Failed Financial Institutions: Reasons, Costs, Remedies, and Unresolved Issues

GAO discussed: (1) characteristics and management practices of failed financial institutions; (2) the Federal Home Loan Bank Board's (FHLBB) recent resolution actions; and (3) actions to prevent the crisis from recurring. GAO found that: (1) in 1987, 203 commercial banks closed at an estimated net cost of $3 billion and, in 1988, the number increased to 221; (2) in 1988, the Federal Savings and Loan Insurance Corporation (FSLIC) acted on 222 problem institutions at a cost of $37 billion and left 350 insolvent thrifts still operating; (3) based on a $27-billion resource estimate to pay for insurance losses, FSLIC would need an additional $50 billion to pay for insurance losses through 1998; (4) many thrifts failed because of internal control weaknesses, over-reliance on volatile funding sources, poor loan administration, appraisal deficiencies, and insider fraud and abuse; (5) FHLBB budget constraints imposed staffing and pay limits and forced it to handle only critical situations and turn examinations over to district banks; (6) FHLBB was prevented from liquidating many insolvent thrifts due to the FSLIC financial condition and began to rely on finding merger partners for troubled thrifts; (7) FHLBB had uncertain regulatory control over state-chartered thrifts; and (8) the dual roles of FHLBB and district banks hampered regulation. GAO believes that Congress needs to consider: (1) containing and resolving the immediate FSLIC financial crisis; and (2) establishing an independent FSLIC to insure, regulate, and supervise the thrift industry.