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New procedures improve data on holding companies

In contrast to findings in our task force study, the Federal Reserve now has standard criteria for scheduling bank holding company inspections (examinations) and a standard inspection report. This gives the agency a much better picture of holding company operations that may affect subsidiary banks.

Until the mid-1970s the Federal Reserve had not been very active in examining bank holding companies. In 1975 only 13 percent of the companies were inspected, and most of these inspections were made by only 3 of the 12 Federal Reserve banks. Because the Federal Reserve had no effective systemwide procedures, our 1976 task force study found that

--nine of the district banks had no written guidelines

detailing the scope of inspections,

-- five did not evaluate nonbank subsidiary assets, and

--seven restricted all holding company supervisory activi

ties due to budgetary constraints.

Since that time, the Federal Reserve has significantly increased its holding company supervision. It has developed a standard holding company inspection manual. Its inspectors use a systemwide report of inspection and rate companies using a standard rating system.

The Federal Reserve has developed and installed a computerbased holding company surveillance system. Each Federal Reserve bank has a corps of holding-company-oriented staff responsible for inspecting and monitoring the companies. Finally, the Federal Reserve has designed special holding company training courses.


Limited or modified scope examinations, designed to evaluate a bank's condition using fewer agency staffdays, are being used and are perceived favorably by field staff. Though we did not evaluate the modified scope procedures in this study, previous GAO work and comments by examiners show this concept should be expanded. However, some limits may have to be placed on the use of modified scope examinations. A less than full-scope examination limits on-the-job training for new staff members, and new examiners' experience has been

questioned by bankers. Also, examiners feel that modified scope procedures should only be used for certain banks and even then not every time they are examined.

Each of the three Federal bank regulatory agencies has developed a modified version of its usual full-scope examination procedures. Although they differ from agency to agency, the intent of each is to limit the amount of work performed onsite at better institutions unless examiners find something that requires further attention. The Comptroller calls these "specialized" examinations, the FDIC calls them "modified" examinations, and the Federal Reserve refers to them as

compacted" examinations. We have used the general term "modified scope" examinations.

In a previous GAO report we concluded that modified scope examinations effectively reduce examination time. 1. In that report we brought out that FDIC, for the first 6 months of 1979, reduced its examination time by an average of 20 percent using modified scope procedures. We also reported that two Federal Reserve banks, San Francisco and Chicago, had shown us significant reductions in time and staffing requirements using their own modified scope examinations.

Senior bank examiners we surveyed felt that modified scope examinations were effective at saving time and resources. Seventy-four percent of all examiners surveyed thought that modified scope examinations were "effective" or "very effective" in accomplishing this objective. The proportion of Federal Reserve examiners, however, rating their modified scope examinations highly was smaller than the proportion at the other agencies.

This may be attributable to the fact that fewer Federal Reserve examiners are using modified scope examinations. The GAO report referred to above reported that inconsistencies existed among the agencies in three regions visited--San Francisco, Chicago, and Atlanta. In our current review, we also found a wide variety of usage. Although over 77 percent of the examiners in general told us they used modified scope procedures in half or more of their examinations, the Comptroller's examiners used them much more often than those in the Federal Reserve and the FDIC. Ninety-one percent of the Comptroller's examiners said

1/"Federal Examination of Financial Institutions: Issues That

Need To Be Resolved" (GGD-81-12, Jan. 6, 1981), pp. 20-21.

half or more of their examinations conducted over the 2-year period prior to the survey were modified scope, as compared to 75.7 percent of FDIC examiners. Only 10 percent of the Federal Reserve examiners responded similarly. This may be due to the fact that, as we have reported before, the Federal Reserve has not experienced resource constraints as severe as those encountered by the other two agencies. 1/

These modified scope examinations usually have been sufficient for evaluating banks. Most examiners we surveyed reported that they normally have not had to expand modified scope examinations in order to adequately appraise a bank's overall condition. In fact, 73.8 percent said that, in the last 2 years, they have had to expand such examinations in about half or in fewer than half of the times they have used them. Of course, even when the examinations were expanded, the resulting time spent would not necessarily have equaled the time spent for a full-scope examination.

Even though modified scope examinations offer benefits, some factors do serve to limit the number that can be substituted for full-scope examinations. First, modified scope examinations offer less on-the-job training for newer examiners. Second, examiners point out that some banks are better candidates than others for receiving modified scope examinations. Third, modified and full-scope examinations probably should be interspersed to maintain an adequate level of knowledge about a bank.

