Depository Institutions

Concerned that certain practices--such as vendors buying stock or making deposits in an institution or buying the institution's assets at an inflated rate--were being imposed as a condition of contract awards for various services, Congress prohibited financial institutions from entering into contracts for goods and services that could harm the safety and soundness of an institution. Congress was also concerned that these practices could have an anticompetitive effect, with large data processing vendors gaining an unfair competitive advantage over small firms. This report looks at (1) whether insured depository institutions are entering into contracts meeting the above description and (2) the extent to which such practices have an anticompetitive effect and should be prohibited.

GAO found that: (1) of 150 data processing servicers reviewed, 51 vendors reported engaging in other business relationships with banks in addition to data processing services, and 16 vendors reported engaging in such relationship with savings associations; (2) 8 percent of the banks and 7 percent of the savings associations surveyed reported engaging in other business activities with vendors providing data processing services; (3) vendors and savings associations reported that the most common types of activities involved the vendor making deposits and purchasing data processing equipment; (4) banks reported that the most common activities included vendors buying or making loans to banks; (5) when vendors bought assets from savings associations, the vendors usually paid the market value rather than the book value; (6) 7 of the 10 vendors that paid book value for assets from banks stated that the book value was higher than the market value; (7) 17 vendors stated that they had definitely or probably lost contracts to vendors who were willing to enter into other business relationships with banks and 11 vendors stated that they had definitely or probably lost contracts with savings associations under the same circumstances; (8) regulators identified such unusual contracting arrangements between depository institutions and data processing servicers as institutions awarding data processing contracts to companies after they agreed to purchase bank assets, vendors providing capital to institutions by purchasing stock in the institution, and institutions making loans to vendors with limited liability and without adequately reviewing the vendors' books; and (9) due to concern that such arrangements adversely affected the institutions' financial soundness, the Federal Deposit Insurance Corporation the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Reserve System Board of Governors issued guidelines concerning the data processing contracts.