Failing Banks:

Lessons Learned from Resolving First City Bancorporation of Texas

GGD-95-37: Published: Mar 15, 1995. Publicly Released: Mar 15, 1995.

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Pursuant to a congressional request, GAO reviewed the Federal Deposit Insurance Corporation's (FDIC) resolution of the First City Bancorporation of Texas, focusing on: (1) why FDIC decided to resolve the corporation by providing financial assistance instead of using other available resolution alternatives; and (2) the additional cost to the Bank Insurance Fund (BIF) as a result of the resolution.

GAO found that: (1) in 1988, FDIC provided $970 million in financial assistance to recapitalize and restructure the banking organization; (2) FDIC chose this method of resolution because it was less costly than liquidating the banks in the event of insolvency; (3) FDIC estimated BIF costs to liquidate the banks to be about $1.74 billion, as opposed to the $970 million estimated for open bank assistance; (4) FDIC did not opt to sell the banks because it did not believe that it would be able to find acceptable buyers with sufficient capital to restore the banks to long-term viability; (5) FDIC placed the banks under its control for about 3 months and operated them as bridge banks to facilitate the orderly resolution of the banks; (6) FDIC relied on its best business judgment in estimating BIF costs at the time of the banks' failures; (7) FDIC considered loss estimates that ranged from $300 million to over $1 billion in making its least-cost resolution determination; (8) the Office of the Comptroller of the Currency could have better supported its decision to close the largest bank by ensuring that its examination reports and underlying workpapers were clear, well documented, and self-explanatory; and (9) FDIC resolution officials could have used OCC examination findings as a means of verifying its valuation of the banks' assets.

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