Troubled Financial Institutions: Solutions to the Thrift Industry Problem
GGD-89-47
Published: Feb 21, 1989. Publicly Released: Feb 21, 1989.
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Highlights
In response to a congressional request, GAO discussed: (1) the benefits and disadvantages of merging the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC); and (2) actions needed to restore the deposit system's financial health.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should disengage FSLIC from the FHLBB and create an independent insurance function for the thrift industry that has adequate supervisory resources. |
Closed – Implemented
|
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) established an independent insurance agency. |
| To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should enhance the ability of both an independent FSLIC and FDIC to place stringent controls on improperly operated or undercapitalized institutions and to withdraw insurance from such institutions. |
Closed – Implemented
|
FIRREA provided for such authority. |
| To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should provide FDIC and FSLIC with the authority to raise assessments as needed to be able to withdraw insurance costs, over and above whatever special arrangements are worked out for solving the current FSLIC crisis. |
Closed – Implemented
|
FIRREA provided for such authority. |
| To help ensure that the situation that has befallen FSLIC is not repeated within the deposit insurance system, Congress should direct appropriate agencies to establish consistency in regulation and supervision of banks and thrifts in matters that have a material effect on the government's exposure to deposit insurance losses. |
Closed – Implemented
|
FIRREA improved consistency in some areas by strengthening enforcement provisions. Treasury and GAO issued reports recommending reforms in the banking system. |
| Congress and the deposit insurance agencies, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented. |
Closed – Implemented
|
FIRREA required studies by Treasury and GAO on this issue were issued in March 1991. Both reports contain reform proposals, GAO-GGD-91-26. |
| Congress should adopt a funding plan that can provide at least $85 billion to pay for insurance losses and to restore the FSLIC reserve. |
Closed – Implemented
|
FIRREA provided for such funds. |
| Congress should seek funds from the thrift industry through creation of good-company and bad-company funds under an independent FSLIC. The good-company fund reserves should be established through capital contributions by thrifts. |
Closed – Implemented
|
FIRREA provided for such funds. |
| Congress should allow well-capitalized thrifts the option of joining FDIC at a cost that is equivalent to joining the good-company FSLIC fund. |
Closed – Implemented
|
FIRREA provided for this. |
| Congress should require thrifts joining the good-company fund or FDIC to make equivalent contributions to meeting the expenses of the bad-company fund. |
Closed – Not Implemented
|
FIRREA made other arrangements. |
| Congress should authorize FSLIC to undertake short-term borrowing for liquidity purposes to enable FSLIC to move as quickly as possible to resolve problem cases. |
Closed – Implemented
|
FIRREA provided borrowing authority for funding corporation, but trust corporation authority to conduct short-term borrowing is unclear and under review. |
| Congress should recognize in budget totals any federal funding that may be provided. |
Closed – Implemented
|
FIRREA provided for both on- and off-budget costing. |
| Congress should establish a special board to protect taxpayers' interest by overseeing the expenditures of any federal funds provided to resolve thrift cases over the next several years. |
Closed – Implemented
|
FIRREA established such a board. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Savings and Loan Insurance Corporation | The government should promptly take control of insolvent thrifts, placing these institutions in a receivership arrangement when necessary until a decision to rehabilitate, merge, or liquidate them can be made on the basis of careful study of their asset portfolios and the net cost of each approach. In the interim, supervisory and insurance officials should limit operations of these institutions to investing in high-grade securities, managing bad assets on the books, and accepting insured deposits from existing customers at market rates. |
Closed – Implemented
FDIC is in the process of carrying out action under FIRREA authority.
|
| Federal Home Loan Bank Board | FHLBB should form a task force of regulators and insurance officials to assess the quality of assets in insolvent thrifts for purposes of deciding which thrifts should be rehabilitated, merged, or liquidated. |
Closed – Implemented
FIRREA established the Resolution Trust Corporation to implement a strategic plan developed by the Oversight Board. The Board's plan will include policies for assessing asset quality of insolvent institutions.
