Minority Banks
Regulators' Assessments of the Effectiveness of Their Support Efforts Have Been Limited Gao ID: GAO-08-233T October 30, 2007Minority 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). While not required to do so by FIRREA, the Board of Governors of the Federal Reserve System (Federal Reserve) and Office of the Comptroller of the Currency (OCC) have established some minority bank support efforts. This testimony, based on a 2006 General Accountability Office (GAO) report, discusses the profitability of minority banks, regulators' support and assessment efforts, and the views of minority banks on the regulators' efforts as identified through responses from a survey of 149 such institutions.
GAO reported in 2006 that 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, according to FDIC data. 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 had adopted differing approaches to supporting minority banks, but no agency had regularly and comprehensively assessed the effectiveness of its efforts. FDIC--which supervises over half of all minority banks--had the most comprehensive support efforts and leads interagency efforts. OTS focused on providing technical assistance to minority banks. While not required to do so by FIRREA, OCC and the Federal Reserve had taken some steps to support minority banks. Although FDIC had recently sought to assess the effectiveness of its support efforts through various methods, none of the regulators comprehensively surveyed minority banks or had developed performance measures. Consequently, the regulators were 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 have emphasized 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.
GAO-08-233T, Minority Banks: Regulators' Assessments of the Effectiveness of Their Support Efforts Have Been Limited
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Testimony:
Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, U.S. House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
October 30, 2007:
Minority Banks:
Regulators' Assessments of the Effectiveness of Their Support Efforts
Have Been Limited:
Statement of George A. Scott, Director Financial Markets and Community
Investment:
GAO-08-233T:
GAO Highlights:
Highlights of GAO-08-233T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, U.S.
House of Representatives.
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). While not required to do so by FIRREA,
the Board of Governors of the Federal Reserve System (Federal Reserve)
and Office of the Comptroller of the Currency (OCC) have established
some minority bank support efforts.
This testimony, based on a 2006 GAO report, discusses the profitability
of minority banks, regulators‘ support and assessment efforts, and the
views of minority banks on the regulators‘ efforts as identified
through responses from a survey of 149 such institutions.
What GAO Found:
GAO reported in 2006 that 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,
according to FDIC data. 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 had adopted differing approaches to supporting minority
banks, but no agency had regularly and comprehensively assessed the
effectiveness of its efforts. FDIC”which supervises over half of all
minority banks”had the most comprehensive support efforts and leads
interagency efforts. OTS focused on providing technical assistance to
minority banks. While not required to do so by FIRREA, OCC and the
Federal Reserve had taken some steps to support minority banks.
Although FDIC had recently sought to assess the effectiveness of its
support efforts through various methods, none of the regulators
comprehensively surveyed minority banks or had developed performance
measures. Consequently, the regulators were 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 have emphasized 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.
Figure: Minority Banks' Ratings of Support Efforts, by Regulator:
This figure is a combination bar chart showing minority banks' ratings
of support efforts, by regulator.
[See PDF for image]
Source: GAO.
[End of figure]
What GAO Recommends:
In the 2006 report, GAO recommended that the regulators review the
effectiveness of their support efforts by such means as (1) surveying
minority banks and/or (2) establishing performance measures.
Since the report, all of the regulators have reported taking steps to
survey or obtain information from minority banks on their support
efforts. However, it is too soon to evaluate the effectiveness of these
assessment efforts.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-233T]. For more information, contact
George Scott at (202) 512-7215 or scottg@gao.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here to discuss the findings of a report that we
issued last year on the efforts of federal bank regulators to support
minority banks.[Footnote 1] As described in our report, minority banks
are a small community within the banking industry, accounting for 2
percent of all financial institutions and total industry assets.
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 toward
which federal regulators must work 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 work toward preserving the
character of minority banks in cases involving mergers or acquisitions
of these institutions (I will refer to such activities as minority bank
support efforts in my testimony today).[Footnote 3] While the other
bank regulators--the Board of Governors of the Federal Reserve System
(Federal Reserve) and the Office of the Comptroller of the Currency
(OCC)--are not subject to Section 308 of FIRREA, they also have engaged
in efforts to support minority banks over the years.
You and other members of the House Financial Services Committee,
including the Chairman, requested in 2005 that we review the efforts of
all of the regulators to support minority banks out of concerns about
the effectiveness of those efforts. We had previously reported in 1993
that while FDIC and OTS had taken steps to comply with Section 308,
minority banks had mixed views on the effectiveness of the agencies'
efforts.[Footnote 4] In particular, minority banks were concerned that
the regulators did not provide adequate technical assistance, and, more
generally, that agency safety and soundness examiners did not
understand the unique challenges that their institutions faced. We
recommended in the 1993 report that FDIC and OTS periodically survey
minority banks to assess the effectiveness of their support efforts.
