International Banking:

Supervision of Overseas Lending Is Inadequate

NSIAD-88-87: Published: May 5, 1988. Publicly Released: May 12, 1988.

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Pursuant to a congressional request, GAO assessed the Department of the Treasury's Office of the Comptroller of the Currency's (OCC), the Federal Reserve System's (FRS), and the Federal Deposit Insurance Corporation's (FDIC) supervision of U.S. banks' international lending, focusing on the agencies': (1) compliance with the International Lending Supervision Act of 1983; and (2) actions in response to 1982 GAO recommendations.

GAO found that the agencies: (1) required an inadequate reserve of $2.3 billion for foreign loans; (2) restricted use of their reserving authority to value-impaired loans, which constituted less than 2 percent of loans to less-developed countries (LDC); (3) required inadequate reserves for those loans; and (4) did not require reserves for loans rated as other transfer risk problems (OTRP) or substandard. GAO also found that the agencies' Interagency Country Exposure Review Committee (ICERC): (1) accurately ranked countries in terms of debt-servicing problems; (2) did not forecast the possible debt-servicing problems in countries with weak loans, although it rated 23.8 percent of its loans as weak; (3) used an inaccurate mathematical model in its ratings; and (4) did not promptly communicate with banks regarding weak ratings or debtor countries' probable debt-servicing problems. In addition, GAO found that the agencies' examiners did not adequately: (1) consider country risk and exposure concentrations in capital adequacy assessments; (2) examine bank compliance with required reserves, accounting procedures for profits from loan rescheduling fees, and public disclosure requirements; (3) review the accuracy of banks' country exposure reports of international loans; (4) review banks' country exposure management systems; or (5) comment on weak assets or highlight significant foreign-owned bank assets.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The agencies conducted an additional review, in response to Public Law (P.L.) 101-240, section 402. OCC may soon have its examiners require reserves for substandard loans, but not OTRP.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.

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

  2. Status: Closed - Not Implemented

    Comments: The agencies conducted an additional review, in response to P.L. 101-240, section 402, on the adequacy of general and required reserves for highly indebted LDC. FDIC concludes, however, that all banks have adequate reserves.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Not Implemented

    Comments: The agencies conducted an additional review, in response to P.L. 101-240, section 402, on the adequacy of general and required reserves for highly indebted LDC. FRB concludes, however, that all banks have adequate reserves.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.

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

  5. Status: Closed - Implemented

    Comments: ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.

    Agency Affected: Federal Deposit Insurance Corporation

  6. Status: Closed - Implemented

    Comments: ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Closed - Not Implemented

    Comments: OCC does not believe that ICERC ratings should be used or regarded as forecasts of debt-servicing problems. The "weak" rating is used like a flashing yellow light indicating "be wary, proceed with caution".

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.

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

  8. Status: Closed - Not Implemented

    Comments: FDIC believes that the purpose of the ratings is not meant to be a statistical exercise in the prediction of actual debt-servicing problems. Rather the intent is to highlight large loan concentrations which are owed by countries with a high potential for incurring debt-servicing problems.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.

    Agency Affected: Federal Deposit Insurance Corporation

  9. Status: Closed - Not Implemented

    Comments: The Board does not believe that it is appropriate for it to speculate as to which foreign borrowers with correctable problems will fail to take appropriate action. Examination reports are given to banks which note concentrations of debt owed by a country with weaknesses.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.

    Agency Affected: Federal Reserve System: Board of Governors

  10. Status: Closed - Not Implemented

    Comments: OCC believes that these ratings are more appropriately used to evaluate a bank's exposure in relation to potential debt-servicing problems. However, banks owing significant amounts of debt are not told of "weak" ratings after triannual ICERC meetings nor are they ever told the probability of debt servicing problems. Informally, if banks ask, they are told verbally.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.

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

  11. Status: Closed - Not Implemented

    Comments: FDIC believes that communication to banks of the weak ratings may cause weak countries to be regarded as being poor credit risks. However, banks owing significant amounts of debt are not told of "weak" ratings after triannual ICERC meetings nor are they ever told the probability of debt-servicing problems.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.

    Agency Affected: Federal Deposit Insurance Corporation

  12. Status: Closed - Not Implemented

    Comments: The Federal Reserve examines banks once a year at which time examiners note "weak" concentrations greater than 10 percent of capital.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.

    Agency Affected: Federal Reserve System: Board of Governors

  13. Status: Closed - Implemented

    Comments: FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.

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

  14. Status: Closed - Implemented

    Comments: FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.

    Agency Affected: Federal Deposit Insurance Corporation

  15. Status: Closed - Implemented

    Comments: FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.

    Agency Affected: Federal Reserve System: Board of Governors

  16. Status: Closed - Implemented

    Comments: FRB-NY has provided more consistent and better quality evaluations of political and social risk.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.

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

  17. Status: Closed - Implemented

    Comments: FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. FRB-NY has provided more consistent and better quality evaluations of political and social risk.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.

    Agency Affected: Federal Deposit Insurance Corporation

  18. Status: Closed - Implemented

    Comments: The Board states that changes have been made to improve the country studies. FRB-NY has provided more consistent and better quality evaluations of political and social risk.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.

