Immediate Measures That Can Be Taken to Strengthen the Bank Insurance Fund

GAO discussed a legislative proposal that would allow the Federal Deposit Insurance Corporation (FDIC) flexibility in setting deposit insurance premiums. GAO noted that: (1) the Bank Insurance Fund balance and FDIC projections showed that the current restrictions on setting assessment rates would prevent the achievement of the designated minimum reserve ratio of 1.25 percent by 1995; (2) financial institutions' weak internal controls continued to contribute significantly to failures; (3) 39 out of 406 of the largest banks that failed in 1988 or 1989 had serious internal control weaknesses; (4) bank management and board directors should maintain effective internal control structures by ensuring that financial transactions are proper, financial records and statements conform to accounting principles, and institutions comply with applicable laws and regulations; (5) despite more effective auditing procedures by some financial institutions, the accounting profession failed to provide sufficient and substantive information to ensure audit effectiveness; and (6) financial institutions did not always adequately address internal control and audit problems. GAO believes that other actions to reduce the risk of a crisis in the banking industry include: (1) improved communications between independent public accountants and regulators; (2) peer reviews of audits; and (3) establishment of oversight committees to ensure that financial institution managers and auditors perform their roles and duties responsibly.