Bank and Thrift Regulation

This testimony summarizes the results of GAO's review of bank and thrift examinations done by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. GAO focused on how well regulators assess the quality of bank and thrift loan portfolios and related loan loss reserves and the effectiveness of the institutions' internal control systems. In reviewing examinations for 58 randomly selected banks and thrifts, GAO discovered surprising weaknesses. Specifically, examinations were too limited to fully reveal the extent of deficiencies jeopardizing safety and soundness. These limitations impeded early warning of the seriousness of bank and thrift weaknesses and reduced the chance to take timely corrective action and minimize losses to the insurance funds. Similar weaknesses affected the quality of bank holding company inspections. Extensive flexibility granted examiners and a lack of minimum requirements were common problems affecting the quality of examinations and inspections. As measured by the unprecedented failures of banks and thrifts since 1980, the regulatory system has become far less effective in preventing and minimizing the number and the cost of failures. Successful implementation of the FDIC Improvement Act of 1991 and strengthened examinations and accounting rules are vital to regulatory effectiveness and protection of the insurance funds. GAO also identified many inconsistencies among the regulators that may hinder their efficiency and effectiveness. GAO concludes that the regulatory structure that arose from the Great Depression has not kept pace with the banking world, one that has become increasingly competitive and complex in the 1990s.