    Agency Affected: Federal Reserve System: Board of Governors

  19. Status: Closed - Implemented

    Comments: The country studies are supplemented with Treasury and bank analyses and projections are comprehensive. OCC supports FRB-NY efforts to improve country studies. Within resource constraints, OCC will improve such analyses and projections and comply with the requirements of new trade legislation. In the country studies, key economic variables are now being projected into the near future.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.

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

  20. Status: Closed - Implemented

    Comments: FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. In the country studies, key economic variables are now being projected into the near future.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.

    Agency Affected: Federal Deposit Insurance Corporation

  21. Status: Closed - Implemented

    Comments: The Board states that changes have been made to improve the country studies. In the country studies, key economic variables are now being projected into the near future.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.

    Agency Affected: Federal Reserve System: Board of Governors

  22. Status: Closed - Implemented

    Comments: The country studies are supplemented with Treasury and bank analyses and projections are comprehensive with respect to monetary policy. OCC supports FRB-NY improvement of country studies. OCC will continue to improve the analyses of monetary policies in countries and will comply with the requirements of the new trade legislation. Country studies now have more intensive analyses of monetary policy.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.

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

  23. Status: Closed - Implemented

    Comments: FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. Country studies now have more intensive analyses of monetary policy.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.

    Agency Affected: Federal Deposit Insurance Corporation

  24. Status: Closed - Implemented

    Comments: The Board states that changes have been made to improve the country studies. Country studies now have more intensive analyses of monetary policy.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.

    Agency Affected: Federal Reserve System: Board of Governors

  25. Status: Closed - Implemented

    Comments: Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.

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

  26. Status: Closed - Implemented

    Comments: FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.

    Agency Affected: Federal Deposit Insurance Corporation

  27. Status: Closed - Implemented

    Comments: The Board states that changes have been made to improve the country studies. Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.

    Agency Affected: Federal Reserve System: Board of Governors

  28. Status: Closed - Implemented

    Comments: When substantive, OCC examiners will include in report comments its evaluation of the influence of country risk and exposure concentrations on capital adequacy. This assessment will be documented in the workpapers, although not more often than annually.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.

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

  29. Status: Closed - Implemented

    Comments: The FDIC updated main examination manual requests that field examiners consider and document country risk and exposure in their assessment of capital adequacy and that supervisors review workpapers to ensure compliance.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.

    Agency Affected: Federal Deposit Insurance Corporation

  30. Status: Closed - Implemented

    Comments: FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.

    Agency Affected: Federal Reserve System: Board of Governors

  31. Status: Closed - Implemented

    Comments: As part of OCC compliance examination procedures, conducted on a biannual basis in banks with more than $1 billion in assets, examiners are required to determine and document required reserves, fee accounting, and public disclosure compliance. Quality assurance checks that these examiner requirements are being met.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.

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

  32. Status: Closed - Implemented

    Comments: The FDIC main examination manual requires that examiners review and document banks' compliance with requirements concerning required reserves' accounting for fees and public disclosure. Supervisors are required to review all workpapers to ensure compliance.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.

    Agency Affected: Federal Deposit Insurance Corporation

  33. Status: Closed - Implemented

    Comments: FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.

    Agency Affected: Federal Reserve System: Board of Governors

  34. Status: Closed - Implemented

    Comments: OCC verifies the accuracy of country exposure reports and documents them biannually under compliance examination procedures.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.

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

  35. Status: Closed - Implemented

    Comments: The FDIC main examination manual requires that field examiners review and document the accuracy of country exposure reports and that supervisors check workpapers to ensure compliance.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.

    Agency Affected: Federal Deposit Insurance Corporation

  36. Status: Closed - Implemented

    Comments: FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.

    Agency Affected: Federal Reserve System: Board of Governors

  37. Status: Closed - Implemented

    Comments: On a biannual basis, OCC examiners assessed the adequacy of the bank's country exposure examination systems.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.

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

  38. Status: Closed - Implemented

    Comments: The FDIC main examination manual requires that field examiners review and document the adequacy of banks' country exposure management systems and that supervisors review workpapers to ensure compliance.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.

    Agency Affected: Federal Deposit Insurance Corporation

  39. Status: Closed - Implemented

    Comments: FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.

    Agency Affected: Federal Reserve System: Board of Governors

  40. Status: Closed - Implemented

    Comments: When examination reports are prepared, OCC examiners will include a schedule listing cross-border exposures by country when the aggregate exposure exceeds 1 percent of capital. This schedule will not be required more frequently than annually. OCC has not assured GAO that these listings will occur in a prominent place in the report or in a letter to the banks' board of directors.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.

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

  41. Status: Closed - Implemented

    Comments: The FDIC main examination manual requires that important risk exposure be in the core summary section of the examination report.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.

    Agency Affected: Federal Deposit Insurance Corporation

  42. Status: Closed - Implemented

    Comments: FRB-NY has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures, along with a request to review procedures in the light of GAO findings.

    Recommendation: The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.

    Agency Affected: Federal Reserve System: Board of Governors

  43. Status: Closed - Implemented

    Comments: For multinational banks, quarterly reports are filed by examiners in charge with headquarters, listing large country expenses, and FDIC internal classifications.

    Recommendation: The Comptroller of the Currency should require OCC examiners to comment on and document that they reviewed country risk as do FRS and FDIC.

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

 

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