Treasury Tax and Loan Accounts

Changes in Collateral Practices Could Reduce the Federal Government's Risk of Loss Gao ID: AFMD-92-54 September 14, 1992

The Department of the Treasury collects most of the government's tax revenue through special accounts at nearly 14,000 financial institutions across the country. During fiscal year 1991, the Treasury collected more than $875 billion through these accounts. Recent failures of banks and savings and loans have underscored the need to secure these accounts with enough collateral to protect the government from major losses. GAO recommends several steps to improve Federal Reserve Bank review, valuation, and monitoring practices. These actions should include (1) accepting depositories' securities before review only when prudent and warranted, (2) rejecting undocumented collateral, and (3) doing comprehensive monthly collateral assessments. GAO also recommends that the Treasury revise its prescribed account collateral valuation method to better emphasize the risk associated with the collateral.

GAO found that: (1) Federal Reserve Banks did not always timely or thoroughly review securities before accepting them as collateral, resulting in unallowable and undocumented securities being pledged as collateral; (2) the banks' review procedures varied widely; (3) because Treasury does not require consistent valuation of similar securities or specific procedures to value certain securities, banks have valued them differently; (4) banks' monitoring of collateral was ineffective because their automated systems contained inaccurate data, and other problems reduced their monitoring ability; and (5) the banks have taken corrective action on specific problems, and one was continuing to develop an information system to help value and monitor definitive securities. GAO also found that Treasury's prescribed method for valuing collateral did not adequately consider the riskiness of securities, was administratively difficult, and had evolved into a formula-based process.

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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