Study on Federal Supervision of State and National Banks

Several congressional committees requested evaluation of the effectiveness of the supervisory efforts of the three federal agencies involved in monitoring banking operations, because of the increasing instability of banks. The study objectives were to evaluate the agencies' efforts to identify unsound conditions and violations of laws in banks and cause bank management to take corrective actions. Adverse economic conditions contributed to some bank failures, but generally embezzlement and poor management of loans were the cause. Problems were not corrected because: (1) the regulatory agencies were reluctant to use their legal authority to force the banks to change; (2) the agencies did not consult with bank boards; (3) examinations were set up on a time basis rather than a problem solving basis; and (4) recommendations were not generally made as to how to solve problems. The agencies should revise their examination practices and frequencies to better identify problems. Examination reports and meetings with bank boards should follow all examinations. More aggressive policies should be developed for the use of formal actions against problem banks. Better training and screening of potential examiners should be implemented. The three agencies, either through their own initiative or legislation, should coordinate their efforts more closely. More stringent procedures for handling charter applications should be devised.