Bank Insider Activities:

Insider Problems and Violations Indicate Broader Management Deficiencies

GGD-94-88: Published: Mar 30, 1994. Publicly Released: Mar 30, 1994.

Additional Materials:

Contact:

Thomas J. McCool
(202) 512-8678
contact@gao.gov

 

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

Pursuant to a congressional request, GAO reviewed: (1) insider activities at failed and open banks; (2) the underlying reasons for insider problems, such as insider fraud, insider abuse, and loan losses to insiders; (3) federal bank regulators' oversight of such activities; and (4) the overall amount of insider lending in the U.S. banking industry.

GAO found that: (1) insider fraud and loan losses were the major causes for bank failures in 1990 and 1991; (2) although federal bank examiners cited 286 banks for 561 insider violations and federal and state regulators took 235 separate enforcement actions, the banks eventually failed; (3) the Federal Deposit Insurance Corporation found insider violations at 13 open banks similar to those found in the failed banks; (4) there is a strong association between insider violations, poor bank management, and inadequate bank board oversight; (5) bank examiners could not effectively identify insider activities in open banks and often failed to communicate significant insider problems to bank boards and bank management; (6) bank examiners need to improve their communication with bank management and ability to identify insider problems at open banks so that insider problems do not become more serious; (7) bank boards and management need to take steps to understand the depth of their insider problems and work with bank examiners to identify insider activities; and (8) although the aggregate amount of insider lending at failed banks is unknown because of a lack of comprehensive data, the aggregate amount of insider lending at open banks through 1993 was $24 billion.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OCC guidance now directs examiners to thoroughly discuss findings in the insider area with bank management, including, as appropriate, the board of directors, to ensure that they understand and take action to address the risks and consequences of the inappropriate insider transactions. If an examiner finds that a violation extends from one examination to the next, the examiner may determine that a failure to correct insider violations is a reflection of poor management and inadequate board oversight. Followup will continue until effective corrective action is achieved. As of September 1996, OCC indicated it is continuing to review whether additional guidance is necessary.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to better ensure--through examination reports, exit conferences, and any other appropriate means--that all directors understand: (1) the primary issues in need of the board's attention; (2) that the problems facing a bank are most often a consequence of deficiencies in the overall management and oversight by the boards of directors; and (3) that the board must see that effective corrective action is taken. In addition, when directors do not understand the problems examiners identify or potential corrective measures, federal regulators should, when appropriate, recommend training to improve the directors' abilities to oversee the management of banks.

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

  2. Status: Closed - Implemented

    Comments: In 1993, the federal bank and thrift regulators (FRB, FDIC, OCC, and OTS) began to implement a new interagency bank examination report format that focuses on the most significant problems identified during an examination. The first page of the examination report under the new format is entitled "Matters Requiring Board Attention." The information is presented in a prioritized manner so that board members can identify the most serious problems requiring immediate attention. The page concludes with a reminder to the directorate that each director must sign the Signature of Directors page, indicating their awareness of and responsibility for the matters highlighted.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to better ensure--through examination reports, exit conferences, and any other appropriate means--that all directors understand: (1) the primary issues in need of the board's attention; (2) that the problems facing a bank are most often a consequence of deficiencies in the overall management and oversight by the boards of directors; and (3) that the board must see that effective corrective action is taken. In addition, when directors do not understand the problems examiners identify or potential corrective measures, federal regulators should, when appropriate, recommend training to improve the directors' abilities to oversee the management of banks.

    Agency Affected: Federal Reserve System

  3. Status: Closed - Implemented

    Comments: FDIC has directed its examiners to review bank files relating to both fidelity and directors and officers liability insurance to glean possibly useful information relating to insiders and their activities and the reasons why any insurance coverage may have been denied for any insider. FDIC further recommends the information be carefully considered for indications of possible insider abuse or violations of law or regulations relating to insider transactions.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to include in their examinations a brief review of a bank's insurance policies. Such a review could determine whether insurers have identified any reasons--such as insider problems--to deny coverage or write exclusions into the policies.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: OCC has directed its examiners to conduct a brief review of the banks' insurance policies to determine whether insurers have identified any reasons, such as insider problems to deny coverage or write exclusions into the policy.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to include in their examinations a brief review of a bank's insurance policies. Such a review could determine whether insurers have identified any reasons--such as insider problems--to deny coverage or write exclusions into the policies.

