Bank Failures

GAO reviewed recent bank failures, focusing on: (1) the internal weaknesses and environmental factors which examiners cited for insured banks that failed in 1987; (2) the extent to which insider abuse and fraud affected the same failed banks; and (3) potential areas of concern which could be used for congressional oversight and policy deliberation, federal bank examination and supervision, bank management, and financial auditors.

GAO found that: (1) the internal control weaknesses that federal regulators identified that most contributed to the 184 bank failures in 1987 included inadequate or imprudent loan policies and procedures, inadequate bank board supervision, weak loan administration, poor loan documentation, and inadequate credit analysis; (2) each of the failed banks had a unique combination of weaknesses that contributed to its failure, most of which related to some aspect of management; (3) although regulators did not cite insider abuse or fraud as a sole factor in any failure, and only rarely as a significant contributing factor, they cited insider abuse in 64 percent and suspected fraud in 38 percent of bank failures; (4) federal regulators did not generally require all insured banks to have an annual independent audit; and (5) small banks, which account for the majority of the failures, were less likely to have adequate internal controls or internal auditing functions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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