Deposit Insurance:

A Strategy for Reform

GGD-91-26: Published: Mar 4, 1991. Publicly Released: Mar 4, 1991.

Additional Materials:

Contact:

James L. Bothwell
(202) 512-8678
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Pursuant to a legislative requirement, GAO reviewed issues associated with reforming the federal deposit insurance system, focusing on whether such reforms will result in a more safe, sound, and stable banking industry.

GAO presented a comprehensive three-part reform program that could change the way banks are regulated and supervised, as well as the way the deposit insurance system functions, focusing on: (1) strengthening supervision, bank internal controls, and financial reporting requirements so that regulators can more effectively protect the Bank Insurance Fund (BIF) from losses; (2) changing economic incentives through strengthened capital requirements, risk-based premiums, and other means to ensure that owners, managers, and creditors bear most of the bank failure costs; and (3) updating the bank holding company structure and regulation to reduce risks to the banking system and to modernize the financial system if Congress wishes to expand the powers of banks and other financial institutions.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The issue of expanded powers will be considered in the future.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should restrict the ability of financial institutions to merge in ways that will allow the creation of a concentrated financial industry.

  2. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To make the tripwire system's early warning features effective, Congress should ensure the annual audit of all banks by independent public accountants and receive full-scope examinations by the regulators.

  3. Status: Closed - Not Implemented

    Comments: The new legislation gives the regulators the mandate to look at the adequacy of accounting rules as they affect book condition.

    Matter: To make the tripwire system's early warning features effective, Congress should develop special accounting rules and audit procedures to further clarify that affiliate transactions are required to be accounted for and reported on the basis of their economic substance.

  4. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To make the tripwire system's early warning features effective, Congress should revise accounting principles for identifying and measuring loss contingencies to obtain prompt recognition of the value of banks' problem assets on the basis of existing market conditions.

  5. Status: Closed - Implemented

    Comments: FDICIA broadened the base for a special premium to be assessed in the case of payoffs for uninsured or foreign deposits. It also acted to restrict coverage of uninsured deposits.

    Matter: Congress should direct FDIC to develop a plan for changing the assessment base against which insurance premiums are levied. Options that should be considered include broadening the base to include all bank liabilities or switching to a system in which insurance premiums are assessed on assets rather than liabilities.

  6. Status: Closed - Not Implemented

    Comments: FDICIA limited some deposit insurance coverage on professionally managed funds and also restricted the ability of poorly capitalized institutions to attract brokered deposits.

    Matter: Congress should eliminate, over the long term, deposit insurance coverage on brokered deposits and perhaps other deposits placed by professional money or pension fund managers.

  7. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: Congress should consider, over the long term, requiring that banks be closed in the least costly manner, and give the Federal Reserve, in conjunction with FDIC, the ability to determine when the failure of a large bank would be detrimental to the stability of the U.S. financial system.

  8. Status: Closed - Not Implemented

    Comments: Congress did not include improved disclosure in FDICIA. The issue will likely resurface as uninsured depositors lose money in bank failures and it becomes clearer that they should have been better informed.

    Matter: Congress should direct federal regulators to develop the means for improved public disclosure of bank condition to enhance the ability of depositors to judge the soundness of their banks.

  9. Status: Closed - Not Implemented

    Comments: Congress decided to make no changes to allow uninsured depositors to protect funds in banks. The issue will likely resurface when small banks have trouble retaining deposits over $100,000.

    Matter: Congress should direct federal regulators to develop alternatives for depositors to protect deposits over $100,000. Such options could include allowing depositors to collateralize deposits over $100,000 with low-risk bank assets or to purchase additional FDIC deposit insurance through their banks.

  10. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: Congress should require bank regulators to implement a system of risk-based deposit insurance premiums.

  11. Status: Closed - Not Implemented

    Comments: In acting on the Federal Deposit Insurance Corporation Improvement Act (FDICIA), Congress declined to include this provision. Since Congress is unlikely to take up similar legislation for a while, this issue should be revisited when implementation of the act is further along.

    Matter: Congress should require bank regulators to phase in a requirement for large banks to meet a portion of their capital requirement with subordinated debt.

  12. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: Congress should require bank regulators to phase in and strengthen risk-based capital requirements after the Basle capital accord has been implemented fully in 1992. The definition of the capital requirements should be left to the discretion of the regulators and, to the extent feasible, developed in accordance with negotiated international agreements.

  13. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To improve the bank regulatory system, Congress should give the Federal Deposit Insurance Corporation (FDIC) the explicit authority to prevent state-chartered banks from engaging in activities that pose significant risks to BIF.

  14. Status: Closed - Implemented

    Comments: Implementation of FDICIA will result in agency consideration of some of the issues that would have been looked at by the panel.

    Matter: To improve the bank regulatory system, Congress should establish a panel appointed by the President and Congress to conduct a thorough analysis of regulatory systems and resource requirements.

  15. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To improve the bank regulatory system, Congress should exercise congressional oversight to ensure that BIF is adequately refinanced.

  16. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To improve the bank regulatory system, Congress should emphasize closer regulatory scrutiny of large complex banking organizations, including more stringent financial reporting requirements and the enhancement of the expertise necessary to understand and quickly react to problems as they develop.

  17. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To make the tripwire system's early warning features effective, Congress should ensure the audit of key information used by regulators in implementing the tripwire system.

  18. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To strengthen the system of corporate governance so that it serves the regulatory need, Congress should appoint fully independent audit committees, and they should be charged with reviewing reports to regulators.

  19. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To strengthen the system of corporate governance so that it serves the regulatory need, Congress should make all financial institutions subject to internal control requirements like those added to the Securities Exchange Act of 1934 by the Foreign Corrupt Practices Act, and Congress should require bank management to annually publicly report on compliance with those requirements.

