Minority Banks
Regulators Need to Better Assess Effectiveness of Support Efforts Gao ID: GAO-07-6 October 4, 2006Minority banks can play an important role in serving the financial needs of historically underserved communities and growing populations of minorities. For this reason, the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established goals that the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) must work toward to preserve and promote such institutions (support efforts). To evaluate their efforts, as well as those of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, GAO (1) reviewed the profitability of minority banks, (2) identified the regulators' support and assessment efforts, and (3) obtained the views of minority banks on the regulators' efforts. GAO reviewed financial data from FDIC, interviewed regulators, and surveyed all minority banks.
The profitability of most large minority banks (assets greater than $100 million) was nearly equal to that of their peers (similarly sized banks) in 2005 and earlier years. However, many small minority banks and African-American banks of all sizes were less profitable than their peers. GAO's analysis and other studies identified some possible explanations for these differences, including relatively higher loan loss reserves and operating expenses and competition from larger banks. Bank regulators have adopted differing approaches to supporting minority banks, but no agency has regularly and comprehensively assessed the effectiveness of its efforts. FDIC--which supervises over half of all minority banks--has the most comprehensive support efforts and leads interagency efforts. OTS focuses on providing technical assistance to minority banks. While not required to do so by Section 308 of FIRREA, OCC and the Federal Reserve have taken some steps to support minority banks and are planning others. Although FDIC has recently sought to assess the effectiveness of its support efforts through various methods, none of the regulators comprehensively surveys minority banks to obtain their views or has developed outcome-oriented performance measures. Consequently, the regulators are not well positioned to assess their support efforts. GAO's survey of minority banks identified potential limitations in the regulators' support efforts that would likely be of significance to agency managers and warrant follow-up analysis. Only about one-third of survey respondents rated their regulators' efforts for minority banks as very good or good, while 26 percent rated the efforts as fair, 13 percent as poor or very poor, and 25 percent responded "don't know." Banks regulated by FDIC were more positive about their agency's efforts than banks regulated by other agencies. However, only about half of the FDIC-regulated banks and about a quarter of the banks regulated by other agencies rated their agency's efforts as very good or good. Although regulators may emphasize the provision of technical assistance to minority banks, less than 30 percent of such institutions have used such agency services within the last 3 years and therefore may be missing opportunities to address problems that limit their operations or financial performance.
RecommendationsOur 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:GAO-07-6, Minority Banks: Regulators Need to Better Assess Effectiveness of Support Efforts
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2006:
MINORITY BANKS:
Regulators Need to Better Assess Effectiveness of Support Efforts:
GAO-07-6:
GAO Highlights:
Highlights of GAO-07-6, a report to congressional requesters:
Why GAO Did This Study:
Minority banks can play an important role in serving the financial
needs of historically underserved communities and growing populations
of minorities. For this reason, the Financial Institutions, Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) established goals that
the Federal Deposit Insurance Corporation (FDIC) and the Office of
Thrift Supervision (OTS) must work toward to preserve and promote such
institutions (support efforts).
To evaluate their efforts, as well as those of the Office of the
Comptroller of the Currency (OCC) and the Federal Reserve, GAO (1)
reviewed the profitability of minority banks, (2) identified the
regulators‘ support and assessment efforts, and (3) obtained the views
of minority banks on the regulators‘ efforts.
GAO reviewed financial data from FDIC, interviewed regulators, and
surveyed all minority banks.
What GAO Found:
The profitability of most large minority banks (assets greater than
$100 million) was nearly equal to that of their peers (similarly sized
banks) in 2005 and earlier years. However, many small minority banks
and African-American banks of all sizes were less profitable than their
peers. GAO‘s analysis and other studies identified some possible
explanations for these differences, including relatively higher loan
loss reserves and operating expenses and competition from larger banks.
Bank regulators have adopted differing approaches to supporting
minority banks, but no agency has regularly and comprehensively
assessed the effectiveness of its efforts. FDIC”which supervises over
half of all minority banks”has the most comprehensive support efforts
and leads interagency efforts. OTS focuses on providing technical
assistance to minority banks. While not required to do so by Section
308 of FIRREA, OCC and the Federal Reserve have taken some steps to
support minority banks and are planning others. Although FDIC has
recently sought to assess the effectiveness of its support efforts
through various methods, none of the regulators comprehensively surveys
minority banks to obtain their views or has developed outcome-oriented
performance measures. Consequently, the regulators are not well
positioned to assess their support efforts.
GAO‘s survey of minority banks identified potential limitations in the
regulators‘ support efforts that would likely be of significance to
agency managers and warrant follow-up analysis. Only about one-third of
survey respondents rated their regulators‘ efforts for minority banks
as very good or good, while 26 percent rated the efforts as fair, 13
percent as poor or very poor, and 25 percent responded ’don‘t know“
(see fig.) Banks regulated by FDIC were more positive about their
agency‘s efforts than banks regulated by other agencies. However, only
about half of the FDIC-regulated banks and about a quarter of the banks
regulated by other agencies rated their agency‘s efforts as very good
or good. Although regulators may emphasize the provision of technical
assistance to minority banks, less than 30 percent of such institutions
have used such agency services within the last 3 years and therefore
may be missing opportunities to address problems that limit their
operations or financial performance.
What GAO Recommends:
GAO recommends that the banking regulators review the effectiveness of
their efforts by such means as (1) regularly surveying minority banks
and/or (2) establishing outcome-oriented performance measures. The
regulators may wish to focus on obtaining feedback from small and
African-American banks. FDIC, OTS, and OCC agreed to implement the
recommendation, while the Federal Reserve will consider implementing it.
[Hyperlink http://www.gao.gov/cgi-bin/getrpt?GAO-07-6.]
To view the full product, including the scope and methodology, click on
the link above. To view the results of GAO‘s survey of minority banks,
click www.gao.gov/cgi-bin/getrpt?GAO-07-7SP. For more information,
contact George A. Scott at 202-512-7215 or scottg@gao.gov
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Larger Minority Banks Showed Profitability Close to That of Their Peers
and Historical Benchmarks, but Many Small and African-American Banks
Have Been Less Profitable:
Regulators Adopted Differing Approaches to Supporting Minority Banks,
but Assessment Efforts Were Limited:
Survey of Minority Banks Identified Potential Limitations in
Regulators' Support Efforts and Other Regulatory Issues:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Minority Bank Eligibility Criteria:
Appendix III: Selected Survey Results:
Appendix IV: Comments from the Federal Deposit Insurance Corporation:
Appendix V: Comments from the Office of Thrift Supervision:
Appendix VI: Comments from the Comptroller of the Currency:
Appendix VII: Comments from the Board of Governors of the the Federal
Reserve System:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number and Percentage of Minority Banks, by Type, 2005:
Table 2: Percentage of Minority Banks and Total Banking Industry, by
Asset Size, 2005:
Table 3: Federal Bank Regulator Bank Supervisory Responsibilities, by
Bank Charter:
Table 4: Number of Minority Banks, by Regulator, 2005/2006:
Figures:
Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005:
Figure 2: Average ROA of Small Minority Banks, 2005:
Figure 3: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005:
Figure 4: Average Loan Loss Reserves as a Percentage of Assets for
African-American and Peer Banks, 2005:
Figure 5: Average Operating Expenses Relative to Earning Assets of
Banks with Assets Less than $100 million, 2005:
Figure 6: Banking Regulators' Efforts to Support Minority Banks:
Figure 7: Minority Banks' Ratings of Support Efforts, by Regulator:
Figure 8: Usefulness of FDIC's Roundtables and Conferences, by
Regulator:
Figure 9: Minority Banks' Use of Technical Assistance, by Regulator:
Figure 10: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions:
Figure 11: Regulators' Eligibility Criteria for Minority Bank Efforts:
Abbreviations:
CRA: Community Reinvestment Act:
FDIC: Federal Deposit Insurance Corporation:
FIRREA: Financial Institutions, Reform, Recovery, and
Enforcement Act:
MBDP: Minority Bank Deposit Program:
MBR: Minority Bankers Roundtable:
NBA: National Bankers Association:
OCC: Office of the Comptroller of the Currency:
OTS: Office of Thrift Supervision:
ROA: return on assets:
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. However, because
this work may contain copyrighted images or other material, permission
from the copyright holder may be necessary if you wish to reproduce
this material separately.
United States Government Accountability Office:
Washington, DC 20548:
October 4, 2006:
Congressional Requesters:
Minority banks are a small community within the banking industry,
accounting for about 2 percent of all financial institutions and total
industry assets.[Footnote 1] Despite their small numbers, minority
banks can play an important role in serving the financial needs of
historically underserved communities, such as African-Americans, and
growing populations of minorities, such as Hispanic-Americans and
Asian-Americans. For this reason, Section 308 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
established goals that federal regulators must work toward to preserve
and promote such institutions.[Footnote 2] For example, the Federal
Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision (OTS), in consultation with the Department of the Treasury
(Treasury), are required to provide minority banks with technical
assistance and training and educational programs and to work toward
preserving the character of minority banks in cases involving mergers
or acquisitions of these institutions (we refer to these activities as
efforts to support minority banks in our report).[Footnote 3]
In 1993, we reported on efforts by Treasury, FDIC, and OTS to support
minority banks in accordance with Section 308 of FIRREA.[Footnote 4] At
that time, we found that these agencies had taken steps to respond to
Section 308, but minority banks we interviewed gave FDIC and OTS mixed
reviews on their efforts. In particular, minority banks were concerned
that the regulators did not provide adequate technical assistance.
Further, minority banks expressed concerns about related regulatory
issues, including their view that agency safety and soundness examiners
did not fully understand the unique challenges their institutions
faced.[Footnote 5] We recommended that FDIC and OTS periodically survey
minority banks to assess the effectiveness of their efforts to support
such institutions.
You requested that we follow up on our 1993 report and review all of
the federal banking regulators' efforts to support minority banks,
including the activities of the Office of the Comptroller of the
Currency (OCC) and the Board of Governors of the Federal Reserve System
(Federal Reserve), which are not subject to Section 308 of
FIRREA.[Footnote 6] Accordingly, our reporting objectives were to (1)
review the profitability of minority banks over time, (2) identify the
federal banking regulators' efforts to support minority banks and
determine whether the regulators were evaluating the effectiveness of
these efforts, and (3) obtain the views of minority banks on the
federal regulators' minority banking support efforts and related
regulatory issues.
To address the first objective, we obtained and analyzed financial data
for minority banks from FDIC for 2005, 2000, and 1995.[Footnote 7] We
also reviewed background literature and conducted interviews with
minority banks to discuss the business environment in which these banks
operate. For the second objective, we interviewed officials from the
Department of the Treasury, FDIC, Federal Reserve, OCC, and OTS and
reviewed regulators' documentation addressing their efforts to support
minority banks and assess the effectiveness of these efforts. We also
compared the regulators' efforts to our standards for program
assessment and performance measures and those established in the
Government Performance and Results Act. To address the third objective,
we conducted a Web-based survey of all institutions identified by the
banking regulators as minority institutions. The survey, which was
conducted from March through April 2006, asked about the banks'
awareness and use of the regulators' minority bank support efforts and
also asked the banks to rate these efforts. We received 149 survey
responses out of a total population of 195 minority banks, for a
response rate of 76 percent. We also interviewed relevant trade
associations and a sample of 19 minority banks throughout the United
States that we selected based on type of minority ownership and primary
regulator. Appendix I explains our scope and methodology in greater
detail. Appendix II describes each regulator's definition of minority-
owned and women-owned banks for purposes of eligibility for
participation in the regulator's particular minority banking support
efforts. Appendix III provides the number of minority banks that
responded to each survey question discussed in the report and thereby
supplements the use of percentages to summarize these results. All
survey questions and the frequencies of responses to each question are
presented in a supplemental product that can be found on our Web site
at www.gao.gov/cgi-bin/getrpt?GAO-07-7SP.
We conducted our work in Washington, D.C., and New York from December
2005 to September 2006 in accordance with generally accepted government
auditing standards.
Results in Brief:
Our analysis of FDIC data showed that while the profitability of most
minority banks with assets greater than $100 million nearly equaled the
profitability of all similarly sized banks (peers), the profitability
of smaller minority banks and African-American banks of all sizes did
not.[Footnote 8] Profitability is commonly measured by return on assets
(ROA), or the ratio of profits to assets, and ROAs are typically
compared across peer groups to assess performance.[Footnote 9] Many
small minority banks (those with less than $100 million in assets) had
ROAs that were substantially lower than those of their peer groups in
2005 as well as in 1995 and 2000. Moreover, African-American banks of
all sizes had ROAs that were significantly below those of their peers
in 2005 as well as in 1995 and 2000 (African-American banks of all
sizes and other small minority banks account for about half of all
minority banks). Our analysis of FDIC data identified some possible
explanations for the relatively low profitability of some small
minority banks and African-American banks. In particular, some of these
banks maintain relatively high reserves for potential loan losses or
may have higher operating expenses, such as administrative expenses or
salaries, than other banks. The results of other studies we reviewed
were consistent with these findings, and minority banks that we spoke
with offered additional explanations, such as the effects of increased
competition from larger banks. Nevertheless, the majority of officials
from banks across all minority groups were positive about their banks'
financial outlook, and many saw their minority status as an advantage
in serving their communities (for example, in providing services in the
language predominantly used by the minority community).
The bank regulators have adopted differing approaches to supporting
minority banks, and no agency assessed the results of its efforts
through regular and comprehensive surveys of minority banks or outcome-
oriented performance measures.[Footnote 10] FDIC--which supervises
more than half of all minority banks--currently has the most
comprehensive program to support minority banks and leads an
interagency group that coordinates such efforts. Among other things,
FDIC has designated officials in the agency's headquarters and regional
offices who are responsible for minority bank efforts, holds periodic
conferences for minority banks, and has established formal policies for
annual outreach to the banks it regulates to make them aware of
available technical assistance. OTS also has staff who are responsible
for the agency's efforts to support minority banks, has developed
outreach procedures, and focuses its efforts on providing technical
assistance. OCC and the Federal Reserve, while not required to do so by
Section 308 of FIRREA, have undertaken some efforts to support minority
banks, such as holding occasional conferences for Native American
banks, and are planning additional efforts. FDIC has proactively sought
to assess the effectiveness of its support efforts through, for
example, surveying minority banks. However, these surveys have not
addressed key activities, such as the provision of technical
assistance, and the agency has not established outcome-oriented
performance measures for its support efforts. None of the other
regulators comprehensively surveys minority banks on their support
efforts or has established outcome-oriented performance measures.
