COMPTROLLER GENERAL'S REPORT TO THE CONGRESS
DESPITE RECENT IMPROVEMENTS,
BANK SUPERVISION COULD BE MORE EFFECTIVE AND LESS
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.
KEY IMPROVEMENTS MADE IN ALL AREAS OF SUPERVISION
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 possible by new legislation.
GGD-82-21 FEBRUARY 26, 1982
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 to 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 legislation was passed has not been realized. (See p. 32.)
POLICY NEEDED ON MODIFIED
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.)
REPORTING REQUIREMENTS
UNNECESSARILY BURDENSOME
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.
INFORMAL METHODS OF SOLVING PROBLEMS COULD BE MORE EFFECTIVE
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.)
BETTER EVALUATION OF SURVEILLANCE SYSTEMS NEEDED
The Federal bank regulatory agencies are using and expanding computerized surveillance sys- tems without fully defining their uses or evaluating their costs versus benefits. 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.)
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.)
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