Safeguards That Need to Accompany Changes to Glass-Steagall Laws

In response to a congressional request, GAO discussed the: (1) current problems in the banking and thrift industries; and (2) safeguards needed to avoid future problems. GAO found that: (1) the financial condition of the thrift industry deteriorated due to mistakes in implementing 1982 regulations that expanded thrifts' powers; (2) at the end of 1987 there were 505 open insolvent institutions and another 435 that had very little capital; (3) although the commercial banking industry did not include a large number of open insolvent institutions, several banks failed due to a combination of adverse economic conditions, poor management practices, and regulators' inability to identify and resolve problems; (4) in 1987, more than 180 banks failed, 1500 banks had problems, and 486 banks' primary operating capital was below the regulatory minimum; (5) 89 percent of the banks that failed since 1979 lacked adequate internal controls; and (6) many banks experienced difficulties managing securities activities, since they acquired this new activity during a turbulent period. GAO also found that: (1) the problems in the thrift industry showed the need for reform in the areas of closure policy, minimum capital requirements, and the division of risk-bearing cost responsibility between insured financial institutions and their federal insurers; (2) construction of firewalls was necessary to prevent the spread of losses for expanded activities and to prevent abuses of conflicts of interest; and (3) sound internal controls and good management and financial reporting practices would guard against unsafe banking operations and conflict-of-interest abuses.