Consequently, the regulators are not well positioned to assess the
results of their minority bank support efforts or identify potential
areas for improvement.
In our survey, minority banks identified potential limitations in the
regulators' support efforts and related regulatory issues that would
likely be of significance to agency managers and may warrant follow-up
analysis. Specifically, our survey showed that (1) only about one-third
of minority banks view the regulators' support efforts as very good or
good; (2) minority banks' usage of the agencies' technical assistance
appears to be low; and (3) some minority banks have concerns about
related regulatory activities, such as examiners' knowledge of issues
that affect their institutions. About 36 percent of survey respondents
rated their regulators' efforts for minority banks as very good or
good, while 26 percent rated the efforts as fair, 13 percent as poor or
very poor, and 25 percent responded "don't know." Banks regulated by
FDIC, which had the most extensive program and outreach efforts, were
more positive about their agency's efforts than banks regulated by
other agencies. However, only about half of the FDIC-regulated banks
and about a quarter of the banks regulated by other agencies rated
their agency's efforts as very good or good. While FDIC and OTS both
emphasize the provision of technical assistance as part of their
minority bank efforts, our survey showed that less than 30 percent of
institutions regulated by these agencies took advantage of such
assistance within the last 3 years. The majority of those banks that
used technical assistance, however, found it to be useful. Minority
banks regulated by OCC and the Federal Reserve reported similarly low
usage of the agencies' technical assistance services. While it is not
clear from our survey why relatively few minority banks use the
agencies' technical assistance services and regulators cannot compel
banks to use such assistance, the potential exists for many such
institutions, particularly small and African-American banks, to benefit
from assistance that might help improve their operations and financial
performance. As with our findings in our 1993 report, some minority
bank officials said that examiners do not always understand the
challenges that the banks may face in providing services in their
communities or operating environments.[Footnote 11] Although the bank
officials said they did not expect special treatment in the examination
process, they suggested that examiners needed to undergo more training
to improve their understanding of minority banks and the customer base
they serve.
This report makes a recommendation designed to help ensure that the
bank regulators are better able to understand the reasons behind
potential limitations in their support efforts and related activities-
-particularly the limited use of technical assistance and concerns
about examiners' knowledge of minority bank issues--within the minority
bank community and to take corrective actions as necessary.
Specifically, the report recommends that the federal banking regulators
review the effectiveness of their efforts to support minority banks
and, in so doing, consider employing the following methods: (1)
regularly surveying the minority banks under their supervision on all
efforts and regulatory areas affecting these institutions and/or (2)
establishing outcome-oriented performance measures to evaluate the
extent to which their efforts are achieving their objectives.
Regulators may also wish to focus their efforts on obtaining feedback
from small minority banks and African-American banks in order to
identify and address, if possible, any issues that may be causing the
relatively low profitability of some of these institutions.
We provided a draft of this report to FDIC, OTS, OCC, and the Federal
Reserve for comment, and they provided written comments that are
reprinted in appendixes IV-VII. In their responses, the agencies
further elaborated on their existing minority bank efforts and
described planned initiatives. Further, FDIC, OTS, and OCC agreed to
implement our recommendation, while the Federal Reserve said it would
consider implementing it. The agencies also provided technical
comments, which were incorporated as appropriate. We also requested
comments from the Department of the Treasury on the section of the
draft report relevant to its activities under Section 308 of FIRREA.
Treasury provided us with technical comments, which we have
incorporated as appropriate.
Background:
Many minority banks are located in urban areas and seek to serve
distressed communities and populations that have traditionally been
undeserved by financial institutions. For example, after the Civil War
banks were established to provide financial services to African-
Americans. More recently, Asian-American and Hispanic-American banks
have been established to serve the rapidly growing Asian and Hispanic
communities in the United States. In our review of regulators' lists of
minority banks, we identified a total minority bank population of 195
for 2005 (table 1).
Table 1: Number and Percentage of Minority Banks, by Type, 2005:
Type of minority bank: Asian-American[A]; Number of banks: 73;
Percentage of all minority banks: 37.
Type of minority bank: African-American; Number of banks: 46;
Percentage of all minority banks: 24.
Type of minority bank: Hispanic-American; Number of banks: 38;
Percentage of all minority banks: 19.
Type of minority bank: Native American; Number of banks: 20; Percentage
of all minority banks: 10.
Type of minority bank: Women-owned; Number of banks: 13; Percentage of
all minority banks: 7.
Type of minority bank: Other[B]; Number of banks: 5; Percentage of all
minority banks: 3.
Type of minority bank: Total; Number of banks: 195; Percentage of all
minority banks: 100.
Source: GAO analysis of Treasury and federal banking regulators' data.
Note: We identified the total minority bank population by obtaining and
reviewing the most current lists (available at the time the population
was compiled) from the federal banking regulators and Treasury. We
reviewed FDIC and the Federal Reserve's publicly available lists, which
were current as of September 30, 2005. We also reviewed OCC's list from
December 31, 2005, Treasury's most recent list from 2004, and OTS's
from January 2006.
[A] Asian-American includes individuals of Pacific Island descent.
[B] The "other" category includes banks considered to have minority
status that are not covered by the listed minority categories. "Other"
also includes banks that are owned or managed by more than one minority
group in accordance with a banking regulator's definition.
[End of table]
Table 2 shows that the distribution of minority banks by size is
similar to the distribution of all banks by size. More than 40 percent
of all minority banks had assets of less than $100 million.
Table 2: Percentage of Minority Banks and Total Banking Industry, by
Asset Size, 2005:
Asset size: < $100 million; Percentage of minority banks: 42;
Percentage of total banking industry: 44.
Asset size: $100 million to $300 million; Percentage of minority banks:
32; Percentage of total banking industry: 33.
Asset size: $300 million to $500 million; Percentage of minority banks:
9; Percentage of total banking industry: 9.
Asset size: $500 million to $1 billion; Percentage of minority banks:
7; Percentage of total banking industry: 7.
Asset size: $1 billion to $10 billion; Percentage of minority banks: 7;
Percentage of total banking industry: 6.
Asset size: > $10 billion; Percentage of minority banks: 3; Percentage
of total banking industry: 1.
Asset size: Total; Percentage of minority banks: 100; Percentage of
total banking industry: 100.
Source: GAO analysis of FDIC data.
[End of table]
Each federally insured depository institution, including each minority
bank, has a primary federal regulator: FDIC, OTS, OCC, or the Federal
Reserve. The primary regulator for each bank is determined by the
institution's charter (table 3).[Footnote 12]
Table 3: Federal Bank Regulator Bank Supervisory Responsibilities, by
Bank Charter:
Regulator: FDIC; Type of bank: State-chartered banks that are not
members of the Federal Reserve System.
Regulator: OTS; Type of bank: Federally chartered and state-chartered
savings associations and registered savings and loan holding companies.
Regulator: OCC; Type of bank: Nationally chartered banks and federal
branches of foreign banks.
Regulator: Federal Reserve; Type of bank: State-chartered banks in the
Federal Reserve System, bank holding companies, and international
banking facilities within the United States.
Source: FDIC, OTS, OCC, and the Federal Reserve.
[End of table]
As shown in table 4, FDIC serves as the federal regulator for over half
of minority banks--109 out of 195 banks, or 56 percent--and the Federal
Reserve regulates the fewest.[Footnote 13]
Table 4: Number of Minority Banks, by Regulator, 2005/2006:
Regulator: FDIC; Number of minority banks: 109; Percentage: 56.
Regulator: OCC; Number of minority banks: 43; Percentage: 22.
Regulator: OTS; Number of minority banks: 22; Percentage: 11.
Regulator: Federal Reserve; Number of minority banks: 21; Percentage:
11.
Regulator: Total; Number of minority banks: 195; Percentage: 100.
Source: GAO analysis of Treasury and the federal banking regulators'
data.
Note: Treasury and the banking regulators have different criteria for
the banks they consider to be eligible to participate in their minority
bank efforts (see app. II). In accordance with our request, in our
population of minority banks we included any bank considered by at
least one regulator to be eligible to participate in its efforts. There
are cases where minority banks not considered by their primary
regulator to be minority institutions were considered to be eligible
for participation in another regulator's efforts. Ten minority banks
regulated by FDIC were such cases, as were 4 Federal Reserve banks, 1
OTS bank, and 3 OCC banks.
[End of table]
The primary responsibilities of federal banking regulators include
helping to ensure the safe and sound practices and operations of the
institutions they oversee, the stability of financial markets, and
compliance with laws and regulations. To achieve these goals, among
other activities, the regulators conduct on-site examinations, issue
regulations, conduct investigations, and take enforcement actions.
Regulators may also close banks that are deemed to be insolvent and
pose risks to the Deposit Insurance Fund.[Footnote 14] FDIC is
responsible for ensuring that deposits in failed banks are protected up
to established federal deposit insurance limits.[Footnote 15]
Banking regulators primarily focus on ensuring the safety and soundness
of banks, but laws and regulatory policies can identify additional
goals and objectives. Recognizing the importance of minority banks,
under Section 308 of FIRREA, Congress outlined five broad goals that
FDIC and OTS, in consultation with Treasury, are to work toward to
preserve and promote minority banks. These goals are:
* preserving the present number of minority banks;
* preserving their minority character in cases involving mergers or
acquisitions of minority banks;
* providing technical assistance to prevent the insolvency of
institutions that are not currently insolvent;
* promoting and encouraging the creation of new minority banks; and:
* providing for training, technical assistance, and educational
programs.
Technical assistance is typically defined as one-on-one assistance that
a regulator may provide to a bank in response to a request. For
example, a regulator may advise a bank on compliance with a particular
statute or regulation. Regulators may also provide technical assistance
to banks that is related to deficiencies identified in safety and
soundness or compliance examinations. In contrast, educational programs
are typically open to all banks regulated by a particular agency or to
all banks located within a regulator's regional office. For example,
regulators may offer training for banks to review compliance with laws
and regulations.
Larger Minority Banks Showed Profitability Close to That of Their Peers
and Historical Benchmarks, but Many Small and African-American Banks
Have Been Less Profitable:
Most minority banks with assets exceeding $100 million were nearly as
profitable--measured by ROA--as their peers in 2005 as well as in
earlier years, or had levels of profitability that have historically
been considered adequate, according to our analysis of FDIC data.
However, small minority and African-American banks of all sizes (which
together account for about half of all minority institutions) have been
significantly less profitable than their industry peers. Our analysis
and other research has suggested some possible reasons for lower
profitability among some small minority banks and African-American
banks, such as higher reserves for potential loan losses and higher
operating expenses. The results of other studies we reviewed were
consistent with these findings, and minority banks that we spoke with
offered additional explanations, such as the effects of increased
competition from larger banks. However, overall officials from banks
across all minority groups were positive about the financial outlook of
their institutions. Many found their minority status to be an advantage
in serving their communities--for example, in communicating with
customers in their primary languages.
Small and African-American Banks' Profitability Was Lower than That of
Peers:
As shown in figure 1, most minority banks with assets exceeding $100
million had ROAs in 2005 that were close to those of their peer groups,
while many smaller banks had ROAs that were significantly lower than
that of their peers.[Footnote 16] Minority banks with more than $100
million in assets accounted for 58 percent of all minority banks, while
those with less than $100 million accounted for 42 percent.[Footnote
17] Each size category of minority banks with more than $100 million in
assets had a weighted average ROA that was slightly lower than that of
its peers, but in each case their ROAs exceeded 1 percent.[Footnote 18]
By historical banking industry standards, an ROA of 1 percent or more
has generally been considered an adequate level of profitability. We
found that of these larger minority banks, Hispanic-American, Asian-
American, Native American, and women-owned banks were close to, and in
some cases exceeded, the profitability of their peers in 2005.
Overall, small minority banks (those with assets of less than $100
million) had an average ROA of 0.4 percent, and their peers had an
average ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000
also indicated some similar patterns, with minority banks with assets
greater than $100 million showing levels of profitability that were
generally close to those of their peers, or ROAs of about 1 percent,
while minority banks with assets of less than $100 million showed
greater differences with their peers. Further, in 2000 the Chairman of
FDIC discussed the agency's finding that many small minority banks
lagged in profitability. According to FDIC's analysis, nearly 70
percent of small minority banks reported an ROA in 1999 of under 1
percent, and nearly 40 percent reported an ROA of less than half the
industry average.[Footnote 19]
Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005:
[See PDF for image]
Source: GAO:
[End of figure]
Among small minority banks, African-American, Asian-American, and
Hispanic-American banks had ROAs that were significantly lower than
those of their peers, while the ROAs of small Native American and
women-owned banks were closer to those of their peers (fig. 2). For
example, the ROA for small Asian-American banks in 2005 was 0.10
percent and Hispanic-American banks' ROA was 0.65 percent, compared
with their peers' ROA of 1 percent. Our analysis of FDIC data for 1995
and 2000 showed similar results, with small African-American, Asian-
American, and Hispanic-American banks in particular having
significantly lower ROAs than their peers.[Footnote 20]
Figure 2: Average ROA of Small Minority Banks, 2005:
[See PDF for image]
Source: GAO analysis of FDIC data:
[End of figure]
The profitability of African-American banks has generally been below
that of their peers in all size categories (fig. 3).[Footnote 21]
African-American banks with less than $100 million in assets--which
constitute 61 percent of all African-American banks--had an average ROA
of 0.16 percent, while their peers averaged 1.0 percent. Similarly,
African-American banks with assets of between $100 million and $300
million--which constituted 26 percent of all African-American banks--
had ROAs that were 75 percent lower than those of their peers. While
profitability improved among larger categories, the profitability of
African-American banks with assets of $300 million or more was lower
than that of their peers. Our analysis of FDIC data for 2000 and 1995
also found that African-American banks of all sizes had lower ROAs than
their peers. For example, in 2000 African-American banks with assets of
between $100 million and $300 million had an average ROA that was about
half of their peers' average of 1.2 percent.
