International Banking: Supervision of Overseas Lending Is Inadequate

Highlights

Pursuant to a congressional request, GAO assessed the Department of the Treasury's Office of the Comptroller of the Currency's (OCC), the Federal Reserve System's (FRS), and the Federal Deposit Insurance Corporation's (FDIC) supervision of U.S. banks' international lending, focusing on the agencies': (1) compliance with the International Lending Supervision Act of 1983; and (2) actions in response to 1982 GAO recommendations.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.	Closed – Implemented The agencies conducted an additional review, in response to Public Law (P.L.) 101-240, section 402. OCC may soon have its examiners require reserves for substandard loans, but not OTRP.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.	Closed – Not Implemented The agencies conducted an additional review, in response to P.L. 101-240, section 402, on the adequacy of general and required reserves for highly indebted LDC. FDIC concludes, however, that all banks have adequate reserves.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to require reserves for bank loans rated OTRP, substandard, and value-impaired.	Closed – Not Implemented The agencies conducted an additional review, in response to P.L. 101-240, section 402, on the adequacy of general and required reserves for highly indebted LDC. FRB concludes, however, that all banks have adequate reserves.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.	Closed – Implemented ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.	Closed – Implemented ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to use secondary market price data, or if unavailable, statistically estimated proxies, as the primary consideration in setting reserve requirements.	Closed – Implemented ICERC does consider secondary market price data in setting reserve requirements, but not as the primary consideration. It believes that secondary markets are improved indicators because these markets are deeper.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.	Closed – Not Implemented OCC does not believe that ICERC ratings should be used or regarded as forecasts of debt-servicing problems. The "weak" rating is used like a flashing yellow light indicating "be wary, proceed with caution".
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.	Closed – Not Implemented FDIC believes that the purpose of the ratings is not meant to be a statistical exercise in the prediction of actual debt-servicing problems. Rather the intent is to highlight large loan concentrations which are owed by countries with a high potential for incurring debt-servicing problems.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to revise the rating scale so that ICERC can forecast the nonimminent development or elimination of debt-servicing problems.	Closed – Not Implemented The Board does not believe that it is appropriate for it to speculate as to which foreign borrowers with correctable problems will fail to take appropriate action. Examination reports are given to banks which note concentrations of debt owed by a country with weaknesses.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.	Closed – Not Implemented OCC believes that these ratings are more appropriately used to evaluate a bank's exposure in relation to potential debt-servicing problems. However, banks owing significant amounts of debt are not told of "weak" ratings after triannual ICERC meetings nor are they ever told the probability of debt servicing problems. Informally, if banks ask, they are told verbally.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.	Closed – Not Implemented FDIC believes that communication to banks of the weak ratings may cause weak countries to be regarded as being poor credit risks. However, banks owing significant amounts of debt are not told of "weak" ratings after triannual ICERC meetings nor are they ever told the probability of debt-servicing problems.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to communicate: (1) weak ratings to banks owing significant amounts of this debt immediately after ICERC meetings; and (2) the probability of future debt-servicing problems when ratings are communicated to banks.	Closed – Not Implemented The Federal Reserve examines banks once a year at which time examiners note "weak" concentrations greater than 10 percent of capital.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.	Closed – Implemented FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.	Closed – Implemented FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should instruct their ICERC representatives to request the Federal Reserve Bank of New York (FRB-NY) to find a better alternative to the present screen.	Closed – Implemented FRB-NY alternative models are in place of the screen. FRB-NY is actively looking at alternatives to the present screen. A very preliminary draft report does not statistically estimate an improved screen. FRB-NY has only to a limited extent looked for alternatives to the present screen and has been unsuccessful.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.	Closed – Implemented FRB-NY has provided more consistent and better quality evaluations of political and social risk.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.	Closed – Implemented FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. FRB-NY has provided more consistent and better quality evaluations of political and social risk.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies present a consistent framework for evaluating political and social developments, including assessments of internal stability, external security threats, and relations with the United States and other countries.	Closed – Implemented The Board states that changes have been made to improve the country studies. FRB-NY has provided more consistent and better quality evaluations of political and social risk.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.	Closed – Implemented The country studies are supplemented with Treasury and bank analyses and projections are comprehensive. OCC supports FRB-NY efforts to improve country studies. Within resource constraints, OCC will improve such analyses and projections and comply with the requirements of new trade legislation. In the country studies, key economic variables are now being projected into the near future.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.	Closed – Implemented FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. In the country studies, key economic variables are now being projected into the near future.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies analyze and project key economic variables into the near future.	