Thrift Examination Quality

This report 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. The Comptroller General summarized this series of reports in testimony before Congress; see: Bank and Thrift Regulation: Improvements Needed in Examination Quality and Regulatory Structure, by Charles A. Bowsher, Comptroller General of the United States, before the House Committee on Banking, Finance, and Urban Affairs, GAO/T-AFMD-93-2, Feb. 16, 1993 (47 pages).

GAO found that: (1) for 17 of the 20 thrifts it reviewed, OTS examiners failed to review sufficient numbers of loans to accurately assess the safety and soundness of individual thrifts, and relied on thrift managers to identify problem loans; (2) OTS did not select loans on a representative basis and failed to accurately represent the thrifts' portfolios; (3) OTS examiners lacked a consistent methodology for assessing the risks to the Savings Association Insurance Fund from inadequate thrift allowances for losses on loans; (4) OTS failed to adequately test internal controls to detect problems that could lead to insolvency; (5) OTS relied on unverified information provided by the thrifts to determine the effectiveness of internal controls, and failed to assess the quality or extent of external auditors' internal control work; (6) OTS and FDIC did not effectively coordinate examinations, which resulted in duplicative work and different conclusions, and undermined confidence in examination results, making prioritization of corrective action difficult; and (7) OTS and FDIC signed a joint memorandum requiring them to perform joint thrift examinations in all but a few cases.

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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