Figure 3: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005:
[See PDF for image]
Source: GAO analysis of FDIC data:
[End of figure]
Higher Loan Loss Reserves, Operating Costs, and Increased Competition
May Help Explain Lower Profitability of Certain Minority Banks:
Our analysis of 2005 FDIC data suggests some possible reasons for the
differences in profitability between some minority banks and their
peers.[Footnote 22] For example, our analysis of 2005 FDIC data showed
that African-American banks with assets of less than $300 million--
which constitute 87 percent of all African-American banks--had
significantly higher loan loss reserves as a percentage of their total
assets than the average for their peers (fig. 4).[Footnote 23] Although
having higher loan loss reserves may be necessary for the safe and
sound operation of any particular bank, because loan loss reserves are
counted as expenses, higher reserves lower bank profits. Most Asian-
American, Hispanic-American, Native American, and women-owned banks had
loan loss reserves that were closer to the average for their peer group
in 2005.
Figure 4: Average Loan Loss Reserves as a Percentage of Assets for
African-American and Peer Banks, 2005:
[See PDF for image]
Source: GAO analysis of FDIC data:
[End of figure]
We also found some evidence that higher operating expenses may affect
the profitability of some minority banks. Operating expenses--
expenditures for items such as administrative expenses and salaries--
are typically compared to an institution's total earning assets, such
as loans and investments, to indicate the proportion of earning assets
banks spend on operating expenses. As figure 5 indicates, many minority
banks with less than $100 million in assets had higher operating
expenses than their peers in 2005. Specifically, the average ratio of
minority banks' operating expenses to earning assets was 4.88 percent,
compared with an average 3.86 percent for the peer group, or a
difference of 21 percent.
Figure 5: Average Operating Expenses Relative to Earning Assets of
Banks with Assets Less than $100 million, 2005:
[See PDF for image]
Source: GAO analysis of FDIC data.
[End of figure]
Small African-American and Asian-American banks had higher operating
expenses than their peers (41 and 20 percent higher, respectively),
while operating expenses for small Hispanic-American banks were closer
to their peers (7 percent higher). Data on the operating expenses of
small women-owned banks were lower than their peers, while Native
American banks had higher operating expenses, although, as we have
seen, both Native American and women-owed banks were the most
profitable of small minority banks. Because larger African-American
banks were relatively less profitable than their peers, we also
reviewed FDIC data on their operating expenses in 2005. The FDIC data
indicate that African-American banks with assets of between $100
million and $500 million had operating expense ratios that exceeded
those of their respective peer groups by 20 percent or more. Other
studies corroborated our findings that some minority banks operate in
more challenging markets and may face higher operating costs.[Footnote
24]
Officials from several minority banks we contacted also described
aspects of their operating environments and business practices,
including a focus on customer service that could result in higher
operating costs. In particular, the officials cited the costs
associated with providing banking services in low-income urban areas or
in communities with high immigrant populations. Bank officials also
told us that they focus on fostering strong customer relationships,
sometimes providing financial literacy services. Consequently, these
banks spend more time and resources on their customers per transaction
than other banks as part of their mission. Other minority bank
officials said that their customers made relatively small deposits and
preferred to do business in person at bank branch locations rather than
through potentially lower-cost alternatives, such as over the phone or
the Internet.
Along with these factors, minority bank officials we contacted cited
other factors that could limit their profitability. First, many
minority banks indicated competition from larger banks, credit unions,
and nonbanks as their institution's greatest challenge. In particular,
minority bank officials said that larger banks, in response to
Community Reinvestment Act (CRA) incentives, were increasingly posing
competitive challenges among the banks' traditional customer
base.[Footnote 25] The bank officials said that larger banks could
offer loans and other financial products at more competitive prices
because these banks could raise funds at lower rates and had
advantageous operational efficiencies. Second, some African-American,
Asian-American, and Hispanic-American banks cited attracting and
retaining quality staff as a challenge to profitability. Officials from
one Hispanic-American bank said that the difficulty of attracting
qualified new staff restricted the bank's growth. An Asian-American
banker said that many Asian-American banks tended to focus on the
Asian-American market, potentially limiting the pool of qualified
applicants.
Despite these challenges, officials from banks across minority groups
were optimistic about the financial outlook for their institutions.
When asked in our survey to rate their financial outlook compared to
those of the past 3 to 5 years, 65 percent said it would be much or
slightly better; 21 percent thought it would be about the same, and 11
percent thought it would be slightly or much worse, while 3 percent did
not know. Officials from minority banks said that their institutions
had advantages in serving minority communities. For example, officials
from an Asian-American bank said that the staff's ability to
communicate in customers' primary language provided a competitive
advantage.
Regulators Adopted Differing Approaches to Supporting Minority Banks,
but Assessment Efforts Were Limited:
FDIC has established the most comprehensive efforts among the bank
regulators to support minority banks and also leads interagency efforts
to coordinate agencies' activities. OTS also has developed several
specific initiatives to support minority banks. While not required to
do so by Section 308 of FIRREA, OCC and the Federal Reserve have taken
some steps to support minority banks, such as holding occasional
conferences for Native American banks, and are planning additional
efforts. Treasury, which FIRREA stipulates is to consult with FDIC and
OTS on preserving minority banks, no longer does so on a routine basis,
but Treasury officials told us that the agency does confer with the
banking agencies on an as-needed basis. Although recently FDIC has
proactively sought to assess the effectiveness of its efforts to
support minority banks, none of the regulators routinely survey
institutions they regulate to obtain comprehensive performance
information on their minority bank efforts, nor have they established
outcome-oriented performance measures to gauge results in relation to
pre-established targets. As a result, the regulators are not well
positioned to assess the results of their efforts to support minority
banks or identify potential areas for improvement.
FDIC Has the Most Comprehensive Minority Banking Support Efforts:
Of the four banking regulators, FDIC--which supervises 109 of 195
minority banks--has developed the most extensive efforts to support
such institutions (fig. 6). FDIC also has taken the lead in
coordinating regulators' efforts in support of minority banks,
including leading a group of all the banking regulators that meets
semiannually to discuss individual agency initiatives, training and
outreach events, and each agency's list of minority banks. FDIC and OTS
have established national and regional coordinators to implement their
policies to support minority banks and provide routine technical and
other outreach procedures for the institutions that they regulate. OCC
officials we contacted said that they believed that minority banks
could play an important role in providing financial services to
minorities and other groups, and Federal Reserve officials told us that
they adhered to the spirit of Section 308 of FIRREA. While neither
agency has developed support efforts designed specifically for all the
minority institutions that they regulate, both agencies provide
technical assistance and educational services to minority banks upon
request, as they do for all of their supervised banks, and have
undertaken efforts in support of some types of minority banks. Both
agencies also told us that they were planning additional efforts to
support minority institutions.
Figure 6: Banking Regulators' Efforts to Support Minority Banks:
[See PDF for image]
Source: GAO:
[A] FDIC holds conferences for all minority banks on a regular basis.
OTS, OCC, and the Federal Reserve have hosted occasional events for
some groups of minority banks.
[End of figure]
The following briefly describes the regulators' minority bank support
programs, as listed in figure 6.
Policy Statements:
FDIC, OTS, and OCC all have policy statements that outline the
agencies' efforts with respect to minority banks. The policy statements
discuss how the regulators identify minority banks, participate in
minority bank events, provide technical assistance, and work toward
preserving the character of minority banks during the resolution
process. OCC officials told us that they developed their policy
statement in 2001 after an interagency meeting of the federal banking
regulators on minority bank issues. Both FDIC and OTS issued policy
statements in 2002.
Staffing Structure:
FDIC has a national coordinator in Washington, D.C., and coordinators
in each regional office from its Division of Supervision and Consumer
Protection to implement the agency's minority bank program. Among other
responsibilities, the national coordinator regularly contacts minority
bank trade associations about participation in events and other issues,
coordinates with other agencies, maintains FDIC's list of all insured
banks that are considered to be minority under the agency's definition,
and compiles quarterly reports for the FDIC chairman based on regional
coordinators' reports on their minority bank activities. Similarly, OTS
has a national coordinator in its headquarters and supervisory and
community affairs staff in each region who maintain contact with the
minority banks that OTS regulates. The national coordinator
participates in the interagency coordination meetings with the other
banking regulators and works with the regional community affairs staff
to compile the agency's annual report to Congress on minority bank
issues. OCC and the Federal Reserve do not have similar structures in
place. However, OCC does have an agency ombudsman who maintains contact
with minority banks and a senior adviser for external outreach and
minority affairs who participates in the interagency coordination
meetings. Officials from the Federal Reserve--which directly supervises
the fewest number of minority banks--told us that Federal Reserve staff
at the district level maintain frequent contact with minority banks
under their purview and Federal Reserve staff participate in
interagency coordination meetings.
Web Pages:
FDIC has a public Web page dedicated specifically to minority banking
issues that includes FDIC's list of all minority banks, staff contacts,
links to trade associations and other relevant sites, and a link to
provide feedback on FDIC's minority banking efforts. FDIC officials
told us that the feedback link has been on their Web page since 2002
but that the agency rarely receives feedback from minority banks. FDIC
is planning to improve its Web page by adding a link to FDIC's home
page and additional resources, including research highlighting issues
relevant to minority banks.
OCC also has a Web page that contains some information on minority bank
issues. The Web site containing this page, BankNet, is available to
registered national banks. OCC's Web site is not as extensive as FDIC's
but does contain a list of minority banks that OCC regulates, links to
OCC's minority bank policy statement, and a comparative analysis tool
to compare the financial performance of minority banks with that of
their peers.
Minority Bank Events and Training:
FDIC has taken the lead role in sponsoring, hosting, and coordinating
with the other regulators events in support of minority banks. These
events have included:
* A national conference in 2001, which was attended by about 70
minority banks supervised by different banking regulators and in which
all four banking regulators participated. Participants discussed
challenges, shared best practices, and evaluated possible actions
regulators could take to preserve minority banks.
* In August 2006, FDIC sponsored a national conference for minority
banks in which representatives from OTS, OCC, and the Federal Reserve
participated.
* Regional forums and conferences, which were organized after 2002 to
follow up on the national conference and implement initiatives set
forth in FDIC's 2002 policy statement. FDIC officials told us that
these events are held annually by each of their regional offices. The
content of these events has varied among regions, but has included
issues relating to safety and soundness and compliance examinations,
community affairs, deposit insurance, and FDIC's minority banking
program. Representatives from other banking agencies have participated
in these events.
* The Minority Bankers Roundtable (MBR) series, which FDIC officials
told us was designed to provide insight into the regulatory
relationship between minority banks and FDIC and explore opportunities
for partnerships between FDIC and these banks. In 2005, FDIC held six
roundtables around the country for minority banks supervised by all of
the regulators.
Other regulators have also held events in support of minority banks.
For example:
* In May 2006, the Director, Deputy Director, and the Northeast
Regional Director of OTS held a meeting in New York in which all of the
OTS-regulated minority banks in the region participated. The issues
discussed included ways to strengthen community development and
investment activities and partnerships with community-based
organizations, and other issues of concern.
* In 2002, OCC held a forum with the North American Native Bankers
Associations and a Native American bank and have created publications
on banking in Native American communities. In February 2006, OCC held
an event for several chief executive officers from African-American
national banks to meet with OCC's Executive Committee and the
Comptroller of the Currency to discuss the challenges these banks
faced.
* Federal Reserve banks have hosted workshops and other events for
Native American banks, as well as produced publications on Native
American banking.
Outside of the customary training and educational programs that
regulators make available to all banks, FDIC is the only regulator to
convene training sessions only for minority banks (including minority
banks not regulated by FDIC) that the banks may attend free of charge.
FDIC officials told us that the agency's regional offices have held
several such training sessions on an as-needed basis or when suggested
at minority bank events. For example, FDIC's Dallas regional office has
conducted 1-day seminars in 2004 and 2005 specifically for minority
banks that included presentations on compliance, the Bank Secrecy Act
and anti-money-laundering issues, and economic and banking conditions.
Technical Assistance and Other Outreach Procedures:
All of the federal banking regulators told us that they provided their
minority banks with technical assistance if requested, but only FDIC
and OTS have specific procedures for offering this assistance. More
specifically, FDIC and OTS officials told us that they proactively seek
to make minority banks aware of such assistance through established
outreach procedures outside of their customary examination and
supervision processes. FDIC also has a policy that requires its
regional coordinators to ensure that examination case managers contact
minority banks 90 to 120 days after an examination to offer technical
assistance in any problem areas that were identified during the
examination. This policy is unique to minority banks. As part of their
quarterly reports to headquarters, FDIC regional coordinators report on
how many offers of technical assistance they have made to minority
banks and how many banks requested the assistance. More generally, FDIC
staff contact the minority banks they supervise at least once a year to
offer to have a member of regional management meet with banks' board of
directors and to familiarize the institutions with FDIC's initiatives.
OTS officials told us that technical assistance is the focus of their
minority banks efforts. According to the agency's policy statement, OTS
monitors the financial condition of minority banks to identify those
that might benefit from a program of increased support and technical
assistance. OTS regional staff contact minority banks they supervise
annually to make them aware of their minority bank efforts and to offer
to meet with the banks' boards of directors to discuss issues of
interest and types of assistance OTS can provide.
Additionally, FDIC and OTS officials told us that they have taken
proactive steps to assist individuals or groups that have filed
applications for deposit insurance or to acquire a national thrift
charter. FDIC officials said that they had developed a package of
assistance to help smaller institutions, including many minority banks,
overcome challenges associated with the FDIC insurance application
process. OTS officials said that they had provided substantial
assistance to a minority group that filed to acquire a national thrift
charter and had extended established application deadlines to assist
the group. FDIC officials said that the agency interprets FIRREA's
general goal to "promote and preserve" minority banks as a charge to
support those minority banks already in existence or those that have
filed deposit insurance applications rather than as a charge to
actively seek out minority groups or individuals to form new banks.
FDIC officials explained that the agency was an insurer, not a
chartering authority, and that it would probably be inappropriate to
encourage potential applicants to choose one banking charter over
another. OTS officials told us that the agency currently does not
promote the thrift charter to any groups but is considering the extent
to which it might do so in the future.
OCC and the Federal Reserve provide technical assistance to all of
their banks, but they currently have not established outreach
procedures for all their minority banks outside of the customary
examination and supervision processes. However, OCC officials told us
that the agency would be designing an outreach plan for all of OCC's
minority banks this fiscal year. Federal Reserve officials told us that
Federal Reserve districts conduct informal outreach to their minority
banks and consult with other districts on minority bank issues as
needed. The officials said that four reserve banks had begun a pilot
outreach program specifically tailored to minority banks that would
include technical assistance, training, advisory visits, and ongoing
analysis. Staff are in the process of conducting interviews with
minority banks to obtain input on their draft program.