Closed – Implemented The Board states that changes have been made to improve the country studies. In the country studies, key economic variables are now being projected into the near future.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.	Closed – Implemented The country studies are supplemented with Treasury and bank analyses and projections are comprehensive with respect to monetary policy. OCC supports FRB-NY improvement of country studies. OCC will continue to improve the analyses of monetary policies in countries and will comply with the requirements of the new trade legislation. Country studies now have more intensive analyses of monetary policy.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.	Closed – Implemented FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. Country studies now have more intensive analyses of monetary policy.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies have more intensive and consistent analyses of monetary policy.	Closed – Implemented The Board states that changes have been made to improve the country studies. Country studies now have more intensive analyses of monetary policy.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.	Closed – Implemented Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.	Closed – Implemented FRB-NY has implemented a number of changes to the country studies. FDIC supports its continued efforts in this regard. Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that country studies discuss whether there is any International Monetary Fund (IMF) adjustment program, and if there is, the degree of program compliance.	Closed – Implemented The Board states that changes have been made to improve the country studies. Country studies now have a greater emphasis on indicating IMF compliance and the country's status with external creditors.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.	Closed – Implemented When substantive, OCC examiners will include in report comments its evaluation of the influence of country risk and exposure concentrations on capital adequacy. This assessment will be documented in the workpapers, although not more often than annually.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.	Closed – Implemented The FDIC updated main examination manual requests that field examiners consider and document country risk and exposure in their assessment of capital adequacy and that supervisors review workpapers to ensure compliance.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners consider and document country risk and exposure concentrations in their assessments of capital adequacy.	Closed – Implemented FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.	Closed – Implemented As part of OCC compliance examination procedures, conducted on a biannual basis in banks with more than $1 billion in assets, examiners are required to determine and document required reserves, fee accounting, and public disclosure compliance. Quality assurance checks that these examiner requirements are being met.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.	Closed – Implemented The FDIC main examination manual requires that examiners review and document banks' compliance with requirements concerning required reserves' accounting for fees and public disclosure. Supervisors are required to review all workpapers to ensure compliance.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to determine and routinely document banks' compliance with requirements concerning required reserves, accounting for fees, and public disclosure.	Closed – Implemented FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.	Closed – Implemented OCC verifies the accuracy of country exposure reports and documents them biannually under compliance examination procedures.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.	Closed – Implemented The FDIC main examination manual requires that field examiners review and document the accuracy of country exposure reports and that supervisors check workpapers to ensure compliance.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should ensure that examiners review and document the accuracy of country exposure reports.	Closed – Implemented FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.	Closed – Implemented On a biannual basis, OCC examiners assessed the adequacy of the bank's country exposure examination systems.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.	Closed – Implemented The FDIC main examination manual requires that field examiners review and document the adequacy of banks' country exposure management systems and that supervisors review workpapers to ensure compliance.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should require examiners to review and document the adequacy of banks' country exposure management systems.	Closed – Implemented FRB-NY, which supervises most of the state member banks with significant international lending exposure, has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures along with a request to review procedures.
Office of the Comptroller of the Currency	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.	Closed – Implemented When examination reports are prepared, OCC examiners will include a schedule listing cross-border exposures by country when the aggregate exposure exceeds 1 percent of capital. This schedule will not be required more frequently than annually. OCC has not assured GAO that these listings will occur in a prominent place in the report or in a letter to the banks' board of directors.
Federal Deposit Insurance Corporation	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.	Closed – Implemented The FDIC main examination manual requires that important risk exposure be in the core summary section of the examination report.
Board of Governors	The Comptroller of the Currency and the Chairmen of the Board of Governors of the Federal Reserve System and FDIC should develop standards to ensure that examiners highlight exposures in examination reports.	Closed – Implemented FRB-NY has developed comprehensive examination procedures for country risk and has reviewed these procedures as a result of the GAO study. The Board sent a letter to the other Federal Reserve Banks concerning these procedures, along with a request to review procedures in the light of GAO findings.
Office of the Comptroller of the Currency	The Comptroller of the Currency should require OCC examiners to comment on and document that they reviewed country risk as do FRS and FDIC.	Closed – Implemented For multinational banks, quarterly reports are filed by examiners in charge with headquarters, listing large country expenses, and FDIC internal classifications.

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