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The bank regulatory agencies and the Council have questioned the need for the form FFIEC 003 and its data. One reason is that it partially duplicates a reporting provision of section 22(g) of the Federal Reserve Act (12 U.S.C. 375a). That section requires member banks to submit periodic reports on loans made to their executive officers. Another reason why the regulators believe that form FFIEC 003 is unnecessary is that their normal examinations for insider loan abuses, with the renewed emphasis and new regulations that have been passed since the mid-1970s, are sufficient to uncover insider abuses. Finally, the agencies report that they have received few requests from the public for the information, and they believe that the form in which it is reported is noninformative and misleading, since it only aggregates loan data.

Our review of reports filed under section 22(g) of the Federal Reserve Act confirmed that most of the information is duplicated on the form FFIEC 003. The 22(g) report for each bank simply lists the number of loans and extensions of credit to executive officers, the total dollar amounts involved, and the range of interest rates charged. The form FFIEC 003 lists executive officers as well as applicable principal shareholders, but still aggregates the indebtedness. Thus, most of the 22(g) information is subsumed in the form FFIEC 003 information.

Our detailed case studies showed that the form FFIEC 003 information required by title IX is not needed by examiners to uncover insider abuses. Six banks we reviewed with recognized financial difficulties had problems with insider loans, none of which were disclosed by forms FFIEC 003. In three cases the abuses existed prior to the use of the reports and were discovered without them, in two cases the design of the report did not allow disclosure of the problem, and in one case inaccurate information on the insider activities was disclosed by the bank.

In one of our cases, insider loans had been a problem since 1977. The examiner felt the new reports did not make a difference in the examining process because it was a simple procedure to look at this bank's insider loans. According to the regional counsel, the bank's form FFIEC 003 did not show anything unusual on the surface. In another case, although insider abuses occurred before the report was required, the examiner felt the form would not have helped detect them. He explained that during an examination field examiners check the reports for technical compliance from the bank records anyway, but the reports are not used to help discover abuses.

One other bank's insider loan report showed nothing unusual on the surface, and the following examination report indicated that loans to directors, executive officers, and related

interests were made with terms and rates commensurate with those available to the outside borrowers. Employees, however, were given preferential rates on installment and mortgage loans, something that would not have been identified through the form FFIEC 003.

In one final case, examiners discovered a poor loan to a business associate of the bank president, using their normal examination procedures. The president denied the association, which was later admitted by the borrower. Since the president did not think an insider relationship had existed, the situation did not show up on the insider loan form.

Since the mid-1970s, all three agencies have taken steps to enhance their scrutiny of insider transactions, steps they feel render the title IX reports unnecessary. Officials at each of the agencies assured us that since the highly publicized abuses of the preceding decade, their examiners have taken a more aggressive approach in their review of insider transactions and correspondent lending practices. Both the Comptroller and FDIC have also formulated new examination procedures which detail more specifically how examiners should search for improper self dealings. The Federal Reserve has not changed its examination procedures in this regard but does instruct its examiners to review insider transactions thoroughly. This strengthening of awareness and procedures, added to the insider loan review methods previously in place, give the agencies, in their opinions, sufficient tools to minimize abusive self dealings.


Federal bank regulators are obtaining more and better information on banks and bank holding companies they supervise than they were when we conducted our 1976 study. However, improvements can be made in two areas.

of the two purposes for establishing title IX reporting requirements--providing information to regulators and disclosing insider loans to the public--the former is served adequately without the reports and how well the latter is served is subject to question. We believe that the form FFIEC 003 can be eliminated as an excessive report requirement without adversely affecting the regulators' ability to scrutinize insider loans. However, the value of public disclosure is a policy issue that should be decided by the Congress. At the very least, the reporting under section 22(g) of the Federal Reserve Act should be discontinued in favor of the more inclusive reporting encompassed under Title IX of FIRA. It is not clear from our case study information or from a review of the design of the FIRA reports that they would disclose insider abuses which might

exist. Therefore, the deterrent value of public disclosure may be diminished.

Alternative legislative options exist. First, the insider reporting requirement can be eliminated entirely by eliminating both the section 22(g) and the FIRA reports. Second, if the Congress feels that public disclosure by banks themselves is important, only the redundant reporting of section 22(g) of the Federal Reserve Act should be eliminated.