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

  5. Status: Closed - Implemented

    Comments: As part of new examination guidance, the Federal Reserve has asked its examiners, when they review for fidelity bond coverage and directors and liability insurance, to review and document any periods without such coverage or any exclusions in those policies. Also, a D&O review is part of the workpaper documentation program as risk and insurance management.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to include in their examinations a brief review of a bank's insurance policies. Such a review could determine whether insurers have identified any reasons--such as insider problems--to deny coverage or write exclusions into the policies.

    Agency Affected: Federal Deposit Insurance Corporation

  6. Status: Closed - Implemented

    Comments: A supervisory letter was issued by the Federal Reserve Board's Division of Banking Supervision and Regulation to the examination department of each reserve bank outlining the numerous requirements for a full-scope safety and soundness examination. One area of that examination guidance re-emphasizes a review of insider activities as part of the minimum requirements of a full-scope examination. The Federal Reserve also adopted an improved workpaper system that provides a greater emphasis on the examiners' review of Regulation O recordkeeping requirements. Specifically, when conducting reviews for Regulation O compliance, examiners must obtain and verify bank records for completeness and accuracy.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman of the Federal Deposit Insurance Corporation (FDIC) should direct examiners to include, as part of their next full-scope examination of each bank under their authority, a review of the insider lending information as reported by each bank in their call reports. This review should include a study of the accompanying documentation to ensure the numbers reported are supportable. Further, Regulation O recordkeeping requirements should be given higher priority by examiners to ensure that bank boards and management understand the importance of proper reporting and to improve examiners' abilities to identify potential insider problems.

    Agency Affected: Federal Reserve System

  7. Status: Closed - Implemented

    Comments: FDIC has issued a copy of the GAO executive summary from the Bank Insider Report to each examiner in each FDIC regional office for review and future reference. In addition, a directive was sent to emphasize the importance of close adherence to all of the GAO recommendations.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman of the Federal Deposit Insurance Corporation (FDIC) should direct examiners to include, as part of their next full-scope examination of each bank under their authority, a review of the insider lending information as reported by each bank in their call reports. This review should include a study of the accompanying documentation to ensure the numbers reported are supportable. Further, Regulation O recordkeeping requirements should be given higher priority by examiners to ensure that bank boards and management understand the importance of proper reporting and to improve examiners' abilities to identify potential insider problems.

    Agency Affected: Federal Deposit Insurance Corporation

  8. Status: Closed - Implemented

    Comments: OCC has consolidated all insider guidance into a single, new chapter of the "Comptroller's Handbook for National Bank Examiners." This chapter contains background information, applicable rules, reporting requirements, examination objectives, an internal control questionnaire, and examination procedures. The guidance was to be available by September 30, 1994. Specifically, the new guidance requires examiners to check the accuracy of reported information in every full-scope examination. In addition, the operational risk associated with failure to maintain management information systems that provide timely, comprehensive, and accurate reports of insider transactions and relationships are described. This was implemented on March 1, 1995.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman of the Federal Deposit Insurance Corporation (FDIC) should direct examiners to include, as part of their next full-scope examination of each bank under their authority, a review of the insider lending information as reported by each bank in their call reports. This review should include a study of the accompanying documentation to ensure the numbers reported are supportable. Further, Regulation O recordkeeping requirements should be given higher priority by examiners to ensure that bank boards and management understand the importance of proper reporting and to improve examiners' abilities to identify potential insider problems.

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

  9. Status: Closed - Implemented

    Comments: FDIC directed its examiners to prioritize issues and problems in order of importance, ensure that the directors understand the issues and problems discussed and management's role in creating and/or permitting the problems to continue, suggest possible means or alternatives for effecting corrections and preventing further deterioration, and specifically note the board's responsibility for deciding, in consultation with management, on appropriate corrective actions and monitoring their implementation within some reasonable time frame.

    Recommendation: The Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Chairman, FDIC, should direct examiners to better ensure--through examination reports, exit conferences, and any other appropriate means--that all directors understand: (1) the primary issues in need of the board's attention; (2) that the problems facing a bank are most often a consequence of deficiencies in the overall management and oversight by the boards of directors; and (3) that the board must see that effective corrective action is taken. In addition, when directors do not understand the problems examiners identify or potential corrective measures, federal regulators should, when appropriate, recommend training to improve the directors' abilities to oversee the management of banks.

    Agency Affected: Federal Deposit Insurance Corporation

 

Explore the full database of GAO's Open Recommendations »

Dec 19, 2014

Dec 17, 2014

Nov 20, 2014

Oct 6, 2014

Sep 17, 2014

Aug 5, 2014

Jul 31, 2014

Jun 18, 2014

Looking for more? Browse all our products here