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Federal bank regulatory agencies have improved
bank safety and soundness supervision since
the General Accounting Office's last compre-
hensive study in 1976. They have used new
laws, procedures, and systems to better
gather data, identify bank problems, and
effect solutions to those problems.

However, the Congress and the bank regulatory
agencies need to reevaluate these laws and pro-
cedures to alleviate unnecessary reporting by
banks and to make the supervisory process
more efficient and effective.

Since GAO's 1976 study, the Congress and the
three Federal bank regulatory agencies--the
Comptroller of the Currency (Comptroller),
the Federal Deposit Insurance Corporation
(FDIC), and the Federal Reserve System--have
made significant changes in the legislation
and procedures used to supervise commercial
banks. Although GAO has studied different
aspects of supervision in the intervening
time period, it has not determined compre-
hensively the overall effect of these changes.
This report gives GAO's assessment of agency
progress and makes recommendations for fur-
ther improvements.

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In each of three major functional areas of
bank supervision--gathering information on
banks, identifying bank problems, and influ-
encing banks to solve problems--the bank regu-
latory agencies have made significant improve-
ments, some made possihle by new legislation.

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One way the agencies get better information on banks they supervise is by using computerized monitoring systems to analyze data regularly reported by banks. These analyses give supervisors a better picture of the banks' and their holding companies' financial conditions and trends. (See p. 9.)

The agencies identify bank problems usually
well before they reach a critical stage and
are paying more attention to bank management
practices that cause financial problems.
But they still equate quality of management
co a bank's financial condition, an equation
that GAO has found could be misleading.
(See p. 20.)


Regulators, using more structured guidelines,
are taking more formal actions against banks
with problems. They employ new supervisory
powers granted by the Congress, though the
full flexibility envisioned when the legis-
lation was passed has not been realized.
(See p. 32.)

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Resource limitations have forced agencies to
spend less time on the premises of banks in
good condition. Consequently, each regulator
modified the scope of its bank examinations
to lessen its resource requirements. Though
use of modified examinations varies, over
half the examinations conducted now are of
this type.

But one potential problem may limit the extent to which modified examinations can be used. Junior examiners, felt to be somewhat unqualified by bankers GAO surveyed, receive degraded on-the-job training from modified examinations. Thus, the agencies should incorporate training needs into their policies for using modified procedures. (See p. 13.)


A report required by 1978 legislation to be
filed by banks on loans to executive officers
and shareholders is not necessary for supervi-
sory purposes and therefore may be unduly
burdensome on the banks. (See p. 14.)
Agency personnel do not need the report to
augment regular examination procedures
in order to identify improper extensions
of credit.


Regulators defer formal actions until a bank's
financial condition deteriorates significantly,
so they use informal persuasion to influence
a bank to solve its management weaknesses
that could lead to more serious problems.
These informal efforts could be made more
effective if the agencies made more specific
recommendations to banks to solve problems--a
practice they now avoid. (See p. 41.)


The Federal hank regulatory agencies are using
and expanding computerized surveillance sys-
tems without fully defining their uses or
evaluating their costs versus benefits. These
systems were designed to provide better infor-
mation to examiners on banks--which they
do--provide early warning of bank problems--
which is questionable--and, in the case of the
Comptroller's system, monitor the progress
of banks known to have problems--which it
is not used for. (See p. 48.)

Though conceptually useful, surveillance is limited in its ability to evaluate bank management and asset quality. Moreover, the agencies have not performed the requisite justification and cost-benefit analyses normally a part of sound system development. (See p. 49.)

Tear Sheet


GAO recommends that the Congress amend Title IX of the Financial Institutions Regulatory and Interest Rate Control Act (12 U.S.C. 1817 (k)) and section 22(g) of the Federal Reserve Act (12 U.S.c. 375a) to eliminate unnecessary reports submitted by banks on loans to executive officers and shareholders or, alternatively, to just amend section 22(g) to eliminate duplicate reporting of information by banks. (See p. 18.)

GAO recommends that the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation:

--Determine the impact of modified scope exam

inations on staff training and integrate the
results into policies on their use.
(See p. 19.)

--Require supervisory staff to make nonbinding

but specific recommendations to banks in writing on ways to improve management weaknesses. (See p. 46.)

--Perform cost-effectiveness evaluations of

computerized surveillance systems as part of developing a better definition of the role and use of such systems. (See p. 58.)


The Federal Reserve, the FDIC, and the Federal
Financial Institutions Examination Council
agreed with GAO's recommendation to reduce the
reporting requirements on insider transactions.
They have expressed similar opinions in legis-
lative proposals to congressional committees.
(See p. 19.) The Comptroller did not comment
on this recommendation.

The bank regulatory agencies expressed differ
ing views with regard to GAO's recommendation
to develop modified scope examination policies
that consider training needs. The Comptroller
agreed that this policy should be evaluated
in light of training needs. FDIC shared GAO's
concerns and agreed to include training needs
in the criteria for determining the scope of
the examination. The Federal Reserve said
it already considers training needs in
scheduling modified scope examinations;
however, GAO found no written policy on
incorporating training needs and few modi-
fied scope examinations being performed.
The Federal Reserve should, as FDIC agreed
to do, formulate a policy and make it known
to its district banks. (See p. 19.)

None of the agencies agreed with the recom-
mendation to adopt policies encouraging
examiners to make more specific written
recommendations to banks on ways to improve
management weaknesses. They supported
their current practices and emphasized
their beliefs that most banks should be
able to manage without extensive examiner
involvement. GAO agrees that unnecessary
interference should be avoided and that
most banks are adequately managed. However,
for banks of supervisory concern, such as
the ones GAO reviewed, earlier attention
could help. Information obtained from bank
officials indicates that they find both the
examination process and examination reports
to be lacking in this area, confirming GAO's
case study observations. (See p. 46.)

Both the Federal Reserve and FDIC disagreed
with the recommendation to perform a cost-
benefit analysis of their surveillance sys-
tems. They are committed to using computerized
surveillance, although they have made continual
reviews of and changes to the systems. The
Comptroller agreed to perform the analyses,
but only on future systems changes. Since
the surveillance systems were developed without
appropriate studies required by accepted system
development criteria, the agencies should
formally assess whether the benefits received
can justify the costs to develop and operate
the systems. (See p. 58.)

Tear Sheet

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