Modified scope examinations have been shown to use agency resources more efficiently while still assuring the safety and soundness of banks. However, various factors limit the arbitrary application of modified scope procedures.

None of the agencies' policies integrate staff training needs into procedures for using modified scope examinations. Since on-the-job training is important, and since bankers perceive a real lack of experience in subordinate examiners, the agencies should develop guidelines for incorporating training into the use of modified procedures.


We recommend the following alternatives to the current legal structure for having banks report on insider transactions:

--Unless the Congress remains convinced of the value of

public disclosure, in addition to supervisory oversight,
as a deterrent to insider abuses, we recommend that
it eliminate the requirement under section 22(g) of
the Federal Reserve Act (12 U.S.C. 375 a) for banks to
submit periodic reports to their primary regulators
on loans made to their executive officers. In addition,
we recommend that it eliminate the requirements under
section 7 of the Federal Deposit Insurance Act (FIRA
title IX reports) that a bank 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, and that the banks and the agencies make
the information available to the public on request.
This would eliminate all requirements for reporting
extensions of credit to executive officers and princi-
pal shareholders that are applicable to all banks.

--If the Congress believes in the value of retaining

public disclosure by the banks themselves, we recommend that the Congress only eliminate the section 22(g) requirement for banks to submit periodic reports to their primary regulator on loans made to their executive officers, while retaining the requirements for

FIRA title IX reports on extensions of credit and public disclosure of such reports.

Appendix VIII contains suggested legislative language to achieve these recommendations.


We recommend that the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, and the Chairman of the Federal Deposit Insurance Corporation ascertain the impact of modified scope examinations on staff training and develop policies on their use that consider training needs.


The Federal Reserve, the FDIC, and the Federal Financial Institutions Examination Council supported one or both of the alternative recommendations to reduce the insider transactions reporting requirements. As they and we pointed out, the agencies and the Council have submitted legislative proposals to the appropriate congressional committees incorporating similar amendments.

With regard to our recommendation on developing policies on using modified scope examinations,

--the FDIC agreed to emphasize this need to its regional

offices (see app. V, p. 94);

--the Federal Reserve said it already considers training

needs in scheduling modified scope examinations (see
arp. VII, p. 99.); and

-the Comptroller agreed that the impact of his modified

scope examinations policy on training needs should be evaluated, though he emphasized that a primary consideration for using them still must be the efficient use of resources (see app. IV, p. 91).

We cannot verify the Federal Reserve's contention since we found no written policy on incorporating training needs, and we found that the Federal Reserve banks use few modified scope examinations, anyway. Because the Federal Reserve's policies give greater latitude to its field offices than do the other agencies' policies, we still feel the Federal Reserve should, as the FDIC agreed to do, at least formulate a policy and make it known to its district banks.

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Federal agencies usually identify bank problems before they become too serious to correct. However, though the agencies are paying more attention to the competence of bank management and its policies that cause problems, they still equate the quality of management to the current condition of a bank. This is an equation that, as we found both in our task force cases and in our current study, can be misleading, because it fails to consider the inordinate vulnerability of the bank to problems. It also fails to motivate agency action until financial conditions deteriorate.


New surveillance systems, designed in part to give early warning of bank problems, are limited in their ability to do

They cannot expose management incompetence until a bank's condition is adversely affected, and they cannot evaluate the quality of a loan. They do, however, usually indicate financial problems before the point at which agencies find it necessary to take formal actions to correct them.


Federal regulators usually identify a bank as having problems before the bank's financial condition deteriorates to an extent warranting special concern. Compared to our 1976 study, the regulators are paying more attention to management weaknesses that cause financial losses. But they are still focusing on financial condition--the effects of management weaknesses--as the primary indicator of management competence. The emphasis on effects is one valid way to judge bank management, but it can be misleading, especially in evaluating a manager's ability to solve problems.

In our 1977 report, we noted that examiners often did not cite management weaknesses in their reports until the effects were manifest on the bank. For example, examiners did not criticize a bank for inadequate loan policies unless the bank actually had classified loans. 1/

1/If an examiner believes that some factor adversely affects the

quality of a loan, he/she may "classify" the loan as being "substandard, "doubtful," or "loss," in order of severity of the problem.

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