OCC and Federal Reserve officials told us that, like FDIC and OTS,
their agencies also provided assistance to minority groups during the
application process and that they put forth extra effort in certain
cases. For example, Federal Reserve officials told us that they had
recently assisted 15 sovereign tribal nations in establishing a Native
American bank. And like FDIC and OTS, neither OCC nor the Federal
Reserve seeks out individuals to form either minority or nonminority
banks. OCC agency officials said it would not be appropriate for their
agency to do so, and Federal Reserve officials told us that it was not
within their jurisdiction to do so, as they did not have authority to
charter banks. The Federal Reserve, however, has conducted activities
such as providing information to Native American, Muslim, and Asian-
American communities on entering the banking business.
Policies to Preserve the Minority Character of Troubled Banks:
FDIC has developed policies for failing banks that are consistent with
FIRREA's requirement that the agency work to preserve the minority
character of minority banks in cases of mergers and acquisitions. For
example, FDIC maintains a list of qualified minority banks or minority
investors that may be invited to bid on the assets of troubled minority
banks that are expected to fail. Officials from several minority banks
we contacted said that FDIC had invited them to bid on failing minority
banks. However, as we pointed out in our 1993 report, FDIC is required
to accept the bids on failing banks that pose the lowest expected cost
to the Deposit Insurance Fund.[Footnote 26] As a result, all bidders,
including minorities, are subject to competition. FDIC provided us with
a list of minority banks that had failed from 1990 to 2005. Of the 20
minority banks that failed during this period, 12 were acquired by
nonminority banks and 5 by minority banks, while 3 were resolved
through deposit payoffs. According to FDIC, the most recent failures of
minority banks were two institutions in 2002, neither of which retained
its minority status.
OTS and OCC's policy statements on minority banks describe how the
agencies are to work with FDIC to identify qualified minority banks or
minority investors to acquire minority banks that are failing. Federal
Reserve officials told us that they do not have a similar written
policy, given the small number of minority banks the agency supervises.
However, agency officials said that they work with FDIC to identify
qualified minority banks or investors to acquire failing minority
banks.
Officials from the four banking agencies said that they also tried to
assist troubled minority banks to help improve their financial
condition before a bank deteriorated to the point at which a resolution
through FDIC was necessary. For example, officials from OCC, Federal
Reserve, and OTS said that they provided technical assistance to such
institutions or tried to identify other minority banks or investors
that might be willing to acquire or merge with them.
Treasury No Longer Regularly Consults with Regulators on Minority Bank
Issues but Does Consult on an As-Needed Basis:
Section 308 of FIRREA required the Secretary of the Treasury to consult
with FDIC and OTS to determine the best methods for meeting FIRREA's
goals in support of minority banks. In 1993, we reported that Treasury
initially convened interagency meetings to facilitate communication
among the federal banking regulators on minority banking issues.
Treasury convened four such meetings between 1990 and 1993 at which
regulators exchanged ideas, discussed policies regarding minority
banks, and worked to coordinate their efforts. However, during our work
for this report, Treasury officials said that the department no longer
convened or participated regularly in interagency discussions on
minority banking issues, although it still consulted with the federal
banking regulators as issues arose. Treasury officials explained that
while the nature of the FIRREA consulting requirement could be open to
some interpretation, given that Treasury had discontinued formal
consultations in 1993, the general view within the department is that
ongoing consultations were not required. Further, Treasury officials
said the department's authority to assist the banking regulators in
preserving the minority character of failing minority banks was limited
by federal legislation that prohibits the Secretary of the Treasury
from intervening in matters or proceedings that are before the Director
of OTS or the Comptroller of the Currency, unless otherwise
specifically provided by law.[Footnote 27] According to these
officials, Section 308 of FIRREA does not override this prohibition,
which is also consistent with Treasury's policy not to intervene in
case-specific matters before the banking agencies.
Regulators Do Not Assess Efforts through Comprehensive Surveys or
Outcome-Oriented Performance Measures:
While FDIC has recently been proactive in assessing its support efforts
for minority banks, none of the regulators have routinely and
comprehensively surveyed their minority banks on all issues affecting
the institutions, nor have the regulators established outcome-oriented
performance measures. Evaluating the effectiveness of federal programs
is vitally important in order to manage programs successfully and
improve program results. To this end, in 1993 Congress enacted the
Government Performance and Results Act, which instituted a
governmentwide requirement that agencies report on their results in
achieving their agency and program goals.[Footnote 28] Agencies can
evaluate the effectiveness of their efforts by establishing performance
measures or through program evaluation.[Footnote 29] Performance
measures are established in order to assess whether a program has
achieved its objectives and are expressed as measurable, quantifiable
indicators. Outcome-oriented performance measures assess a program
activity by comparing it to its intended purpose or targets.[Footnote
30] Program evaluations are systematic studies that are conducted
periodically to assess how well a program is working. In our 1993
report, we recommended that FDIC and OTS periodically survey minority
banks that they regulate to help assess their support efforts. Surveys
are an instrument by which agencies may assess their efforts and obtain
feedback from the recipients of their efforts on areas for improvement.
As part of its assessment methods, FDIC has recently conducted
roundtables and surveyed minority banks on aspects of its minority bank
efforts, as follows:
* In 2004, in response to an FDIC Corporate Performance Objective to
enhance minority bank outreach efforts, FDIC completed a review of its
minority bank outreach program that included a survey of 20 minority
banks from different regulators. Seven banks responded. On the basis of
the 2004 review, FDIC established the MBR program to gain insights into
issues affecting minority banks and obtain feedback on its efforts.
* In 2005, FDIC requested feedback on its minority bank efforts from
institutions that attended the agency's six MBRs (which approximately
one-third of minority banks attended). The agency also sent a survey
letter to all minority banks to seek their feedback on several
proposals to better serve such institutions, but only 24 minority banks
responded. The proposals included holding another national minority
bank conference, instituting a partnership program with universities,
and developing a minority bank museum exhibition.[Footnote 31] FDIC
officials said that they used the information gathered from the MBRs
and the survey to develop recommendations for improving programs and
developing new initiatives.
According to FDIC officials, these recommendations, which have been
approved and are expected to be implemented by the end of 2006,
include:
* enhancing the agency's minority bank Web page by (1) adding a link to
FDIC's home page, (2) including a calendar of minority bank events, and
(3) adding more resource links, such as links to research highlighting
issues relevant to minority banks;
* hosting another national conference for minority banks--the
conference was held in August 2006;
* continuing the MBR series and hosting six more roundtables in 2006;
and:
* instituting the University Partnership Program, through which FDIC
and minority bank staff would advise and lecture at universities that
have an emphasis on minority student enrollment. The goals of the
program include enhancing recruiting efforts for minority banks and
FDIC and increasing students' knowledge base of banking in general and
minority banks in particular.
While recently FDIC has taken steps to assess the effectiveness of its
minority bank support efforts, we identified some limitations in the
agency's approach. For example, in its surveys of minority banks, the
agency did not solicit feedback on key aspects of its support efforts,
such as the provision of technical assistance. Moreover, FDIC has not
established outcome-oriented performance measures to gauge the
effectiveness of its various support efforts. As discussed previously,
in its quarterly reports FDIC has provided output measures that track
the number of technical assistance offers it makes to minority banks
and the number of banks making use of the assistance. FDIC also
requires regional case managers to follow up with minority banks 90 to
120 days after examinations to offer technical assistance to address
deficiencies that have been identified in examinations. However, FDIC
does not report agencywide on the extent to which minority banks are
able to resolve any deficiencies found during the examination process.
FDIC officials told us while the agency has not conducted surveys
regarding technical assistance or developed related performance
measures, technical issues may be resolved during the course of the
examination process. Further, FDIC officials said that throughout the
examination process and through other agency contacts, minority banks
may informally provide feedback on the effectiveness of any assistance
provided. However, without surveys or agencywide outcome-oriented
performance measures, FDIC management may lack comprehensive and
reliable information necessary to help ensure that agency staff provide
effective technical assistance to minority banks to help them resolve
problems identified in examinations or through other means. Further,
the public and stakeholders, such as Congress, may not be informed as
to the effectiveness of the agency's technical assistance, as well as
other efforts in support of minority banks.
In 1994-1995, OTS interviewed the 40 minority banks that it regulated
to obtain their views on the agency's support efforts. The interviews
covered topics such as the banks' overall impressions of the agency's
efforts, technical assistance, and application issues and asked for
suggestions for improving OTS's efforts to support minority banks.
However, OTS has not conducted a similar effort since that time. OTS
officials told us that in 2003 and 2004 the agency conducted surveys of
all OTS-regulated institutions and that a 2006 survey is in process.
Because of restrictions imposed by the Office of Management and Budget
on the amount of information that can be collected from institutions,
OTS officials told us that they surveyed all of their banks at the same
time. The surveys solicited feedback on OTS's examination process and
provided opportunities for banks to make suggestions for improving
OTS's operations. While OTS officials stated that the results from
these surveys could be sorted by minority status, and has plans to do
so and use the information for program enhancement, such analysis has
not been conducted.
As required under Section 3 of FIRREA, OTS provides annual reports to
Congress that, among other things, track technical assistance offers
made to minority banks. But OTS has also not established quantifiable
outcome-oriented measures to gauge the quality and effectiveness of
technical assistance.
OCC and Federal Reserve officials told us that they had not surveyed
the minority banks that they regulated to assess the effectiveness of
their support efforts, and neither agency has established performance
measures related to minority banking efforts. OCC officials explained
that the agency did not survey minority banks because it did not treat
these banks any differently from other banks. However, as described
earlier, OCC has a written policy statement for minority banks,
information on a Web page for such institutions, and has held events on
Native American banking. OCC officials also told us that they recently
convened a forum for African-American bankers and were in the process
of developing an outreach program specifically for its minority banks.
By not periodically surveying and obtaining comprehensive feedback from
a substantial number of minority banks or through developing outcome-
oriented performance measures for various support efforts (such as
technical assistance), the regulators are not well positioned to assess
their support efforts or identify areas for improvement. Further, the
regulators cannot take corrective action as necessary to provide better
support efforts to minority banks.
Survey of Minority Banks Identified Potential Limitations in
Regulators' Support Efforts and Other Regulatory Issues:
Minority bank survey respondents identified potential limitations in
the regulators' efforts to support them and related regulatory issues,
such as examiners' understanding of issues affecting minority banks,
which would likely be of significance to agency managers and warrant
follow-up analysis. Minority banks regulated by FDIC were generally
more positive about the agency's efforts than other banks were about
their regulators' efforts. Still, only about half of FDIC-regulated
banks gave their regulator very good or good marks, whereas about a
quarter of banks regulated by other agencies gave the same ratings.
Although some regulators emphasized technical assistance as a key
component of their efforts to support minority banks, relatively few
institutions used such assistance. Further, in our interviews and open-
ended survey responses, banks reported some specific concerns about
regulatory issues related to their minority status. In particular,
survey respondents were concerned that (1) examiners, as was also noted
in our 1993 report, did not always understand their operating
environment or the challenges that minority banks faced in their
communities and might need more training on the topic, and (2) a
provision of CRA designed to facilitate relationships between minority
banks and other banks has not produced the desired results.
About a Third of Survey Respondents Viewed Regulators' Minority Bank
Support Efforts as Very Good or Good, and Technical Assistance Usage
Appeared Low:
When minority bankers were asked to rate regulators' overall efforts to
support minority banks, responses varied. Some 36 percent of survey
respondents described the efforts as very good or good, 26 percent
described them as fair, and 13 percent described the efforts as poor or
very poor (fig. 7). A relatively large percentage--25 percent--
responded "don't know" to this question. Banks' responses varied by
regulator, with 45 percent of banks regulated by FDIC giving very good
or good responses, compared with about a quarter of banks regulated by
other agencies.[Footnote 32] However, more than half of FDIC-regulated
banks and about three-quarters of the other minority banks responded
that their regulator's efforts were fair, poor, or very poor or
responded with a "don't know." In particular, banks regulated by OTS
gave the highest percentage of poor or very poor marks, while banks
regulated by the Federal Reserve most often provided fair
marks.[Footnote 33]
Figure 7: Minority Banks' Ratings of Support Efforts, by Regulator:
[See PDF for image]
Source: GAO:
[End of figure]
Nearly half of minority banks reported that they attended FDIC
roundtables and conferences designed for minority banks, and about half
of the 65 respondents that attended these events found them to be
extremely or very useful (fig. 8). Almost a third found them to be
moderately useful, and 17 percent found them to be slightly or not at
all useful. One participant commented, "The information provided was
useful, as was the opportunity to meet the regulators." Many banks also
commented that the events provided a good opportunity to network and
share ideas with other minority banks.
Figure 8: Usefulness of FDIC's Roundtables and Conferences, by
Regulator:
[See PDF for image]
Source: GAO:
[End of figure]
We noted that minority banks frequently reported participating in
training and education events and that they found these events
extremely or very useful, even though most of these programs were not
designed specifically for minority banks. About 58 percent reported
participating in their regulator's training and education activities--
a higher percentage than had participated in FDIC roundtables and
conferences. Of this group, 76 percent found training and education to
be extremely or very useful, 15 found it to be moderately useful, 6
percent found it to be slightly useful, and 3 percent did not know.
While FDIC and OTS emphasized technical services as key components of
their efforts to support minority banks, less than 30 percent of the
institutions they regulate reported using such assistance within the
last 3 years in our survey (fig. 9). Minority banks regulated by OCC
and the Federal Reserve reported similarly low usage of the agencies'
technical assistance services. However, of the few banks that used
technical assistance--41--the majority rated the assistance provided as
extremely or very useful.[Footnote 34] Further, although small minority
banks and African-American banks of all sizes have consistently faced
financial challenges and may benefit from certain types of assistance,
these banks also reported low rates of usage of the agencies' technical
assistance. In addition, both regulators and minority banks explained
that minority banks often have difficulty attracting and retaining
qualified staff, and given this fact, technical assistance could be
particularly important in providing these banks with guidance tailored
to their staff's specific needs. While our survey did not address the
reasons that relatively few minority banks appear to use the agencies'
technical assistance and banking regulators cannot compel banks under
their supervision to make use of offered technical assistance, the
potential exists that many such institutions may be missing
opportunities to learn how to correct problems that limit their
operational and financial performance.
