Additional Reserves and Reforms Are Needed to Strengthen the Bank Insurance Fund

T-AFMD-90-28: Published: Sep 11, 1990. Publicly Released: Sep 11, 1990.

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GAO discussed its audit of the Bank Insurance Fund's 1989 financial statements. GAO noted that: (1) over the last 2 years, the Fund balance decreased 28 percent, from $18.3 billion to $13.2 billion; (2) the Fund lost $4.2 billion in 1988 and $852 million in 1989; (3) the Federal Deposit Insurance Corporation (FDIC) believes that the Fund could suffer losses of $2 billion in 1990, due to the continuing high level of bank failures; (4) 35 major banks that were in severe financial condition and likely to fail could cost the Fund between $4.4 billion and $6.3 billion; (5) the Fund's cash resources were too low to enable it to deal decisively with problem banks; (6) as of December 1989, the Fund had $13.7 billion in cash and investments but was contingently liable for about $8 billion of troubled assets that acquirers could pass back to FDIC; (7) acquirers' overstated appraisals of foreclosed real estate could lead to additional Fund losses; (8) at the end of 1989, the ratio of the Fund balance to insured deposits reached its lowest point ever, 0.7 percent, and was not expected to achieve the legislatively set minimum reserve ratio of 1.25 percent by 1995; (9) increased risks in the commercial banking industry could greatly affect the Fund; (10) banks' quarterly financial condition reports did not always reflect their true financial condition; and (11) serious internal control weaknesses contributed to many bank failures in 1988 and 1989.

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