The Federal Savings and Loan Insurance Corporation--Financial Condition and Recapitalization Issues

GAO discussed: (1) a proposed Federal Savings and Loan Insurance Corporation (FSLIC) recapitalization act; and (2) the financial health of FSLIC and savings and loan institutions (S&L). GAO noted that: (1) from 1981 to 1986, 211 S&L failed, and the number of insolvent S&L increased from 16 to 44; (2) 15 percent of current FSLIC-insured S&L are insolvent and 20 percent are unprofitable; (3) diversification into nontraditional assets severely weakened some S&L portfolios; (4) FSLIC has allowed insolvent and unprofitable S&L to continue to operate in order to protect its own resources and has assisted them with loans, contributions, and net worth or income capital certificates; and (5) because of the steady decline in its reserves and its increasingly expensive case load, FSLIC will need $23.5 billion to resolve known and borderline cases requiring assistance. GAO believes that the capital forbearance policy, which would defer normal regulatory action against well-managed, viable institutions whose net worth falls below requirements, could be a useful tool for the industry if FSLIC maintains the same stringent requirements as the commercial banking industry. GAO also believes that Congress should consider: (1) requiring FSLIC to limit the industry's ability to enter into high-risk investments and loans; (2) ensuring congressional review and oversight; (3) ensuring that there will be sufficient funds if FSLIC premium income is inadequate; and (4) strengthening regulations and oversight to reduce speculation.