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Since 1976, when the General Accounting Office (GAO) made its first study of Federal bank supervision, many changes have taken place in the supervisory process. The Congress has given the three Federal bank regulatory agencies new powers. The agencies have formulated new regulations and supervisory procedures, and they have devised new information systems to aid them.

Although in the intervening years GAO has reviewed various aspects of bank supervision, it has not attempted to determine if the Federal agencies have improved the essential supervisory functions of gathering information, identifying bank problems, and effecting solutions. This report gives our assessment of progress and makes recommendations for further improvements.


In reaction to an increase in the size and number of bank failures and problem banks in the early 1970s, several congressional committees requested that GAO make a broad study of Federal bank supervision. GAO formed a task force and reviewed various aspects of the supervisory operations of the three Federal bank regulatory agencies--the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve System. We issued two reports in 1977 based on our task force work. In them we covered many diverse topics, including bank chartering, competence of examiners, interagency cooperation, bank examinations, how agencies deal with bank problems, and what happens when a bank fails. 1/ We also made recommendations in many of those areas.

Though the scope of our 1976 task force was much broader than our current study, a considerable portion of the earlier work concerned basic supervisory functions: gathering information on banks, identifying problems they may have, and taking actions to solve the problems. Although we discussed the newly developing computerized bank surveillance systems, they were not far enough along to warrant evaluation. In our 1977 report we identified the need for better interagency coordination, and we recommended as one alternative new legislation to establish a

1/GAO issued two reports, "Federal Supervision of State And

National Banks," OCG-77-1, and "Highlights of A Study of Federal Supervision of State And National Banks, " OCG-77-la, both dated January 31, 1977.

mechanism to facilitate it. That mechanism was created in 1978 in the form of the Federal Financial Institutions Examination Council.

This current report is organized differently from our task force reports. However, in the following chapters we have incorporated information from our 1976 work in order to evaluate changes made since then.

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Each of the three Federal bank supervisory agencies has many responsibilities regarding the banks it supervises, some unique and some common to all three. In this review, we focused on the common supervisory functions of gathering information about the banks, identifying potential or actual problems in them, and taking action to solve those problems.

The Comptroller of the Currency (Comptroller) was created in 1863 after a period of State-controlled, so-called "free bank chartering." 1/ The Comptroller charters and supervises the 4,425 national banks. 2/

The Federal Reserve System was created in 1913 3/ to carry out monetary policy, provide central banking services for banks and for the U.S. Government, and improve the supervision of banking.

Later, the Federal Reserve also was given the responsibility for approving bank holding company formations and for supervising them. Although national banks are members of the Federal Reserve, it normally restricts its supervisory attention to the 997 State-chartered members, 2) the 3,057 bank holding companies, and about 130 other corporations conducting international banking. 4/

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to insure small depositors against losses resulting from hank failures. 5/ FDIC also acts as receiver for closed

1/12 Stat. 665 (1863), superseded by 13 Stat. 99 (1864).

2/As of December 31, 1980, according to the Federal Deposit

Insurance Corporation (FDIC) 1980 Annual Report, Table 107.

3/38 Stat. 251.

4/As of December 31, 1980.

5/48 Stat. 168.

insured banks. It normally supervises federally insured Statechartered banks that are not members of the Federal Reserve System, some 9,013 banks. 1/

Though each agency was created for different reasons, all three perform common supervisory functions. These functions and their components may be categorized as follows:

Gathering information

Each agency uses a variety of ways to gather information on banks it supervises, including

--periodic reports from banks,

--examinations and other visits to banks, and

--computer-based surveillance systems that process

and analyze data collected.

All this information is used to ascertain the current condition of a bank, provide indications of industrywide conditions and trends, and ascertain the bank's compliance with various laws and regulations. Perhaps the most important use of the information, though, is to spot potential or actual problems in the bank that would lead to the deterioration of its financial condition.

Identifying problems

Most banks at some time encounter some problems, though in most instances those problems are not serious enough to warrant special action by the supervisory agencies. Two major objectives in bank supervision are to identify problems in banks and to effect solutions before the problems become serious.

Problems can be of many types, but, though aggravated by economic conditions, studies have shown that they usually are caused by improper or ill-advised management decisions. The problems most often cited by examiners in one or more of the agencies in cases we studied were

--poor quality loans or other assets,

--violations of laws and regulations,

1/As of December 31, 1980, according to the FDIC 1980 Annual

Report, Table 107.

--poor internal controls,

--inadequate capital,

--poor liquidity,

--poor loan management,

--concentrations of credit, and

--management ineffectiveness.

Studies by FDIC and GAO's 1976 task force and our current case studies show that almost all the problems result from bad management decisions, poor procedures and controls, or, in some cases, self-dealing by insiders. Since the sooner a problem or a potential problem is identified, the better the chance of solving it before its effects on a bank's condition become serious, GAO has in past reports emphasized the importance of early identification of underlying causes of problems, such as poor management policies.

Effecting solutions to problems

A bank's management and board of directors have the ultimate responsibility to solve its problems. But bank supervisors can use a variety of methods to influence bank officials to take action.

Most banks solve their problems without much prodding by supervisors, but if the bank managers are unwilling or unable to do so then the supervisory agencies begin to exert pressure. In most cases varying degrees of persuasion are sufficient. However, occasionally bank officials are, in the supervisor's view, so recalcitrant and the bank's condition so threatened that the supervisor must employ stronger administrative or legal methods. These range from memorandums of understanding between banks and their supervisors to the issuance of cease and desist orders or civil money penalties.


The general criteria, scope, and approach we used are presented below. Greater detail on our scope and methodology is contained in chapter 6.


Our overall objective was to answer the question, "Is supervision better now than during our 1976 task force study?"

The definition of "better supervision" is based on observations of supervisory processes--gathering information, identifying problems, and effecting solutions--rather than on the overall impact of supervision on the financial industry--e.g., the number of bank failures, the number of banks with problems, or the general condition of banks. This is because many factors affect the overall condition of financial institutions, so the success of the bank supervisory agencies cannot be determined solely on the basis of industry statistics. In spite of any action taken by regulators, the condition of a bank and its potential to fail are determined primarily by the quality of its management. Moreover, economic downturns, beyond the control of the agencies, exacerbate bank problems.

The supervisory agencies' success in getting bank problems corrected depends largely on how willing and cooperative bank managers are to change those practices and policies which caused the problems. As we found in 1976, it is difficult for an agency to influence particularly recalcitrant managers to solve their problems, no matter what actions the agency takes. This is an inherent characteristic of a free enterprise industry.

Significant increases in bank problems and failures are related to the country's general economic condition. For example, after the early 1970s recession the number of hank failures reached the highest level since 1942. Recent problems besetting the industry stem from unprecedented volatility in interest rates causing a great increase in the cost of funds and a transfer of deposits to other forms of investment.

Scope and methodology

Though it is difficult to assess the quality of supervision by looking at overall industry statistics, supervisors' efforts can be evaluated by studying their functions as applied to specific cases. In this way, we can ascertain if the changed laws, regulations, and procedures are having the desired effects. If we judge the effectiveness of a new law, regulation, etc., in a sample of specific cases, then we can state whether supervision overall has been improved.

In evaluating changes in bank supervision, we asked two questions as general criteria:

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