Figure 9: Minority Banks' Use of Technical Assistance, by Regulator:
[See PDF for image]
Source: GAO:
[End of figure]
Survey Respondents Expressed Concerns about the Examination Process and
a Provision of CRA Designed to Assist Minority Banks:
Over 80 percent of the minority banks we surveyed responded that their
regulators did a very good or good job of administering examinations,
and almost 90 percent felt that they had very good or good
relationships with their regulator. However, as in our 1993 report,
some minority bank officials said in both survey responses and
interviews that examiners did not always understand the challenges the
banks faced in providing services in their particular communities.
Twenty-one percent of survey responses mentioned this issue when asked
for suggestions about how regulators could improve their efforts to
support minority banks, and several minority banks we spoke with in
interviews elaborated on this topic.
The bank officials said that examiners tended to treat minority banks
like any other bank when they conducted examinations and thought such
comparisons were not appropriate. For example, some bank officials
whose institutions serve immigrant communities said that their
customers tended to do business in cash and carried a significant
amount of cash because banking services were not widely available or
trusted in the customers' home countries. Bank officials said that
examiners sometimes commented negatively on the practice of customers
doing business in cash or placed the bank under increased scrutiny with
respect to the Bank Secrecy Act's requirements for cash
transactions.[Footnote 35] While the bank officials said that they did
not expect preferential treatment in the examination process, several
suggested that examiners undergo additional training so that they could
better understand minority banks and the communities that these
institutions served. FDIC has conducted such training for its
examiners. In 2004, FDIC invited the president of a minority bank to
speak to about 500 FDIC examiners on the uniqueness of minority banks
and the examination process. FDIC officials later reported that the
examiners found the discussion helpful. According to a Federal Reserve
official, the organization is developing guidance to better educate
examination staff about the various types of minority institutions and
minority communities. Also, according to an OCC official, OCC has an
initiative under consideration to provide training for its examiners on
minority bank issues.
Many survey respondents also said that a provision in the Community
Reinvestment Act (CRA) that was designed to assist their institutions
was not effectively achieving this goal. CRA requires bank regulators
to encourage institutions to help meet credit needs in all areas of the
communities they served. The act includes a provision allowing
regulators conducting a CRA examination to give consideration to banks
that assist minority banks through capital investment, loan
participations, and other ventures that help meet the credit needs of
local communities. Despite this provision, only about 18 percent of
survey respondents said that CRA had--to a very great or great extent-
-encouraged other institutions to invest in or form partnerships with
their institutions, while more than half said that CRA encouraged such
activities to some, little, or no extent (fig. 10). Some minority bank
officials said that current interagency guidance on the provision
granting consideration for investments in minority banks should be
clarified to assure banks that they will receive CRA consideration for
such investments. Some minority banks believe that CRA does not provide
incentives for nonminority banks to make investments in minority banks
that operate in other parts of the country. A minority bank official
said that the CRA provision does not clearly state that a bank making
an investment in a minority bank that is outside of its CRA assessment
area will receive consideration for such investments in its CRA
compliance examinations. However, officials from each of the four
regulators said that they had interpreted the provision in CRA as
allowing consideration for such out-of-area investments in minority
banks. OCC recently published guidance clarifying this issue, and FDIC
officials said that the agencies would clarify the guidance provided to
all CRA examiners across agencies on such investments.
Figure 10: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions:
[See PDF for image]
Source: GAO:
[End of figure]
This report does not contain all results from the survey. The survey
and a more complete tabulation of the results can be viewed at GAO-07-
7SP.
Conclusions:
Federal banking regulators have adopted differing approaches to support
minority banks but generally have not assessed their efforts using
regular and comprehensive surveys of minority banks or outcome-oriented
performance measures. FDIC, which along with OTS is required by FIRREA
to help preserve and promote minority banks, has established the most
comprehensive support efforts and has taken the lead on interagency
initiatives. In this regard, FDIC appears to be serving a coordination
and facilitation role for the banking agencies' efforts. OTS has also
taken several steps to support minority banks, while OCC and the
Federal Reserve, which are not subject to Section 308 of FIRREA, have,
on their own initiative, taken some steps to support such institutions.
Further, officials from OCC and the Federal Reserve, which collectively
supervise about one-third of minority banks, stated that they recognize
the importance of minority banks and are planning additional efforts to
support them. While these efforts may help ensure that more minority
banks receive support, it is important that when managing both existing
and new programs, regulators assess their effectiveness. While FDIC has
recently sought to evaluate its efforts through conducting surveys,
these surveys have not addressed all key activities (including the
provision of technical assistance), and the agency has not established
outcome-oriented performance measures. None of the other agencies
regularly or comprehensively surveys minority banks regarding its
support efforts or has developed outcome-oriented performance measures.
Consequently, the regulators are not well positioned to identify issues
of concern to minority banks or to take corrective actions to improve
their support efforts.
Our work identified potential limitations in the regulators' support
efforts and related activities that would likely be of significance to
agency managers and potentially warrant follow-up analysis and the
initiation of corrective actions as necessary. For example, only about
half of minority banks regulated by FDIC and only about a quarter
regulated by the other agencies view their regulator's support efforts
as very good or good. We also found that some issues identified in our
1993 report may still be potential limitations to the regulators'
efforts. First, although regulators emphasize the provision of
technical assistance services to minority banks, less than 30 percent
of such banks have recently used such services. Small banks and
African-American banks, which have struggled financially over the years
and potentially stand to benefit most from additional technical
assistance, are no more likely than other minority banks to use such
assistance. While there may be a variety of reasons that minority banks
do not take advantage of the regulators' technical assistance services
and regulators cannot compel banks to use this assistance, without
soliciting further feedback from these banks, the regulators cannot
identify these reasons, determine whether more banks would benefit from
such assistance, or obtain suggestions for improvement. Second, both
our 1993 report and our current analysis found that some minority banks
believe that regulators have not ensured that examiners fully
understand the challenges that such institutions often face in, for
example, providing financial services in areas with high concentrations
of poverty or to immigrant communities. Again, without further analysis
and soliciting feedback from banks, regulators cannot identify possible
areas where they can provide additional assistance or take corrective
action. By establishing outcome-oriented performance measures to
determine the extent to which they are achieving program goals,
regulators could then measure the progress of their efforts and any
results. Using existing interagency forums for coordination to assess
minority bank support efforts and related regulatory activities could
help ensure that all minority banks have access to the same
opportunities while minimizing burdens on the regulators themselves.
Recommendation for Executive Action:
We recommend that the Chairman of the FDIC, the Director of OTS, the
Comptroller of the Currency, and the Chairman of the Federal Reserve
regularly review the effectiveness of their minority bank support
efforts and related regulatory activities and, as appropriate, assess
the need to make changes necessary to better serve such institutions.
In conducting such reviews, the regulators should consider:
* conducting periodic surveys of such institutions to determine how
they view regulators' minority support efforts and related activities,
and/or:
* developing outcome-oriented performance measures to assess the
progress of their efforts in relation to program goals.
As part of these regular program assessments, the regulators may wish
to focus on such areas as minority banks' overall views on support
efforts, the usage and effectiveness of technical assistance services
(particularly technical assistance provided to small minority banks and
African-American banks), and the level of training provided to agency
examiners regarding minority banks and their operating environments.
Regulators may also wish to utilize existing interagency coordination
processes in implementing this recommendation to help ensure consistent
efforts and minimize burdens on agency staff.
Agency Comments and Our Evaluation:
We provided a draft of this report to FDIC, OTS, OCC, and the Federal
Reserve for comment, and they provided written comments that are
reprinted in appendixes IV-VII. In their responses, the agencies
further elaborated on their efforts to support minority banks and
described planned initiatives. Further, FDIC, OTS, and OCC agreed to
implement our recommendation, while the Federal Reserve commented that
it would consider implementing the recommendation. The agencies also
provided technical comments, which we have incorporated as appropriate.
We also requested comments from the Department of the Treasury on the
section of the draft report relevant to their activities under Section
308 of FIRREA. Treasury provided us with technical comments, which we
have incorporated as appropriate.
We will provide copies to Chairman of the FDIC, the Director of OTS,
the Comptroller of the Currency, the Chairman of the Federal Reserve,
and the Secretary of the Department of the Treasury, and other
interested congressional committees. We will also make copies available
to others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or scottg@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report at listed in appendix VIII.
[Signed by]
George A. Scott:
Acting Director, Financial Markets and Community
Investment:
List of Requesters:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
The Honorable Gary Ackerman:
House of Representatives:
The Honorable Joe Baca:
House of Representatives:
The Honorable Michael E. Capuano:
House of Representatives:
The Honorable Julia Carson:
House of Representatives:
The Honorable Wm. Lacy Clay:
House of Representatives:
The Honorable Emanuel Cleaver:
House of Representatives:
The Honorable Joseph Crowley:
House of Representatives:
The Honorable Artur Davis:
House of Representatives:
The Honorable Harold E. Ford, Jr.:
House of Representatives:
The Honorable Al Green:
House of Representatives:
The Honorable Luis V. Gutierrez:
House of Representatives:
The Honorable Ruben Hinojosa:
House of Representatives:
The Honorable Darlene Hooley:
House of Representatives:
The Honorable Steve Israel:
House of Representatives:
The Honorable Paul E. Kanjorski:
House of Representatives:
The Honorable Barbara Lee:
House of Representatives:
The Honorable Stephen F. Lynch:
House of Representatives:
The Honorable Carolyn B. Maloney:
House of Representatives:
The Honorable Carolyn McCarthy:
House of Representatives:
The Honorable Gregory W. Meeks:
House of Representatives:
The Honorable Brad Miller:
House of Representatives:
The Honorable Dennis Moore:
House of Representatives:
The Honorable Gwen Moore:
House of Representatives:
The Honorable Bernard Sanders:
House of Representatives:
The Honorable Debbie Wasserman Schultz:
House of Representatives:
The Honorable David Scott:
House of Representatives:
The Honorable Melvin L. Watt:
House of Representatives:
The Honorable Maxine Waters:
House of Representatives:
[End of section]
Appendix I Objectives, Scope, and Methodology:
The objectives of this report were to (1) review the profitability of
minority banks over time, (2) identify the federal banking regulators'
efforts to support minority banks and determine whether the regulators
were evaluating the effectiveness of these efforts, and (3) obtain the
views of minority banks on the federal regulators' minority banking
support efforts and related regulatory issues.
To review the profitability of minority banks, in addition to
undertaking a literature review, we analyzed financial data provided by
the Federal Deposit Insurance Corporation (FDIC) for year end 2005,
2000, and 1995. Each bank is required to file consolidated Reports of
Condition and Income (Call Report) data, and each thrift institution is
required to file Thrift Financial Reports (Thrift Report) quarterly. We
obtained Call and Thrift Report data from FDIC listing each minority
bank's financial characteristics (such as return on assets, net income,
and loan loss provisions), along with summary statistics for peer
groups. Peer groups were formed by FDIC based on standard asset sizes
used in FDIC reports (less than $100 million, $100 million-$300
million, $300 million-$500 million, $500 million-$1 billion, $1billion-
$10 billion, greater than $10 billion). The peer groups include
minority and nonminority institutions.
Using these data, we classified the minority banks by asset size and
minority status. To classify the banks by minority status, we used the
regulators' designations and confirmed these classifications with a
bank's survey response (if the banks responded to our survey). FDIC
provided summary statistics for peer groups based on asset size. The
peer groups included all banks of a given asset size, including
minority banks. We did not attempt to remove minority banks from the
peer group to simplify the analysis because minority banks are so few,
it is unlikely that their inclusion in the peer group would change
composite statistics for any peer group. We analyzed the profitability
characteristics of each group and compared the summary statistics to
the comparable statistics generated by FDIC for relevant peer groups.
Because information on minority banks was not available for both 2000
and 1995 from all federal banking regulators, for these periods we
analyzed data only for those minority banks that were still operating
as minority banks in 2005. On the basis of the regulators' lists, we
were aware that not all of the banks were operating in 2005 were
operating in previous years. In 2000, 181 of these banks were
operating, and 152 were operating in 1995. Minority banks that failed
or merged with other institutions between 1995 and 2005 are not
included in the analysis for those years. In addition, we did not
obtain data on the minority status of banks operating in 1995 and 2000
and were unable to confirm that all 2005 minority banks were operating
as minority banks in 1995 and 2000, although the change of ownership
rate for minority banks is low.
We chose to use Call and Thrift Report data because it was designed to
provide information on all federally insured banks' financial condition
and has been collected and reported by FDIC in a standardized format.
We have tested the reliability of FDIC's Call and Thrift Report
databases during previous studies and found the data to be
reliable.[Footnote 36] As with any self-reported financial information,
however, the data are subject to change for a variety of reasons. We
corroborated our analysis of the Call and Thrift Report data with other
studies, which also found that minority banks lag in profitability and
have high operating expenses.[Footnote 37]
To address the second objective, we interviewed officials at the
federal banking agencies and the Department of the Treasury and
reviewed regulators' documentation addressing their efforts to support
minority banks and assess the effectiveness of these efforts. We also
reviewed publicly available documentation maintained by the regulators,
such as policy statements, lists of minority banks, Web sites, and
public statements. We reviewed the regulators' minority banking support
efforts across the different banking agencies and compared any program
assessment efforts with our standards for program assessment and
performance measures, and those established in the Government
Performance and Results Act.[Footnote 38] We also interviewed 19
minority banks throughout the United States that we selected based on
type of minority ownership and primary regulator, and relevant trade
associations, to discuss the business environment in which they
operate, regulators' minority banking efforts, any assessment efforts
undertaken by the regulators, and their knowledge and experience with
their regulators' minority banking efforts.
To obtain the views of minority banks on the federal regulators'
minority banking support efforts and related regulatory issues, we
surveyed banks that were designated as minority institutions. We
created a list of the population of minority banks by asking FDIC,
Office of the Comptroller of the Currency (OCC), Federal Reserve, and
Office of Thrift Supervision (OTS) for the names of all such
institutions. The objective was to survey all minority banks that were
officially recognized by regulators as such. Of the 204 institutions in
our original population, 14 represented women-owned institutions. We
identified the total minority bank population by reviewing and
compiling one list of these banks from FDIC and the Federal Reserve's
lists as of September 30, 2005; OCC's list from December 31, 2005; the
most recent list from the Department of the Treasury (December 2004);
and OTS's list as of January 2006.
