Bank Insider Activities

Insider fraud and other problems were evident in 61 percent of 286 bank failures in 1990 and 1991, according to investigations of those failures by the Federal Deposit Insurance Corporation (FDIC). GAO found that in 26 percent of the failures, FDIC investigators cited insider problems as one of the major causes. During the three years before these banks failed, federal bank examiners cited the banks for a total of 561 insider violations. Even though insider violations were cited and enforcement actions were taken, the banks still went under. In a review of federal examination reports for 13 open and relatively healthy banks, GAO discovered insider violations similar to those found in the failed banks. In general, GAO found that examiners were not as effective in spotting insider problems at the failed banks when the banks were operating as investigators were after the banks had failed. GAO also found that examiners often failed to adequately communicate to bank boards and management the potential seriousness of problems and violations; as a result, the problems went uncorrected and became more serious. At the same time, bank boards of directors and bank management often failed to take steps to understand the depth of the problems examiners were trying to explain.

GAO found that: (1) insider fraud and loan losses were the major causes for bank failures in 1990 and 1991; (2) although federal bank examiners cited 286 banks for 561 insider violations and federal and state regulators took 235 separate enforcement actions, the banks eventually failed; (3) the Federal Deposit Insurance Corporation found insider violations at 13 open banks similar to those found in the failed banks; (4) there is a strong association between insider violations, poor bank management, and inadequate bank board oversight; (5) bank examiners could not effectively identify insider activities in open banks and often failed to communicate significant insider problems to bank boards and bank management; (6) bank examiners need to improve their communication with bank management and ability to identify insider problems at open banks so that insider problems do not become more serious; (7) bank boards and management need to take steps to understand the depth of their insider problems and work with bank examiners to identify insider activities; and (8) although the aggregate amount of insider lending at failed banks is unknown because of a lack of comprehensive data, the aggregate amount of insider lending at open banks through 1993 was $24 billion.

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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