Bank and Thrift Regulation

The thrift and banking crisis of the 1980s caused losses in the deposit insurance funds estimated at more than $125 billion. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which was enacted to beef up federal oversight of depository institutions, created two new sections in the Federal Deposit Insurance Act--sections 38 and 39--that require regulators to establish a two-part regulatory framework to strengthen safeguards for the deposit insurance funds. The first part focuses on capital levels of depository institutions, and the second focuses on other measures of a financial institution's safety and soundness. This report discusses the progress and results of the federal regulators' implementation of FDICIA's provisions. Specifically, GAO assesses the (1) regulators' implementation of sections 38 and 39 and (2) impact of the two sections on federal oversight of the banking industry.

GAO found that: (1) regulators have taken the required steps to implement FDICIA prompt regulatory action provisions, but have had to use the additional enforcement powers granted by the provisions against a relatively small number of depository institutions; (2) the improved financial condition of banks and thrifts has allowed them to build their capital levels to the point where only a few institutions were considered undercapitalized according to section 38 standards; (3) OCC and FRS generally took prescribed regulatory actions against the 61 undercapitalized banks reviewed; (4) as of September 1996, regulators had not used their section 39 authority; (5) the final two safety and soundness standards, asset quality and earnings, required to fully implement section 39 became effective on October 1, 1996; (6) the guidelines and regulations issued to date by regulators to implement section 39 do not establish clear, objective criteria for what would be considered unsafe and unsound practices or conditions or link the identification of such conditions to specific mandatory enforcement actions; (7) other FDICIA provisions and initiatives recently announced by regulators should help in the early identification of depository institutions with safety and soundness problems; and (8) the success of these provisions and initiatives will be determined by the regulators' willingness to use their enforcement powers early enough to prevent or minimize losses to the deposit insurance funds.