All institutions we originally identified as minority banks were asked
to complete a Web-based questionnaire in March of 2006. We determined
that of the original 204 minority banks we identified, 9 were actually
ineligible, either because the ownership was no longer minority or had
insignificant minority interest, and some had merged with other banks.
Our final survey population therefore consisted of 195 institutions.
When the survey closed in late April, 149 of the 195 banks ultimately
determined to be eligible minority banks had provided usable responses,
for a response rate of 76 percent.
While developing our Web-based questionnaire, we asked all four banking
regulators and minority banking associations to review a draft of the
instrument and to offer comments. We also conducted four pretests of
the draft questionnaire, each one using the software environment that
actual respondents would experience. During the pretest, we observed
respondents filling out the questionnaire and asked follow-up questions
to clarify the respondents' understanding of the questions. On the
basis of these results, we made modifications as appropriate before
finalizing the questionnaire. The questionnaire also underwent a peer
review by an independent survey specialist in our organization. The
survey, which was implemented as an automated questionnaire on a secure
Web site, was accessible only to specifically contacted bank officials
and could be completed using a typical Web browser. However, the
questionnaire, which contained 51 questions, was also reproduced as an
electronic word-processing document that could be administered via e-
mail, mail, or fax, for those respondents who preferred those modes or
who could not access the Internet.
We began the survey in late February of 2006 by precontacting banks by
telephone to verify their status and to obtain the names, titles, and
e-mail addresses of the president or chief executive officer of the
institution, who were designated as respondents, or were responsible
for delegating the survey to another official. Prenotification e-mails
were sent in early March to verify that the e-mails were valid. The
survey was opened and respondents were given user names and passwords
to their institution's questionnaires on March 14.
In late March and early April 2006, we sent two reminder e-mails to
banks that had not yet responded, and began to call nonrespondents
after that. We also made appeals encouraging responses through the
National Bankers Association's (NBA) e-mailings and events. We also
made a paper copy of the questionnaire that respondents could receive
and return via mail or fax. In a final set of telephone follow-ups, we
gave reluctant respondents the opportunity to answer a reduced set of
key questions to encourage participation. A final reminder e-mail was
sent in late April, and the survey was closed on April 28.
Not all surveyed members of the population returned questionnaires or
answered every question. Two institutions explicitly refused to
participate, and we were not able to obtain answers from the other 44
nonrespondents by the close of this review. This resulted in a response
rate of 76 percent, calculated as the number of usable questionnaires
returned divided by the final eligible population. The response rate to
any one particular question varied, however, as some survey
participants declined to provide answers to individual questions, and
those 4 institutions agreeing to respond only to the final telephone
follow-up attempt were asked only a limited number of key questions.
Results from this type of survey are subject to several types of
errors: failure to include all eligible members in the listing of the
population, measurement errors when administering the questions,
nonresponse error from failing to collect information on some or all
questions from part of the surveyed population, and data-processing
error.
To limit the error from failing to list members of the population, we
compared the regulators' lists of minority banks and discussed any
discrepancies with each regulator. In accordance with our request, we
included any bank considered by at least one regulator to be eligible
to participate in its efforts. In some cases we surveyed minority banks
that were not considered by their primary regulator to be minority
institutions but were considered to have minority status or be eligible
for participation in another regulator's efforts. We compared the
survey results for questions reported on in the text of the report with
and without such banks to ascertain whether or not the results would
have been significantly different without including such banks. We
found no significant differences in the results when the banks not
considered minority banks by their regulator were included from when
such banks were excluded. Generally, removing the responses from such
banks would have changed the results of key questions by 1 or 2
percentage points. In a few cases, the inclusion of banks not viewed by
their regulators as minority institutions changed the survey results by
4 or 5 percentage points in a manner more favorable to the regulator.
However, the inclusion of such banks did not have a material effect on
the overall results.
To limit measurement error, we obtained comments from experts and
tested the questionnaire with bank officials and attempted to improve
the questionnaire before finalizing it.
Although we chose to send our survey to all members of the population
and not a sample, and thus the survey results are not technically
subject to sampling error, because only 76 percent of the population
provided usable responses, bias from nonresponse may result. If the
responses of those who did not respond would have differed from the
responses of those who did on some survey questions, the estimates made
solely from those who did respond would be biased from excluding parts
of the population with different characteristics or views. To limit
this kind of error, we made multiple attempts to gain the participation
of as many banks as possible. To assess the likelihood of significant
bias, we compared characteristics such as asset size, regulator, and
minority type--which may be related to the substance of answers to our
survey questions--of nonrespondents to respondents. We did not detect a
significant difference between those who chose to respond and those who
did not based on these characteristics. To further assess the potential
extent of nonresponse bias, we compared the response rates of the
subgroups of those characteristics in our population, and determined
that response rate did not differ markedly between categories of these
subgroups, suggesting that banks of certain types were not materially
more likely to participate or not participate than others. Finally, we
analyzed the patterns in response between those who answered in the
earlier part of the fieldwork period and those who responded only after
repeated follow-up attempts. It is possible that the latter group
resembles nonrespondents. No significant difference in the answers
between the groups was detected, which may suggest that actual
nonrespondents would not have answered in a substantially different way
from those who did. While the possibility exists that the true results
for the entire population might be different from those we estimated in
our report, we feel that on the basis of our analysis, nonresponse bias
is unlikely.
To limit data-processing error, a second data analyst independently
verified analysis programming. In addition, the coding process of
converting narrative answers into quantitative, categorical data was
independently assessed to be reliable, and diagnostic checks were
performed on the survey data to the extent possible. For example, one
of our checks identified inconsistencies for four questionnaires that
indicated a primary supervisor which did not match regulator records,
allowing us to make a correction to responses. We did not otherwise
verify the substance of respondents' answers to our questions.
We conducted our work in Washington, D.C., and New York from December
2005 to September 2006 in accordance with generally accepted government
auditing standards.
[End of section]
Appendix II Minority Bank Eligibility Criteria:
Banking regulators use different criteria for determining the types of
institutions that can participate in their respective minority bank
efforts, and all regulators maintain lists of minority banks based on
these different criteria (fig. 11). Some regulators base their
definition on Section 308 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), and others base their
definition on the criteria in a 1969 executive order that established
the Department of the Treasury's Minority Bank Deposit Program (MBDP).
The MBDP is a voluntary program that encourages federal agencies, state
and local governments, and the private sector to use MBDP participants
as depositaries and financial agents. Participants are certified by
Treasury's Bureau of Financial Management Service and included on an
annual program roster.
* FDIC is subject to the "minority depository institution" definition
set forth in Section 308 of FIRREA but has interpreted ownership by
"socially and economically disadvantaged individuals" as requiring
ownership by minorities as defined in Section 308. FDIC does not
include women-owned banks in its minority bank definition. For stock
institutions, FDIC determines minority ownership of stock institutions
based on the proportion of the outstanding voting stock owned by
minorities. In addition, FDIC has made its program available to public
or privately held stock institutions and mutuals whose boards of
directors and communities served are predominantly minority, without
regard to the minority status of the institution's ownership or its
account holders.
Figure 11: Regulators' Eligibility Criteria for Minority Bank Efforts:
[See PDF for image]
Sources: Treasury, FDIC, OTS, OCC, and Federal Reserve:
[A] "S&Ls" refers to savings and loans, a term synonymous with "thrift
institutions," which are a type of financial institution regulated by
OTS. In this report, we include S&Ls or thrifts under the term "banks."
Also under this definition, minorities must own or have voting control
over more than 50 percent of the outstanding stock.
[B] Under FIRREA's definition, a privately or publicly owned
institution is considered minority-owned if more than 51 percent is
owned by one or more "socially disadvantaged individuals."
[End of figure]
* OTS is also subject to the "minority depository institution"
definition set forth in Section 308 of FIRREA. Like FDIC, OTS has
interpreted ownership by "socially and economically disadvantaged
individuals" as requiring ownership by minorities as defined in Section
308. OTS also determines minority ownership of stock institutions based
on the proportion of the outstanding voting stock owned by minorities.
OTS has also expanded the availability of its program to some
constituencies that are not eligible for FDIC's program. For example,
mutual institutions that have women CEOs and have a majority of women
on their boards of directors are eligible to participate in OTS's
minority bank efforts. In addition, public stock institutions and
mutuals (but not private stock institutions) whose boards of directors,
communities served, and account holders are predominantly minority, may
participate in OTS's efforts regardless of the minority status of the
institution's ownership.
* Treasury's criteria--on which OCC and the Federal Reserve base their
criteria--differ from those of Section 308 of FIRREA, FDIC, and OTS in
several ways. In the first instance, the MBDP program is available to
both minority-and women-owned banks, stock savings and loans, and
mutual savings and loans. In order to be included on Treasury's MBDP
roster as a minority-owned bank or stock savings and loans, more than
50 percent of an institution's outstanding stock must be either owned
or controlled for voting purposes by individuals of minority groups. A
mutual savings and loan may qualify as minority-owned if a majority of
the institution's board of directors are members of minority groups. To
qualify as a women-owned bank or stock savings and loans, more than 50
percent of the institution's outstanding stock must be owned by women
and a significant percentage of senior management positions must be
held by women. A women-owned mutual savings and loan is eligible for
the MBDP if a majority of its board of directors are women and a
significant percentage of senior management positions are held by
women.
* The OCC's definition is consistent with that established by
Treasury's MBDP criteria. OCC is not covered by Section 308 of FIRREA.
* The Federal Reserve also bases its definition on Treasury's MBDP
criteria. However, the Division of Supervision of the Federal Reserve
also compiles an internal list of minority banks that is based on
Section 308 FIRREA criteria.
We identified several discrepancies in the regulators' lists of
minority banks. These banks were all listed as minority banks by one
regulator but not by another. When we spoke to officials from each of
the agencies, they told us that these discrepancies were due to
differences in criteria for minority banks. For example, five of these
discrepancies were the result of FDIC's exclusion of women-owned banks-
-women-owned banks cannot participate in FDIC's programs, but they can
participate in the MBDP program. Another discrepancy resulted from a
bank's primary regulator excluding a certain ethnicity (not named in
FIRREA), while another regulator included it.
[End of section]
Appendix III Selected Survey Results:
This appendix provides the number of minority banks that responded to
each survey question discussed in the report body by response category.
Table 5: How good or poor are these efforts for supporting minority-
owned financial institutions?
Very good/good; FDIC: 35; Federal Reserve: 5; OCC: 8; OTS: 4; Total:
52.
Fair; FDIC: 17; Federal Reserve: 8; OCC: 8; OTS: 5; Total: 38.
Poor/very poor; FDIC: 6; Federal Reserve: 2; OCC: 6; OTS: 5; Total: 19.
Don't know; FDIC: 19; Federal Reserve: 2; OCC: 11; OTS: 4; Total: 36.
Total; FDIC: 77; Federal Reserve: 17; OCC: 33; OTS: 18; Total: 145.
Source: GAO.
[End of table]
Table 6: Has your primary regulator made your institution aware of any
of the technical assistance it offers in the past 3 years?
Yes; FDIC: 50; Federal Reserve: 6; OCC: 9; OTS: 8; Total: 73.
No; FDIC: 20; Federal Reserve: 10; OCC: 15; OTS: 8; Total: 53.
Don't know/No answer; FDIC: 10; Federal Reserve: 1; OCC: 8; OTS: 1;
Total: 20.
Total; FDIC: 80; Federal Reserve: 17; OCC: 32; OTS: 17; Total: 146.
Source: GAO.
[End of table]
Table 7: Has your institution used any technical assistance offered by
your primary regulator in the past 3 years?
Yes; FDIC: 23; Federal Reserve: 4; OCC: 9; OTS: 5; Total: 41.
No; FDIC: 48; Federal Reserve: 10; OCC: 23; OTS: 11; Total: 92.
Don't know; FDIC: 7; Federal Reserve: 2; OCC: 0; OTS: 2; Total: 11.
Total; FDIC: 78; Federal Reserve: 16; OCC: 32; OTS: 18; Total: 144.
Source: GAO.
[End of table]
Table 8: (If used) How useful or not useful do you think your primary
regulator's technical assistance is?
Extremely/very useful; Total: 33.
Moderately useful; Total: 5.
Slightly/not at all useful; Total: 3.
Total; Total: 41.
Source: GAO.
[End of table]
Table 9: Are you aware or unaware whether FDIC or any other regulator
has held roundtables and/or conferences for minority-owned financial
institutions in the past 3 years, and if so, have you attended any?
(Below are responses concerning FDIC roundtables and/or conferences.)
Unaware; FDIC: 14; Federal Reserve: 3; OCC: 15; OTS: 1; Total: 33.
Aware, and attended; FDIC: 40; Federal Reserve: 7; OCC: 9; OTS: 9;
Total: 65.
Aware, NOT attended; FDIC: 24; Federal Reserve: 8; OCC: 7; OTS: 7;
Total: 46.
No answer; FDIC: 1; Federal Reserve: 0; OCC: 0; OTS: 1; Total: 2.
Total; FDIC: 79; Federal Reserve: 18; OCC: 31; OTS: 18; Total: 146.
Source: GAO.
[End of table]
Table 10: (If attended) How useful or not useful do you think these
minority institution roundtables and conferences are? (Below are
responses for FDIC roundtables and/or conferences.)
(Continued From Previous Page)
Extremely/very useful; FDIC: 20; Federal Reserve: 4; OCC: 6; OTS: 3;
Total: 33.
Moderately useful; FDIC: 10; Federal Reserve: 3; OCC: 3; OTS: 4; Total:
20.
Slightly/not at all useful; FDIC: 9; Federal Reserve: 0; OCC: 0; OTS:
2; Total: 11.
Don't know; FDIC: 1; Federal Reserve: 0; OCC: 0; OTS: 0; Total: 1.
Total; FDIC: 40; Federal Reserve: 7; OCC: 9; OTS: 9; Total: 65.
Source: GAO.
[End of table]
Table 11: Has your institution participated in training or education
programs offered by your primary regulator or other regulators in the
past 3 years? (Below are responses for the bank's primary regulator's
training and educational programs.)
Yes; Total: 83.
No; Total: 53.
