Reserve Accounting:

Rural Telephone Bank's Reserve for Losses Due to Interest Rate Fluctuations

AFMD-89-15: Published: Mar 27, 1989. Publicly Released: Mar 27, 1989.

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Pursuant to a legislative requirement, GAO studied the Rural Telephone Bank's (RTB) reserve for losses due to interest-rate fluctuations.

GAO found that: (1) RTB retained annual profits as patronage capital after distribution of cash dividends to government and private stockholders, was required to place at least 10 percent of its patronage capital in a contingency reserve, and distributed the residual balance to its loanholders; (2) RTB has converted $87.8 million in profits to loanholder patronage stock, designated $98.3 million for the reserve, and claimed $37.4 million as profits earned after dividends; (3) Public Law 100-203 eliminated fixed-rate loan commitments for advances; (4) although RTB still faced some risks due to its $625 million in outstanding unadvanced fixed-loan commitments, interest rates would have to exceed 19.2 percent for RTB to incur losses; (5) because of the low risk of large losses, a $10 million reserve appeared reasonable; (6) after RTB established the reserve level, it could distribute any residual amounts from the reserve as patronage refunds; and (7) Congress would have to change the law before RTB could redeem patronage stock for cash.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The RTB Board of Directors established the reserve at $10 million per GAO recommendation at its May 1989 Board meeting.

    Matter: Congress should direct the Governor of the Rural Telephone Bank to initially establish the reserve for losses due to interest-rate fluctuations at an amount not to exceed $10 million.

  2. Status: Closed - Implemented

    Comments: Amounts in excess of $10 million were approved for distribution by the RTB Board of Directors at its May 1989 Board meeting. Distribution was completed by June 30, 1989.

    Matter: Congress should direct the Governor of the Rural Telephone Bank to distribute amounts over the initially established $10-million level as class B patronage stock dividends to RTB borrowers, in proportion to the interest each borrower paid over the period when the excess was accumulated.

  3. Status: Closed - Implemented

    Comments: The RTB Board of Directors adopted this recommendation at its May 1989 Board meeting.

    Matter: Congress should direct the Governor of the Rural Telephone Bank to charge the reserve for any losses due to interest-rate fluctuations.

  4. Status: Closed - Implemented

    Comments: The RTB Board of Directors adopted this recommendation at its May 1989 Board meeting.

    Matter: Congress should direct the Governor of the Rural Telephone Bank to replenish the reserve, as needed, to the established level or a lower level, as the risk of interest losses decreases.

 

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