Comments: FIRREA provided for this.

    Matter: Congress should allow well-capitalized thrifts the option of joining FDIC at a cost that is equivalent to joining the good-company FSLIC fund.

  9. Status: Closed - Not Implemented

    Comments: FIRREA made other arrangements.

    Matter: Congress should require thrifts joining the good-company fund or FDIC to make equivalent contributions to meeting the expenses of the bad-company fund.

  10. Status: Closed - Implemented

    Comments: FIRREA provided borrowing authority for funding corporation, but trust corporation authority to conduct short-term borrowing is unclear and under review.

    Matter: Congress should authorize FSLIC to undertake short-term borrowing for liquidity purposes to enable FSLIC to move as quickly as possible to resolve problem cases.

  11. Status: Closed - Implemented

    Comments: FIRREA provided for both on- and off-budget costing.

    Matter: Congress should recognize in budget totals any federal funding that may be provided.

  12. Status: Closed - Implemented

    Comments: FIRREA established such a board.

    Matter: Congress should establish a special board to protect taxpayers' interest by overseeing the expenditures of any federal funds provided to resolve thrift cases over the next several years.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FDIC is in the process of carrying out action under FIRREA authority.

    Recommendation: The government should promptly take control of insolvent thrifts, placing these institutions in a receivership arrangement when necessary until a decision to rehabilitate, merge, or liquidate them can be made on the basis of careful study of their asset portfolios and the net cost of each approach. In the interim, supervisory and insurance officials should limit operations of these institutions to investing in high-grade securities, managing bad assets on the books, and accepting insured deposits from existing customers at market rates.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  2. Status: Closed - Implemented

    Comments: FIRREA established the Resolution Trust Corporation to implement a strategic plan developed by the Oversight Board. The Board's plan will include policies for assessing asset quality of insolvent institutions.

    Recommendation: FHLBB should form a task force of regulators and insurance officials to assess the quality of assets in insolvent thrifts for purposes of deciding which thrifts should be rehabilitated, merged, or liquidated.

    Agency Affected: Federal Home Loan Bank Board

  3. Status: Closed - Implemented

    Comments: FIRREA authorizes FDIC, as manager of the Resolution Trust Corporation, to utilize personnel of other agencies on a reimbursable basis. Action is being taken by FDIC.

    Recommendation: FSLIC should arrange with FDIC or other regulatory agencies for any required assistance.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  4. Status: Closed - Implemented

    Comments: FIRREA required a report and an explanation of the differences by August 1990.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement.

    Agency Affected: Federal Deposit Insurance Corporation

  5. Status: Closed - Implemented

    Comments: FIRREA required a report and an explanation of the differences by August 1990.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement.

    Agency Affected: Federal Home Loan Bank Board

  6. Status: Closed - Implemented

    Comments: FIRREA required FDIC and banking agencies to develop uniform accounting standards for determining capital ratios. The new requirements and enforcement actions were published and are phasing in through 1992.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  7. Status: Closed - Implemented

    Comments: FIRREA required a report and an explanation of the differences by August 1990.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement.

    Agency Affected: Federal Reserve System: Board of Governors

  8. Status: Closed - Implemented

    Comments: Treasury is conducting a study in consultation with FDIC on reforms needed. The study was issued in February 1991.

    Recommendation: FDIC and FSLIC, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented.

    Agency Affected: Federal Deposit Insurance Corporation

  9. Status: Closed - Implemented

    Comments: Treasury is conducting a study in consultation with FDIC on reforms needed. The study was issued in February 1991.

    Recommendation: FDIC and FSLIC, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  10. Status: Closed - Implemented

    Comments: The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) applied the source-of-strength principle only to depository institutions and subsidiaries of the holding company. FDIC included a source-of-strength requirement.

    Recommendation: The Board of Governors of the Federal Reserve System (FRS) should develop a specific proposal for clearly defining holding company financial responsibility for insured depository institutions.

    Agency Affected: Federal Reserve System: Board of Governors

  11. Status: Closed - Not Implemented

    Comments: This issue was addressed in the new deposit insurance reform legislation.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability.

    Agency Affected: Federal Deposit Insurance Corporation

  12. Status: Closed - Implemented

    Comments: FIRREA abolished FSLIC and FHLBB, transferred some supervision to FDIC, and put FHL supervisors under Treasury's Office of Thrift Supervision. Banking regulatory agencies OCC, FDIC, Treasury, and FRS now have comparable pay flexibility to attract and keep adequate supervisory resources.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability.

    Agency Affected: Federal Home Loan Bank Board

  13. Status: Closed - Implemented

    Comments: FIRREA abolished FSLIC and FHLBB, transferred some supervision to FDIC, and put FHL Bank supervisors under Treasury's Office of Thrift Supervision. Banking regulatory agencies OCC, FDIC, Treasury, and FRS now have comparable pay flexibility to attract and keep adequate supervisory resources.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  14. Status: Closed - Not Implemented

    Comments: This issue was addressed in new deposit insurance reform legislation.

    Recommendation: FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability.

    Agency Affected: Federal Reserve System: Board of Governors

  15. Status: Closed - Implemented

    Comments: By August 1990, FDIC, Treasury, and FRB established rules to govern real estate appraisal procedures and provide uniform definitions of capital ratios for audit purposes. GAO has recommended other audit and corporate governance reforms. The issue is being considered in new deposit insurance reform legislation.

    Recommendation: FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector.

    Agency Affected: Federal Deposit Insurance Corporation

  16. Status: Closed - Not Implemented

    Comments: FHLBB was abolished by FIRREA.

    Recommendation: FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector.

    Agency Affected: Federal Home Loan Bank Board

  17. Status: Closed - Not Implemented

    Comments: FSLIC and FHLBB were abolished by FIRREA.

    Recommendation: FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector.

    Agency Affected: Federal Home Loan Bank Board: Federal Savings and Loan Insurance Corporation

  18. Status: Closed - Implemented

    Comments: FDIC, Treasury, and FRB are implementing rules governing real estate appraisal procedures and providing uniform definitions of capital ratios for audit purposes. The issue is addressed in FDICIA.

    Recommendation: FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector.

    Agency Affected: Federal Reserve System: Board of Governors

 

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