Don't know; Total: 6.
Total; Total: 142.
Source: GAO.
[End of table]
Table 12: (If attended) How useful or not useful do you think these
training and educational programs are? (Below are responses for the
bank's primary regulator's training and educational programs.)
Extremely/very useful; FDIC: 37; Federal Reserve: 9; OCC: 14; OTS: 1;
Total: 61.
Moderately useful; FDIC: 6; Federal Reserve: 3; OCC: 2; OTS: 1; Total:
12.
Slightly useful; FDIC: 2; Federal Reserve: 0; OCC: 0; OTS: 3; Total: 5.
Don't know; FDIC: 0; Federal Reserve: 0; OCC: 2; OTS: 0; Total: 2.
Total; FDIC: 45; Federal Reserve: 12; OCC: 18; OTS: 5; Total: 80.
Source: GAO.
[End of table]
Table 13: How good or poor of a job do you think your regulator does in
administering examinations?
Very good/good; Total: 118.
Fair; Total: 18.
Poor/very poor; Total: 5.
Don't know; Total: 4.
Total; Total: 145.
Source: GAO.
[End of table]
Table 14: Overall, how good or poor is your relationship with your
primary regulator?
Very good/good; 128.
Fair; 11.
Poor/very poor; 5.
Don't know; 1.
Total; 145.
Source: GAO.
[End of table]
Table 15: To what extent do you feel this provision of CRA has
encouraged other insured depository institutions to make investments in
your institution or undertake loan participations or other ventures
with your institution?
Very great/great extent; Total: 21.
Moderate extent; Total: 28.
Some/little or no extent; Total: 60.
Don't know; Total: 5.
Total; Total: 114.
Source: GAO.
[End of table]
Table 16: How would you rate your institution's current financial
outlook compared with the past 3 to 5 years?
(Continued From Previous Page)
Much/slightly better; Total: 94.
About the same; Total: 30.
Slightly/much worse; Total: 16.
Don't know; Total: 4.
Total; Total: 144.
Source: GAO.
[End of table]
Table 17: What suggestions, if any, do you have for improving existing
federal banking regulators' efforts to support minority-owned financial
institutions, or suggestions for creating new programs or policies in
that area?
More understanding of/sensitivity to minority banks' uniqueness; Total:
24.
Improved communication on issues/programs relevant to minority banks,
provide financial data on minority banks; Total: 16.
More guidance, specific technical assistance, training on minority
banks issues; Total: 12.
Other; Total: 8.
Reduce regulatory burden, examine well-performing minority banks less
frequently; Total: 7.
Facilitate, encourage Community Reinvestment Act (CRA) investments and
partnerships between institutions and minority banks; Total: 5.
Continued training/providing updated general information; Total: 4.
Uniformity/centralization of minority bank programs across regulators;
Total: 4.
More/improved deposit programs; Total: 4.
Increase accountability, oversight of regulators; Total: 3.
Not applicable; Total: 26.
Total number of comments; Total: 113.
Source: GAO.
[End of table]
[End of section]
Appendix IV Comments from the Federal Deposit Insurance Corporation:
FDIC:
Federal Deposit Insurance Corporation:
550 17th Street NW, Washington, D.C. 20429-9990:
Division of Supervision and Consumer Protection:
September 11, 2006:
Mr. George A. Scott, Acting Director:
Financial Markets and Community Investments:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Scott:
Thank you for the opportunity to comment on the draft report entitled
Minority Banks - Regulators Need to Better Assess Effectiveness of
Support EfForts (GAO-07-6). We are appreciative of the acknowledgement
that, of the four Federal banking agencies, the Federal Deposit
Insurance Corporation ("FDIC") has developed the most extensive efforts
to support minority banks. We will continue to look for new and
innovative ways to preserve and promote the minority bank segment of
the banking industry.
The FDIC generally agrees with the report content. We are aware of the
profitability challenges faced by many minority banks. Historically,
minority banks as a group have had lower profitability than their non-
minority bank peer group. For example, minority institutions often have
higher proportions of accounts with low deposit balances and lower fee
income which contribute to lower income levels relative to their peers.
We will continue to monitor the profitability of minority banks and
continue our efforts to provide technical assistance to both the
minority bank segment of the industry and the individual minority bank
institutions.
We agree with the specific recommendations in the report and will take
the steps necessary to implement them. Although we regularly review the
effectiveness of our minority bank support efforts, and routinely
assess the need to make any necessary changes, we agree that conducting
periodic surveys of FDIC-regulated minority banks to confirm that our
efforts are effective is appropriate. Such a survey would complement
our examination and visitation efforts, as well as our routine offers
of technical assistance and outreach initiatives aimed specifically at
the minority bank community. Implementation of this new survey will
assist in measuring success under the second recommendation contained
in the report, which is to establish outcome-oriented performance
measures to assess the progress of FDIC efforts relative to achieving
program goals. Specifically, we will take a more pro-active approach in
following up with minority banks that utilize our "technical
assistance" program to see if this assistance contributed to the
desired result; we will undertake a review of the way in which we
promote our "technical assistance" program to ascertain ways to achieve
a higher minority bank usage rate; we will continue our efforts to
educate our examiners on minority bank characteristics and issues; we
will continue to be at the forefront of providing informative and
effective outreach programs to the minority bank community; and we will
continue to look for new ways to partner with and promote the financial
health of the minority institutions and the communities they serve.
Thank you again for the opportunity to respond to your findings.
Sincerely,
[Signed by]
Sandra L. Thom:
Acting Director:
[End of section]
Appendix V Comments from the Office of Thrift Supervision:
Office of Thrift Supervision Department of the Treasury:
1700 G Street, N.W., Washington, DC 20552 * (2o2) 9o6-6590:
John M. Reich:
Director:
September 25, 2006:
George A. Scott:
Acting Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Scott:
Thank you for the opportunity to review and comment on the Government
Accountability Office's (GAO) report entitled Minority Banks -
Regulators Need To Better Assess Effectiveness of Support Efforts (GAO-
07-6). The report reviews the efforts of the Office of the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve, and the Office of Thrift
Supervision in supporting minority banks.
OTS has long recognized the important role minority owned institutions
play in fostering economic vitality and access to capital, particularly
in minority and low-income communities. The foundation of OTS's
Minority Owned Institutions Program can be found in the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
Section 308 of FIRREA requires OTS to:
* Preserve the number of minority depository institutions;
* Preserve their minority character in cases involving merger or
acquisition of a minority depository institution;
* Provide technical assistance to prevent insolvency of institutions not
now insolvent;
* Promote and encourage creation of new minority depository
institutions; and:
* Provide for training, technical assistance, and educational programs.
The GAO's report recommends that the banking agencies: (1) conduct
periodic surveys of minority banks to determine how they view support
efforts and related activities; and (2) develop outcome-oriented
performance measures to assess the progress of efforts in relation to
program goals. The report also suggests that the agencies focus on
minority banks' overall view on support efforts, the usage and
effectiveness of technical assistance services (particularly technical
assistance provided to small minority banks and African-American
banks), and the level of training provided to agency examiners
regarding minority banks and their operating environments.
George A. Scott:
Page 2:
OTS agrees with these recommendations and has initiated steps to
develop specific implementation strategies. These actions will enhance
the long standing minority financial institution support program that
OTS and its predecessor have provided since the 1970s.
Through the minority owned institutions program, OTS provides one-on-
one technical assistance to most of the minority owned savings
associations it regulates. We have focused on technical assistance as a
vehicle to achieve the broad goals contained in FIRREA. Technical
assistance varies depending upon issues identified in examinations,
while conducting outreach activities, or as requested by an
institution.
Examples of the types of technical assistance that OTS provided to
minority owned institutions in 2005 include: guidance on enhancing
compliance management programs, including Bank Secrecy Act (BSA)
compliance requirements; assistance with identifying and hiring key
personnel, including board members; and assistance with credit risk
analysis, including the evaluation of large loan exposures.
While we are pleased with our positive and proactive record of
supporting minority owned institutions, we have taken steps to enhance
our efforts in the future. For example, OTS is actively exploring
initiatives to help meet our commitment to preserve existing minority
owned institutions and encourage the formation of new ones. One such
initiative, in response to requests from minority owned institutions,
is the development of training on ways minority owned institutions can
attract investment. OTS has also developed an outreach plan to
participate in widely-attended banking conferences and meetings across
the country, that includes the use of an OTS booth. We plan to utilize
the booth to provide information about the thrift charter, including
its benefits, our Minority Owned Institutions Program, and the types of
assistance OTS provides. OTS has also dedicated additional staff
resources to support this important program. Lastly, OTS is updating a
strategic plan that will clearly identify steps we will take to
implement the recommendations included in the GAO report along with
other initiatives designed to support minority owned institutions.
We appreciate the opportunity to comment on the report. OTS is
committed to dedicating the resources necessary to further enhance our
efforts to support minority owned institutions.
Sincerely:
[Signed by]
John M. Reich:
Director:
[End of section]
Appendix VI Comments from the Comptroller of the Currency:
Comptroller of the Currency:
Administrator of National Banks:
Washington, DC 20219:
September 14, 2006:
Mr. George A. Scott:
Acting Director, Financial Markets and Community Investment:
U. S. Government Accountability Office:
Washington, DC 20548:
Subject: Comments on Draft Report:
Dear Mr. Scott:
We have reviewed your draft report titled "Minority Banks: Regulators
Need To Better Assess Effectiveness Of Support Efforts." The purpose of
the report is to update earlier GAO work looking at the efforts of all
of the federal banking regulators, not just those covered by Section
308 of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA). To fulfill the objective you used the FIRREA goals as
evaluation criteria, i.e., preserving the present number of minority
banks; preserving their minority character in cases involving mergers
or acquisitions of minority banks; providing technical assistance to
prevent the insolvency of institutions that are not currently
insolvent; promoting and encouraging the creation of new minority
banks; and providing for training, technical assistance, and
educational programs. You are reporting that the regulators have
adopted differing approaches to supporting minority banks and that none
have undertaken a deliberate effort to assess the effectiveness of
their efforts.
Minority-owned institutions play a vital role in many American
communities, and we appreciate the insights you offered in your report.
Your recommendations will provide valuable assistance as we evaluate
and try to improve our program. I can assure you that the OCC is
committed to working with minority-owned national banks and to
providing the technical assistance they need to be successful.
The OCC issued a policy statement on minority banks in March 2001. That
policy statement, still in effect, defines "minority-owned bank" and
calls for an annual update of the list of minority institutions;
pledges technical assistance to applicants interested in entering the
national banking system; allows for capital investments in minority-
owned banks by other national banks; describes examination support,
including coordination with the FDIC in resolving problem situations;
and calls for information, education, and outreach for minority-owned
banks.
In pursuit of this policy, the OCC participated in formal activities
targeted to minority-owned institutions, including events sponsored by
the FDIC and other organizations. Minority outreach was pursued as a
specialized activity, often within our broader community affairs
framework, i.e., community affairs officers in the districts and the
Ombudsman. Then, in December 2004, we created a new senior advisor for
external outreach and minority affairs to serve as a focal point for
minority banking issues going forward.
Over the last year, the OCC has pursued a number of initiatives
consistent with the goals of FIRREA, including more activities on our
own. In February 2006, for example, we reached out to the leaders of
African-American national banks. As noted in your report, they met with
OCC's executives to discuss the challenges their banks face. Following
that discussion, the bankers made a well-attended presentation of their
challenges to OCC employees. We are using the feedback received from
this event to develop additional initiatives.
In March 2006, we took a very important step by making it easier for
national banks to receive CRA consideration for Part 24 investments in
minority-owned institutions. We recently established a Web Page for
Minority Affairs that will feature information of interest and related
to minority banks, including identification of investments that are
eligible for CRA consideration. Other initiatives currently under
consideration include providing technical assistance and information on
emerging issues to minority-owned institutions and providing training
for our examiners.
We agree, as you recommend, that an assessment of the effectiveness of
our efforts is necessary and useful and have taken that into
consideration in planning the new initiatives described above. In
addition, we are planning three focus group sessions for minority banks
in the coming year that are expected to provide targeted and specific
feedback on the OCC's efforts to support minority-owned banks and an
assessment of their needs. We will use this information to plan
initiatives, whenever possible, to meet their needs.
Thank you for the opportunity to review and comment on the draft
report. Technical comments were provided separately.
Sincerely,
[Signed by]
John C. Dugan:
Comptroller of the Currency:
[End of section]
Appendix VII Comments from the Board of Governors of the Federal
Reserve System:
Board Of Governors:
Of The:
Federal Reserve System:
Washington, D. C. 20551:
Sandra F. Braunstein:
Director:
Division Of Consumer:
And Community Affairs:
September 19, 2006:
Mr. George A. Scott, Acting Director:
Financial Market and Community Investments:
General Government Division:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Scott:
We appreciate the opportunity to comment on the GAO's August 2006
report entitled Minority Banks: Regulators Need to Better Assess
Effectiveness of Support Efforts, a follow-up to its report in 1993 on
the implementation of section 308 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"). Section 308 of FIRREA
established goals for the Federal Deposit Insurance Corporation
("FDIC") and the Office of Thrift Supervision ("OTS"), in consultation
with the Department of the Treasury, to provide support to, and
preserve the character of, institutions in which minority individuals
or organizations hold a majority of the ownership interests ("minority
institutions"). Congress recognized in Section 308 that those agencies,
unlike the Federal Reserve, have the ability to affect these
institutions very directly in this regard through their liquidation and
receivership activities. Consequently, it is not surprising that the
draft report concluded that the FDIC and the OTS have the most
comprehensive programs to support minority-owned institutions, and that
the FDIC has taken the lead to coordinate interagency efforts in this
regard. Nonetheless, despite not being subject to Section 308, the
Federal Reserve has provided significant assistance and support to the
minority institutions it supervises and has actively participated in
regulatory, supervisory, and community development efforts that benefit
minority institutions. We believe our informal program to support
minority-owned institutions is reasonable and justified in light of the
small number, diversity, and geographic dispersion of the minority-
owned state member banks we supervise.
There are 17 minority-owned state member banks subject to the
supervisory authority of the Federal Reserve System. These banks are
quite diverse in terms of their minority ownership (e.g., African
American, Native American, Asian, and Hispanic) and the markets they
serve. Some are quite profitable and operate in higher income markets
while others serve lower income communities. Some face challenges with
regard to such matters as high overhead expenses, retention of
qualified management, and strong competition from larger institutions
in their markets. The 17 state member banks are geographically
dispersed across seven of the System's twelve districts.
