Inspectors General:

Mandated Studies to Review Costly Bank and Thrift Failures

GGD-97-4: Published: Nov 7, 1996. Publicly Released: Nov 7, 1996.

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Pursuant to a legislative requirement, GAO reviewed the compliance of the Inspectors General (IG) offices of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury with section 38(k) of the Federal Deposit Insurance Act of 1991, focusing on: (1) the findings of the material loss review (MLR) reports initiated between July 1, 1994, and June 30, 1995; (2) recommendations to improve bank supervisory practices; and (3) the economy and efficiency of the MLR process.

GAO found that: (1) the Federal Reserve, FDIC, and Treasury IG issued a total of four MLR reports on banks that failed or whose losses were recognized during the second year of the MLR mandate; (2) these reports noted that the four banks failed for similar reasons, including rapid growth, excessive loan concentrations in the commercial real estate industry, poor internal controls, and violations of laws and regulations; (3) in three of the four cases, bank regulators did not take aggressive enforcement actions to correct identified safety and soundness deficiencies or to ensure that troubled banks complied with existing enforcement actions; (4) the relatively small number of reports issued in the first 2 years of the mandate did not provide a sufficient basis to reach overall conclusions about the quality of bank supervisory practices; and (5) there are reasons to question the cost-effectiveness of the MLR process, including the fact that certain MLR requirements are relatively inflexible and divert IG staff and resources from broader reviews of the quality of bank supervision.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has not taken action, therefore GAO is closing out this issue.

    Matter: Congress may wish to consider whether the current MLR requirement is a cost-effective means of achieving improved bank supervision. If it determines that the requirement is not cost-effective, Congress may consider amending the requirement so that the IG have more flexibility in choosing the number and timing of MLR to initiate each year.


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