Depository Institutions: Flexible Accounting Rules Lead to Inflated Financial Reports
AFMD-92-52
Published: Jun 01, 1992. Publicly Released: Jun 01, 1992.
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Highlights
GAO provided information on: (1) problems with accounting for bank loan losses; and (2) the status of certain Financial Accounting Standards Board (FASB) projects.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| The Senate and House Banking Committees may wish to urge the regulators to adopt accounting rules that will reflect the fair value of nonperforming loans for regulatory financial reports. The committees may also wish to urge FASB to adopt such accounting rules as the principles for impaired loans that are currently being developed. |
Closed – Not Implemented
|
The Committee has expressed interest but is monitoring FASB and regulator efforts in reviewing accounting rules as a basis to decide what future action may be needed. Also, the Committee suggested that GAO develop some case studies, which is being done under a separate job. |
| The Senate and House Banking Committees may wish to urge the regulators to adopt accounting rules that will reflect the fair value of nonperforming loans for regulatory financial reports. The committees may also wish to urge FASB to adopt such accounting rules as the principles for impaired loans that are currently being developed. |
Closed – Not Implemented
|
The Committee has expressed interest but is monitoring FASB and regulator efforts in reviewing accounting rules as a basis to decide what future action may be needed. Also, the Committee suggested that GAO develop some case studies, which is being done under a separate job. |
| Absent the adoption of such accounting rules by either the regulators or FASB, Congress may wish to hold hearings and consider legislating such requirements for financial reports prepared for the banking regulators. |
Closed – Not Implemented
|
The Committee suggested that GAO develop some case studies, which is being done under a separate job. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of Thrift Supervision | In implementing the Federal Deposit Insurance Corporation (FDIC) Improvement Act, FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that losses be recognized when more than 50 percent probability of loss exists. |
Closed – Not Implemented
Regulators are developing a joint policy statement on loan loss reserves, but no specific date for completion has been established.
|
| Office of the Comptroller of the Currency | In implementing the Federal Deposit Insurance Corporation (FDIC) Improvement Act, FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that losses be recognized when more than 50 percent probability of loss exists. |
Closed – Not Implemented
OCC agreed conceptually but believed that its ongoing programs addressed underlying concerns. It did not agree with some of the findings. No specific action is planned. GAO referred the issue to Congress.
|
| Federal Deposit Insurance Corporation | In implementing the Federal Deposit Insurance Corporation (FDIC) Improvement Act, FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that losses be recognized when more than 50 percent probability of loss exists. |
Closed – Not Implemented
FDIC agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Board of Governors | In implementing the Federal Deposit Insurance Corporation (FDIC) Improvement Act, FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that losses be recognized when more than 50 percent probability of loss exists. |
Closed – Not Implemented
FRB agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Office of Thrift Supervision | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that current market prices be used to value nonperforming loans. |
Closed – Not Implemented
Regulators are developing a joint policy statement on loan loss reserves, but no specific date for completion has been established.
|
| Office of the Comptroller of the Currency | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that current market prices be used to value nonperforming loans. |
Closed – Not Implemented
OCC agreed conceptually but believed that its ongoing programs addressed underlying concerns. It did not agree with some of the findings. No specific action is planned. GAO referred the issue to Congress.
|
| Federal Deposit Insurance Corporation | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that current market prices be used to value nonperforming loans. |
Closed – Not Implemented
The agency agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Board of Governors | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that current market prices be used to value nonperforming loans. |
Closed – Not Implemented
FRB agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Office of Thrift Supervision | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that market-based discount rates should be used in discounting cash flows. |
Closed – Not Implemented
Regulators are developing a joint policy statement on loan loss reserves, but no specific date for completion has been established.
|
| Office of the Comptroller of the Currency | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that market-based discount rates should be used in discounting cash flows. |
Closed – Not Implemented
OCC agreed conceptually but believed that its ongoing programs addressed underlying concerns. It did not agree with some of the findings. No specific action is planned. GAO referred the issue to Congress.
|
| Federal Deposit Insurance Corporation | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that market-based discount rates should be used in discounting cash flows. |
Closed – Not Implemented
FDIC agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Board of Governors | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that market-based discount rates should be used in discounting cash flows. |
Closed – Not Implemented
FRB agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Office of Thrift Supervision | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that appropriate periods of time reflecting market conditions should be used to develop fair value estimates when active markets do not exist. |
Closed – Not Implemented
Regulators are developing a joint policy statement on loan loss reserves, but no specific date for completion has been established.
|
| Office of the Comptroller of the Currency | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that appropriate periods of time reflecting market conditions should be used to develop fair value estimates when active markets do not exist. |
Closed – Not Implemented
OCC agreed conceptually but believed that its ongoing programs addressed underlying concerns. It did not agree with some of the findings. No specific action is planned. GAO referred the issue to Congress.
|
| Federal Deposit Insurance Corporation | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that appropriate periods of time reflecting market conditions should be used to develop fair value estimates when active markets do not exist. |
Closed – Not Implemented
FDIC agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
| Board of Governors | In implementing the FDIC Improvement Act, FDIC, the Federal Reserve Board, OCC, and OTS should change loan-loss recognition and measurement rules for nonperforming loans used in preparing quarterly reports to the federal banking agencies by requiring that appropriate periods of time reflecting market conditions should be used to develop fair value estimates when active markets do not exist. |
Closed – Not Implemented
FRB agreed conceptually but believed that regulatory programs addressed underlying concerns. No specific action is planned. GAO referred the issue to Congress.
|
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Topics
Accounting proceduresBank failuresBanking regulationFair market valueFinancial disclosureInsured commercial banksLending institutionsLossesRegulatory agenciesReporting requirements