The Federal Reserve System historically has offered tailored technical
assistance, director training, and other support to state member banks
and bank holding companies that may benefit from such assistance. Such
assistance is offered based on need equally to all state member banks
and bank holding companies. The Federal Reserve System also has
particularly focused its support effort on banks that operate in low-to
moderate-income communities in light of the particular challenges such
banks face irrespective of whether they are minority-owned
institutions.
Currently, the Federal Reserve has a pilot program underway to focus on
the special needs of minority institutions and other institutions that
focus on serving communities with significant minority populations. The
Federal Reserve is also developing guidance to better educate
examination staff about the various types of minority institutions and
minority communities, and hopes to gain interagency and industry
support for this project. These efforts are expected to benefit a
larger number of institutions that serve a broader scope of customers
and minority communities than programs focused only on minority-owned
institutions.
Because the 17 minority institutions are geographically dispersed,
serve very different types of communities, and have different needs, we
have taken what we believe to be the sensible approach of addressing
these institutions' needs through individually tailored technical
assistance as opposed to a single program that attempts to deal with
the varied circumstances of all of these institutions. When
appropriate, this assistance has included contacting minority
institutions that have required a private or FDIC resolution since the
enactment of FIRREA in 1989. For others that have needed capital or
management support, our assistance has included contacting other
minority institutions to ascertain interest in making an acquisition,
as well as contacting other nonminority-owned institutions about
possibly making investments and providing management assistance. Some
of these efforts were successful and helped preserve the minority-owned
status of institutions, while in other cases the institution contacted
declined to pursue an acquisition, make an investment, or provide other
assistance after conducting due diligence regarding the troubled
minority institution.
Because the draft report does not fully recognize the many efforts made
by the Federal Reserve to preserve, and serve, minority institutions,
we believe it should be expanded to acknowledge these efforts. We also
have some disagreement with the GAO's interpretations of the results of
the survey it conducted to produce this draft report. We have relayed
our concerns, and provided corrections to some factual inaccuracies, to
the GAO staff separately. We trust these matters will be addressed in
the final report.
We will take into consideration your recommendation that the agencies
regularly review the effectiveness of their minority bank support
efforts and related regulatory activities and, as appropriate, assess
the need to make changes necessary to better serve such institutions.
We will also consider the means for doing so that you suggest. We
believe that outreach to minority institutions; exploring options to
engage more of the minority institutions in technical assistance and
training; and providing appropriate training for examiners to
assist in their analysis and supervision of these institutions have
value when properly done. The Federal Reserve is, and has been,
actively involved with the other agencies in addressing the needs of
minority-owned institutions, as your recommendation suggests.
Sincerely,
[Signed by]
Sandra Braunstein:
c:Wesley M. Phillips, Assistant Director, GAO:
[End of section]
Appendix VIII GAO Contact and Staff Acknowledgments:
GAO Contact:
George A. Scott (202) 512-7215 or scottg@gao.gov:
Acknowledgments:
In addition to the contact named above, Wesley M. Phillips, Assistant
Director; Allison Abrams; Anna Bonelli; Stefanie Bzdusek; Emily
Chalmers; Catherine Hurley; Marc Molino; Carl Ramirez; and Omyra
Ramsingh made significant contributions to this report.
FOOTNOTES
[1] For purposes of this report, the term "minority banks" refers to
all depository institutions--including thrifts--that are considered
minority-or women-owned by the Department of the Treasury (Treasury)
and the federal banking regulators--the Federal Deposit Insurance
Corporation (FDIC), the Board of Governors of the Federal Reserve
System (Federal Reserve), the Office of the Comptroller of the Currency
(OCC), and the Office of Thrift Supervision (OTS). As discussed in
appendix II, FDIC and OTS are subject to the "minority depository
institution definition" set forth in Section 308 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
Treasury uses different criteria as set forth for eligibility in its
Minority Bank Deposit Program (MBDP). OCC and the Federal Reserve
employ Treasury's criteria for minority-and women-owned banks (although
the Federal Reserve uses both the FIRREA definition and Treasury's for
different purposes). Treasury and each of the banking regulators
compile lists of institutions that they consider to be eligible to
participate in their minority banking efforts. As Section 308 of FIRREA
is not aimed at preserving and promoting the minority ownership status
of credit unions, we did not include the National Credit Union
Administration in our review.
[2] FIRREA, Pub. L. No. 101-73, § 308, 103 Stat. 183, 353 (1989).
[3] "Technical assistance" is typically defined as one-on-one
assistance that a regulator may provide to a bank. For example, a
regulator may advise a bank on compliance with a particular statute or
regulation. Regulators may also provide technical assistance to banks
that is related to deficiencies identified in safety and soundness or
compliance examinations. In contrast, education programs are typically
open to all banks regulated by a particular agency or to all banks
located within a regulator's regional office. For example, regulators
may offer training for banks to review compliance with laws and
regulations.
[4] GAO, Minority-Owned Financial Institutions: Status of Federal
Efforts to Preserve Minority Ownership, GAO/GGD-94-1 (Washington, D.C.:
Nov. 3, 1993).
[5] Federal banking regulators conduct periodic examinations of banks
to assess their financial condition and compliance with laws and
regulations, among other activities.
[6] Unless otherwise specified, we use the term "Federal Reserve"
throughout this report to refer to the Federal Reserve System. The
Federal Reserve System includes the Federal Reserve's Board of
Governors and the 12 Federal Reserve Banks.
[7] Because information on minority banks was not available for both
2000 and 1995 from all federal banking regulators, for these periods we
analyzed only those minority banks that were still operating as
minority institutions in 2005. As a result, minority banks that failed
or merged with other institutions between 1995 and 2005 are not
included in the analysis for those years. In addition, we were unable
to confirm that all 2005 minority banks were operating as minority
banks in 1995 and 2000, although the rate of change in ownership among
minority banks is low.
[8] Peer groups include all institutions of a similar asset size,
including minority and nonminority institutions. Peer groups were
defined by FDIC.
[9] Examples of assets include loans and securities.
[10] Outcome-oriented performance measures assess the results of a
program against its intended purposes.
[11] When asked for suggestions about how regulators could improve
their efforts to support minority banks, 21 percent of survey responses
mentioned this issue. In addition, several minority banks we spoke with
in interviews voiced similar opinions.
[12] Throughout the report, we refer to thrifts as banks.
[13] In our 1993 report, we reported that FDIC supervised 52 minority
banks and OTS supervised 41 minority banks as of March 1993. OCC
officials told us that their agency regulated 42 minority banks in
1993, and the Federal Reserve reported that it regulated 16 in 1993.
[14] The Deposit Insurance Fund is the fund that provides deposit
insurance for banks and thrifts and is administered by FDIC.
[15] For most of FDIC's history, purchase and assumption agreements--
during which a healthy bank purchases some or all of the assets of a
failed bank, as well as some or all of its liabilities--have been the
preferred resolution method for troubled and failed banks. Under this
method, FDIC values and markets the institutions and closes the
institutions. The other two resolution methods FDIC has employed are
(1) a deposit payoff, in which FDIC is the appointed receiver and all
depositors with insured funds are paid the full amount of their
deposits (depositors with uninsured funds and other general creditors
of the failed bank are given receivership, entitling them to a share of
the net proceeds from the sale of the bank's assets); and (2) an open
bank assistance agreement under which FDIC provides financial
assistance to an operating insured bank that is in danger of closing by
making loans to the bank, purchasing assets, or placing deposits in the
troubled bank.
[16] Some minority banks were established relatively recently (between
2002 and 2006). Although newer banks tend to be less profitable than
older banks, we found that, in 2005, generally both older and newer
small banks had significantly lower ROAs than their peers.
[17] The banking industry as a whole has an asset size distribution
similar to that of minority banks (table 2).
[18] A weighted average is a variation on a simple average. Weighted
averages take into account banks' asset size instead of counting each
bank as an equal unit.
[19] Donna Tanoue, "Remarks By Donna Tanoue, Chairman Federal Deposit
Insurance Corporation before The National Bankers Association, Chicago,
Illinois October 4, 2000," FDIC. Available at http://www.fdic.gov/news/
news/speeches/archives/2000/sp04Oct00.html.
[20] The findings from our analysis of ROAs were consistent with our
analysis of another measure of profitability--return on equity (ROE).
ROE represents the bank's net income divided by shareholders' equity.
As with ROA comparisons, small minority banks had on average lower ROEs
than their peers (3.83 versus 8.09). And consistent with our ROA
analysis, among small minority banks, African-American (ROE of 1.54),
Asian-American (0.72), and Hispanic-American banks (6.11) had lower
ROEs than Native American (8.69) and women-owned institutions (8.39).
Further, African-American banks with assets of between $100 million and
$300 million had ROEs that were significantly lower, on average (3.45),
than those of their peers (11.03).
[21] In 2005, African-American banks did not occupy all asset size
categories. The largest African-American banks had less than $1 billion
in assets, and these banks were not found in the largest size
categories: $1 billion to $10 billion and greater than $10 billion.
[22] While our review offers possible explanations for lower levels of
profitability among some minority banks, it does not attempt to fully
explain the differences among various minority groups or sizes of
minority banks.
[23] The term "loan loss reserves" refers to the allowance each bank
must maintain to absorb estimated credit losses associated with its
loan and lease portfolio.
[24] Zahid Iqbal, Kizhanathan V. Ramaswamy, and Aigbe Akhigbe, "The
Output Efficiency of Minority-Owned Banks in the United States,"
International Review of Economics and Finance, vol. 8 (1999) p. 113;
Iftekhar Hasan and William C. Hunter, "Management Efficiency in
Minority-and Women-owned banks," Economic Perspectives, vol. 20 (1996).
Edward C. Lawrence, "The Viability of Minority-Owned Banks," The
Quarterly Review of Economics and Finance, vol. 37, no. 1 (1997).
[25] Section 807 of the Community Reinvestment Act of 1977 requires the
federal banking regulators in connection with their examination of each
institution they supervise to assess the institution's record of
meeting the credit needs of the entire community it serves, including
moderate-and low-income neighborhoods. Pub. L. No. 95-128, § 807, 91
Stat. 1147 (codified as amended at 12 U.S.C. § 2906).
[26] Section 13(c) of the Federal Deposit Insurance Act [12 U.S.C. §
1823(c)], as amended in 1991, prohibits FDIC from engaging in the
assisted resolution of any failed depository institution unless FDIC
determines that the total amount of expenditures and obligations it
will incur is the least costly alternative.
[27] 12 U.S.C. § 1462a(b)(3) and 12 U.S.C. § 1.
[28] GAO, Managing for Results: Enhancing Agency Use Performance
Information for Management Decision Making, GAO-05-927 (Washington,
D.C.: Sept. 9, 2005); and GAO, The Results Act: An Evaluator's Guide to
Assessing Agency Annual Performance Plan, GAO/GGD-10.1.20 (Washington,
D.C.: April 1998).
[29] GAO, Performance Measurement and Evaluation: Definition and
Relationship, GAO-05-739SP (Washington, D.C.: May 2005).
[30] Government Performance and Results Act of 1993 § 7, 39 U.S.C.
2801(1).
[31] This project was to develop a museum exhibition that would trace
the history of minority banks in the United States. However, after
conducting additional research on this proposal, FDIC is currently not
pursuing the project, in part because of limited interest from some
minority banks.
[32] We were requested to report on all the banking regulators'
minority bank efforts and to obtain minority banks' views on these
efforts. However, the banking regulators have different definitions for
banks they consider to be minority and eligible to participate in their
minority bank efforts (see app. II). In our population of minority
banks we included any bank considered by at least one regulator to be
eligible to participate in its efforts. In some cases, we surveyed
minority banks that were not considered by their primary regulator to
be minority institutions but were considered to have minority status or
be eligible for participation in another regulator's efforts. Nine of
the 80 FDIC minority banks responding were such cases, as were 4 of the
18 Federal Reserve minority banks, 1 of the 18 OTS banks, and 2 of the
33 OCC banks. We reviewed these banks' responses to key survey
questions in total and by each regulator and found that they did not
have a material negative or positive impact on the survey results, and
would generally have changed results by 1 or 2 percentage points. For
example, if these banks were removed from the survey results, the
percentage of minority banks who responded that their regulator's
overall efforts to support minority banks were very good or good would
be 1 percentage point higher. In a few cases, the inclusion of banks
not viewed by their regulators as minority institutions changed the
survey results by regulator by 4 or 5 percentage points in a manner
favorable to the regulator. However, the inclusion of such banks did
not have a material effect on the overall results. For example, if
banks not viewed by FDIC as minority banks were removed from the survey
results, the percentage of institutions rating the agencies' overall
support efforts as very good or good would increase from 45 percent to
49 percent.
[33] See appendix III for the survey responses in this report discussed
as the number of minority bank responses.
[34] The survey did find that minority banks regulated by FDIC and OTS
were more aware of the agencies' technical assistance outreach efforts
than institutions regulated by OCC and the Federal Reserve. This
finding is consistent with the fact that FDIC and OTS have formalized
technical assistance outreach efforts, while the other regulators do
not.
[35] The body of law commonly referred to as the Bank Secrecy Act (BSA)
is codified at 31 U.S.C. §§ 5311-5322 and 12 U.S.C. §§ 1829b and 1951-
1959. The purpose of BSA is to prevent financial institutions from
being used as intermediaries for the transfer or deposit of money
derived from criminal activity and to provide a paper trail for law
enforcement agencies in their investigations of possible money
laundering. The federal banking regulators review institutions for
compliance with the BSA as part of their safety and soundness
examinations or in targeted examinations focused on BSA compliance.
[36] For example, GAO, Industrial Loan Corporations: Recent Asset
Growth and Commercial Interest Highlight Differences in Regulatory
Authority, GAO-05-621 (Washington, D.C.: Sept. 2005), 87.
[37] Iqbal, Ramaswamy, Akhigbe, "The Output Efficiency of Minority-
Owned Banks in the United States," 113; Hasan and Hunter, "Management
Efficiency in Minority-and Women-owned banks"; Lawrence, "The Viability
of Minority-Owned Banks."
[38] GAO-05-739SP, GAO-05-927, and GAO/GGD-10.1.20.
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