A few FDIC examiners and other agency officials told us that modified scope examinations do not provide the level of training for new staff that full examinations do. One FDIC examiner, in a comment on our questionnaire, stated that this problem "may lead to a weakening of the Corporation because new employees do not get in-depth training in a modified exam. Higher level agency officials acknowledged that the ability to train examiners while using modified scope examinations is a matter for concern. According to one, FDIC regions do some full-scope examinations to accommodate training needs even when the banks are eligible for modified scope examinations. Still, he added that FDIC might have to consider revising its examination procedures in order to preserve full-scope examinations as appropriate.

1/"Federal Structure For Examining Financial Institutions Can

Be Improved" (GGD-81-21, Apr. 24, 1981), pp. 24-30.

This could be an important consideration, because bankers we surveyed were critical of the experience levels of subordinate Federal examiners. In 6 of the 10 areas in which we asked them to rate subordinate examiners, at least 20 percent of the bankers felt they were less than adequate or very much less than adequate. (See app. I, quest. 4.) In two other areas, almost 20 percent had the same opinion.

Officials at the Comptroller's office and at FDIC told us that they recognize that a problem exists, but as yet none of the agencies has determined how it will relate on-the-job training requirements to using such examinations. However, this factor is one that would tend to limit the number of modified scope examinations performed.

Although the bank examiners we surveyed were generally encouraging about using modified scope examinations, comments by a few of them indicate other possible limitations on the extent to which modified scope procedures can be employed. Some of the examiners stated that modified scope examinations should be used mostly with larger banks and banks in good condition. Several mentioned that the area that suffers most in the modified scope examinations is the evaluation of loans. Consequently, examiners expressed the belief that these examinations should not be given consecutively to the same bank; instead they should be alternated with full-scope examinations in order to maintain a certain level of knowledge about the bank.

Each agency's policies are flexible enough to allow its field offices to consider all these factors in scheduling modified scope examinations. The Comptroller categorizes banks into three priority levels and specifies which may receive modified scope examinations, depending on their sizes and conditions. The FDIC also has the equivalent of a three-tier system based on condition designed to increase the use of modified scope examinations. The Federal Reserve's policy, updated in February 1981, is the least explicit and merely "authorizes and encourages" Reserve hanks to alternate use of modified scope procedures with full-scope ones for eligible State member banks.


Revelations of past abuses hy bank officials taking advantage of their positions as insiders prompted passage of legislation that requires what is now seen by regulators as unnecessary reporting of insider transactions. Though some of the information reporter may be useful, increased emphasis by

the agencies on scrutinizing insider transactions during examinations renders much of what is reported excessive for supervisory needs. Our case studies also lead us to conclude that one of the reports is not needed by supervisors.

Highly publicized bank failures in the early 1970s and revelation of certain activities of a former Government official prompted the Congress to pass stricter legislation aimed at abuses by bank insiders. The Congress noted that insider abuses had been shown to be the greatest cause of bank failures and problems. In our 1977 task force report, we pointed out that improper or self-serving loans were the most significant causes of failures we studied. FDIC statistics also support this finding.

In reaction to this, the Congress in 1978 passed Titles VIII and IX of the Financial Institutions Regulatory and Interest Rate Control Act (FIRA) (Public Law 95-630). Title VIII limits loans to a bank's directors, officers, and owners from correspondent banks. ll It also requires bank officials and owners of at least 10 percent of a bank's stock to make a written report to the bank of all outstanding extensions of credit froin correspondent institutions. The bank is then required to file the information with its primary regulator. Title IX requires each bank to report to its primary regulator a list of certain stockholders and a list of executive officers and shareholders who have extensions of credit from the bank and the aggregate amount of such credit. This title further requires the banks and the agencies to make the information available to the public on request.

Through their interagency coordination organization, the Federal Financial Institutions Examination Council, the supervisors developed forms on which the information could be compiled and reported. Data to be given by bank officials to their boards of directors under title VIII is reported on Council form FFIEC 004. Data reported by banks to their regulators, and made available to the public, is compiled on form FFIEC 003.

1/A correspondent bank performs certain banking services,

such as obtaining coin and currency, for another bank.

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