  20. Status: Closed - Not Implemented

    Comments: The topic of expanded powers will be considered in the future.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should create an interindustry regulatory board to promulgate regulations that ensure consistent and safe financial services holding company regulation. The Board should consist of the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities Exchange Commission, and the Secretary of the Treasury.

  21. Status: Closed - Not Implemented

    Comments: This issue was dropped from FDICIA, but will still be relevant when expanded powers are considered again.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should require controls on the sharing of confidential customer information among holding company entities.

  22. Status: Closed - Not Implemented

    Comments: This topic was dropped from FDICIA, but the issue of expanded powers will be considered in the future.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should allow nondepository financial institutions to acquire banks but require such institutions to act as sources of financial strength to their bank and other regulated subsidiaries. Congress should subject all financial institutions affiliated with commercial banks to consolidated capital requirements and regulations.

  23. Status: Closed - Not Implemented

    Comments: This topic was dropped from FDICIA, but the issue of expanded powers will be considered in the future.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should restrict expanded powers to nondepository subsidiaries of bank holding companies and restrict transactions between those subsidiaries and affiliated banks to ensure that insured deposits are not used to finance expanded powers.

  24. Status: Closed - Not Implemented

    Comments: This topic was dropped from FDICIA, but the issue of expanded powers will be considered in the future.

    Matter: If Congress decides to enact legislation to allow banks access to expanded powers, it should require that only well-capitalized, well-managed bank holding companies be given access to expanded bank powers on a case-by-case basis.

  25. Status: Closed - Not Implemented

    Comments: Congress did not deal with this issue in FDICIA, but should include disclosure in any bill to expand powers.

    Matter: To resolve the regulatory gaps that currently characterize the regulation and structure of bank holding companies in a way that will protect the safety and soundness of the U.S. banking system, Congress should, before expanding bank powers, require uniform disclosure of federally insured and uninsured products, comparable cost and yield information on similar types of financial products, and information regarding brokers' commissions and fees.

  26. Status: Closed - Implemented

    Comments: Revisions to 23A and 23B were contained in FDICIA. The need for additional changes should be considered if and when expanded powers are taken up.

    Matter: To resolve the regulatory gaps that currently characterize the regulation and structure of bank holding companies in a way that will protect the safety and soundness of the U.S. banking system, Congress should, before expanding bank powers, legislate improvements to sections 23A and 23B of the Federal Reserve Act that will enhance regulators' abilities to protect insured banks from risks undertaken by their nonbank affiliates.

  27. Status: Closed - Not Implemented

    Comments: The issue of expanded powers will return sometime.

    Matter: To resolve the regulatory gaps that currently characterize the regulation and structure of bank holding companies in a way that will protect the safety and soundness of the U.S. banking system, Congress should, before expanding bank powers, require that holding companies associated with banks be regulated in a consolidated manner, with functional regulation of regulated subsidiaries, and that they be subject to consolidated capital requirements.

  28. Status: Closed - Implemented

    Comments: A source-of-strength provision was included in FDICIA.

    Matter: To resolve the regulatory gaps that currently characterize the regulation and structure of bank holding companies in a way that will protect the safety and soundness of the U.S. banking system, Congress should, before expanding bank powers, enact a source-of-strength doctrine that will require holding companies to take responsibility for the financial health of their bank subsidiaries and the potential losses incurred by FDIC in resolving bank failures.

  29. Status: Closed - Not Implemented

    Comments: The interstate banking issue was dropped from the legislation and may be taken up next year. More GAO work on the topic of interstate banking is underway.

    Matter: To resolve the regulatory gaps that currently characterize the regulation and structure of bank holding companies in a way that will protect the safety and soundness of the U.S. banking system, Congress should, before expanding bank powers, phase out the McFadden Act and sections of the Douglas Amendment to the Bank Holding Company Act that restrict interstate banking, but only after controls are adapted to be certain that only well-capitalized, well-managed banking organizations can take advantage of the new opportunities for interstate expansion.

  30. Status: Closed - Not Implemented

    Comments: This purpose can be achieved under FDICIA reforms.

    Matter: To accomplish the expansion of auditing activities, Congress should ensure the use of resources of the public accounting profession if only independent public accounting firms that are subject to the accounting profession's peer review program would be permitted to audit banks.

  31. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To accomplish the expansion of auditing activities, Congress should ensure the use of resources of the public accounting profession if regulators are promptly informed of internal control weaknesses and noncompliance with laws and regulations.

  32. Status: Closed - Not Implemented

    Comments: This recommendation is essentially covered by FDICIA reforms.

    Matter: To deal with the extraordinary risks to BIF from large banks, Congress should require that independent public accountants review the annual financial forecasts prepared by bank management.

  33. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To deal with the extraordinary risks to BIF from large banks, Congress should require that independent public accountants review the quarterly call reports.

  34. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To strengthen the system of corporate governance so that it serves the regulatory need, Congress should require that independent public accountants audit the adequacy of internal accounting controls and compliance with safety and soundness laws.

  35. Status: Closed - Implemented

    Comments: Included in FDICIA.

    Matter: To improve the bank regulatory system, Congress should ensure that the regulators take timely and effective enforcement actions by mandating a tripwire intervention approach.

 

Explore the full database of GAO's Open Recommendations »

Sep 21, 2016

Aug 3, 2016

Aug 1, 2016

Jul 14, 2016

Jul 5, 2016

Jun 30, 2016

Jun 28, 2016

Jun 23, 2016

Jun 22, 2016

Looking for more? Browse all our products here