Inspectors General

Mandated Studies to Review Costly Bank and Thrift Failures Gao ID: GGD-97-4 November 7, 1996

The Inspectors General (IG) at the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury issued a total of four material loss review (MLR) reports on banks that failed or whose losses were recognized during the second year of the MLR mandate. GAO found that the four banks failed for similar reasons: rapid growth, excessive loan concentrations in commercial real estate, poor internal controls, and violations of laws and regulations. The reports also cited weaknesses in the bank regulators' oversight of these institutions. GAO is not making any general recommendations to the bank regulators because the relatively small number of reports issued during the first two years of the mandate--six--does not provide a basis for reaching overall conclusions about the quality of supervisory practices. In GAO's view, the limited basis that these reports provide for making recommendations about overall bank supervision raises questions about the cost-effectiveness of the MLR process as currently structured. Another reason to question the cost-effectiveness of the current process is that some MLR requirements are relatively inflexible and divert IG staff and resources from broader reviews of the quality of bank supervision.

GAO found that: (1) the Federal Reserve, FDIC, and Treasury IG issued a total of four MLR reports on banks that failed or whose losses were recognized during the second year of the MLR mandate; (2) these reports noted that the four banks failed for similar reasons, including rapid growth, excessive loan concentrations in the commercial real estate industry, poor internal controls, and violations of laws and regulations; (3) in three of the four cases, bank regulators did not take aggressive enforcement actions to correct identified safety and soundness deficiencies or to ensure that troubled banks complied with existing enforcement actions; (4) the relatively small number of reports issued in the first 2 years of the mandate did not provide a sufficient basis to reach overall conclusions about the quality of bank supervisory practices; and (5) there are reasons to question the cost-effectiveness of the MLR process, including the fact that certain MLR requirements are relatively inflexible and divert IG staff and resources from broader reviews of the quality of bank supervision.

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.

Director: Team: Phone:


The Justia Government Accountability Office site republishes public reports retrieved from the U.S. GAO These reports should not be considered official, and do not necessarily reflect the views of Justia.