|
| Federal Savings and Loan Insurance Corporation | FSLIC should arrange with FDIC or other regulatory agencies for any required assistance. |
Closed – Implemented
FIRREA authorizes FDIC, as manager of the Resolution Trust Corporation, to utilize personnel of other agencies on a reimbursable basis. Action is being taken by FDIC.
|
| Federal Deposit Insurance Corporation | FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement. |
Closed – Implemented
FIRREA required a report and an explanation of the differences by August 1990.
|
| Federal Home Loan Bank Board | FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement. |
Closed – Implemented
FIRREA required a report and an explanation of the differences by August 1990.
|
| Federal Savings and Loan Insurance Corporation | FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement. |
Closed – Implemented
FIRREA required FDIC and banking agencies to develop uniform accounting standards for determining capital ratios. The new requirements and enforcement actions were published and are phasing in through 1992.
|
| Board of Governors | FHLBB, FSLIC, FDIC, and the Federal Reserve Bank Board should strengthen capital adequacy requirements and their enforcement. |
Closed – Implemented
FIRREA required a report and an explanation of the differences by August 1990.
|
| Federal Deposit Insurance Corporation | FDIC and FSLIC, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented. |
Closed – Implemented
Treasury is conducting a study in consultation with FDIC on reforms needed. The study was issued in February 1991.
|
| Federal Savings and Loan Insurance Corporation | FDIC and FSLIC, in consultation with federal and state chartering agencies, should pursue a more comprehensive reform agenda after FSLIC funding needs are met and the other recommendations implemented. |
Closed – Implemented
Treasury is conducting a study in consultation with FDIC on reforms needed. The study was issued in February 1991.
|
| Board of Governors | The Board of Governors of the Federal Reserve System (FRS) should develop a specific proposal for clearly defining holding company financial responsibility for insured depository institutions. |
Closed – Implemented
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) applied the source-of-strength principle only to depository institutions and subsidiaries of the holding company. FDIC included a source-of-strength requirement.
|
| Federal Deposit Insurance Corporation | FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability. |
Closed – Not Implemented
This issue was addressed in the new deposit insurance reform legislation.
|
| Federal Home Loan Bank Board | FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability. |
Closed – Implemented
FIRREA abolished FSLIC and FHLBB, transferred some supervision to FDIC, and put FHL supervisors under Treasury's Office of Thrift Supervision. Banking regulatory agencies OCC, FDIC, Treasury, and FRS now have comparable pay flexibility to attract and keep adequate supervisory resources.
|
| Federal Savings and Loan Insurance Corporation | FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability. |
Closed – Implemented
FIRREA abolished FSLIC and FHLBB, transferred some supervision to FDIC, and put FHL Bank supervisors under Treasury's Office of Thrift Supervision. Banking regulatory agencies OCC, FDIC, Treasury, and FRS now have comparable pay flexibility to attract and keep adequate supervisory resources.
|
| Board of Governors | FHLBB, FSLIC, FDIC, and the Federal Reserve Board (FRB) should improve their supervisory capability. |
Closed – Not Implemented
This issue was addressed in new deposit insurance reform legislation.
|
| Federal Deposit Insurance Corporation | FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector. |
Closed – Implemented
By August 1990, FDIC, Treasury, and FRB established rules to govern real estate appraisal procedures and provide uniform definitions of capital ratios for audit purposes. GAO has recommended other audit and corporate governance reforms. The issue is being considered in new deposit insurance reform legislation.
|
| Federal Home Loan Bank Board | FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector. |
Closed – Not Implemented
FHLBB was abolished by FIRREA.
|
| Federal Savings and Loan Insurance Corporation | FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector. |
Closed – Not Implemented
FSLIC and FHLBB were abolished by FIRREA.
|
| Board of Governors | FHLBB, FSLIC, FDIC, and FRB should undertake efforts to enhance the effectiveness of the related risk control infrastructure in the private sector. |
Closed – Implemented
FDIC, Treasury, and FRB are implementing rules governing real estate appraisal procedures and providing uniform definitions of capital ratios for audit purposes. The issue is addressed in FDICIA.
|
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Bank examinationBank failuresBank managementBanking regulationDeposit fundsFederal agency reorganizationInsured commercial banksProposed legislationSavings and loan associationsDeposit insurance