Highlights of a Study of Federal Supervision of State and National Banks [Vol. I]

OCG-77-1A: Published: Jan 31, 1977. Publicly Released: Jan 31, 1977.

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Several congressional committees requested the evaluation of the effectiveness of the supervisory efforts of the three federal agencies involved in monitoring banking operations, because of the increasing instability of banks. The study objectives were to evaluate the agencies' efforts to identify unsound conditions and violations of laws in banks and cause bank management to take corrective actions. Examination reports and correspondence files on more than 900 banks supervised by the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Federal Reserve Board were examined, including 30 of 42 banks that had failed, 294 of 787 problem banks, and a general sample of 600 banks in the United States.

Adverse economic conditions contributed to some bank failures, but generally embezzlement and poor management of loans were the cause. Problems were not corrected because: (1) the regulatory agencies were reluctant to use their legal authority to force the banks to change; (2) the agencies did not consult with bank boards; (3) examinations were set up on a time basis rather than a problem solving basis; and (4) recommendations were not generally made as to how to solve problems. Examiners have enforcement tools they may use, which include: (1) informal request that banks make the changes; (2) formal written agreements to confirm correction plans; (3) cease and desist orders; (4) removal of management; (5) financial assistance; (6) cancellation of deposit insurance; (7) cancellation of Federal Reserve membership; and (8) revocation of charter. Federal Reserve Board surveillance of bank holding companies is not adequate. Training of examiners is not adequate. Major improvements of bank supervision include organizational changes, closer bank surveillance, self-dealing and insider transaction monitoring, consumer protection law enforcement, new examination procedures, closer contact with bank boards, problem solving monitoring, more use of formal powers, experiments on relying on state examinations, and better training of examiners. GAO stated that the agencies involved are not working as closely as they should.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The agencies should revise their examination practices and frequencies to better identify problems. Examination reports and meetings with bank boards should follow all examinations. More aggressive policies should be developed for the use of formal actions against problem banks. Better training and screening of potential examiners should be implemented. The three agencies, either through their own initiative or legislation, should coordinate their efforts more closely. More stringent procedures for handling charter applications should be devised.

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