Bank Insurance Fund

Additional Reserves and Reforms Needed to Strengthen the Fund Gao ID: AFMD-90-100 September 11, 1990

GAO: (1) audited the Bank Insurance Fund's financial statements for the years ended December 31, 1989, and 1988; and (2) discussed serious problems facing the banking industry, the Fund's ability to deal with those problems, and reforms to strengthen the Fund.

GAO found that: (1) although the Fund had the resources to handle anticipated bank failures in 1990, its low level of reserves, coupled with a recession, could lead to a level of bank failures that would exhaust the Fund and require taxpayer assistance; (2) the Fund ended 1989 with a net loss of $852 million, which reduced its balance to $13.2 billion; (3) the increasingly risky nature of loan portfolios was the leading cause of problems within the banking industry; (4) 35 banks were in such severe financial condition that they were likely to fail or require assistance within the next year, and about 1,100 banks had serious financial problems; (5) the ratio of the Fund's balance to insured deposits stood at 0.7 percent, the lowest level ever; (6) the Fund was not likely to reach its legislatively required minimum reserve ratio of 1.25 percent until 1995; (7) the Fund was contingently liable for $8 billion of troubled assets held by acquirers of failed banks; and (8) regulators relied on banks' quarterly reports of financial condition, but such reports were not always accurate or comprehensive. GAO also found that the financial statements: (1) presented fairly the Fund's financial position; and (2) did not include the estimated costs of anticipated bank failures, since those costs did not meet the degree of certainty for loss recognition established by accounting principles. GAO believes that adherence to those principles may unduly delay the recognition of losses that could substantially reduce the Fund's balance.

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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