Given the passage of time between 1993 and 2005, you requested that we
follow up on minority bank issues and the efforts of all bank
regulators to support such institutions.
In my testimony today, I will discuss the key findings of our 2006
report, which included steps to (1) review the profitability of
minority banks over time; (2) identify the regulators' minority bank
support efforts and determine whether the regulators were evaluating
the effectiveness of those efforts; and (3) obtain the views of
minority banks on the support efforts and related regulatory issues.
Additionally, in the last section of this testimony, I will provide a
brief update on some of the steps the regulators have taken in response
to recommendations in our 2006 report.
To address the first objective, we obtained and analyzed financial data
for minority banks from FDIC for 1995, 2000, and 2005. 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 Treasury, FDIC, the
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.[Footnote 5] To address the third objective, we surveyed
all institutions identified by the banking regulators as minority
institutions. The Web-based 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.
Finally, in preparation for this testimony, we contacted the regulators
in order to obtain information on any efforts they may have undertaken
in response to the recommendations in our 2006 report.
We conducted our work in Washington, D.C., and New York in accordance
with generally accepted government auditing standards.
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 6] 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 7] 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, such as relatively higher
reserves for potential loan losses and administrative expenses and
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, at the time of our review, no agency had assessed
the effectiveness of its efforts through regular and comprehensive
surveys of minority banks or outcome-oriented performance
measures.[Footnote 8] FDIC--which supervises more than half of all
minority banks--had the most comprehensive program to support minority
banks and led an interagency group that coordinates such efforts. Among
other things, FDIC has designated officials in the agency's
headquarters and regional offices to be responsible for minority bank
efforts, held periodic conferences for minority banks, and established
formal policies for annual outreach to the banks it regulates to make
them aware of available technical assistance. OTS also designated staff
to be responsible for the agency's efforts to support minority banks,
developed outreach procedures, and focused its efforts on providing
technical assistance. OCC and the Federal Reserve, while not required
to do so by Section 308 of FIRREA, undertook some efforts to support
minority banks, such as holding occasional conferences for Native
American banks, and were planning additional efforts. FDIC proactively
sought to assess the effectiveness of its support efforts; for example,
it surveyed minority banks. However, these surveys did not address key
activities, such as the provision of technical assistance, and the
agency had not established outcome-oriented performance measures for
its support efforts. Furthermore, none of the other regulators
comprehensively surveyed minority banks on the effectiveness of their
support efforts or established outcome-oriented performance measures.
Consequently, the regulators were not well positioned to assess the
results of their support efforts or identify areas for improvement.
Our survey of minority banks identified potential limitations in the
regulators' support efforts that likely would be of significance to
agency managers and warrant follow-up analysis. 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 "do not know."
FDIC-regulated banks were more positive about their agency's efforts
than banks that other agencies regulated. 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 said they
had used such agency services within the last 3 years. Therefore, the
banks may have been missing opportunities to address problems that
limited their operations or financial performance. As we found in our
1993 report, some minority bank officials also said that examiners did
not always understand the challenges that the banks may face in
providing services in their communities or operating environments.
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.
To allow the regulators to better understand the effectiveness of their
support efforts, our October 2006 report recommended that the
regulators review such efforts 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; or (2) establishing outcome-oriented performance measures
to evaluate the extent to which their efforts are achieving their
objectives. Subsequent to the report's issuance, the regulators have
reported taking steps to better assess or enhance their minority bank
support efforts. For example, all of the regulators have developed
surveys or are in the process of consulting with minority banks to
obtain feedback on their support efforts. I also note that some
regulators plan to provide additional training to their examiners on
minority bank issues. These initiatives are positive developments, but
it is too soon to evaluate their effectiveness. We encourage agency
officials to ensure that they collect and analyze relevant data and
take steps to enhance their minority bank support efforts as may be
warranted.
Background:
Many minority banks are located in urban areas and seek to serve
distressed communities and populations that financial institutions
traditionally have underserved. 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
(see 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. As shown in table 3, FDIC serves
as the primary federal regulator for more than half of minority banks-
-109 of the 195 banks, or 56 percent--and the Federal Reserve regulates
the fewest.
Table 3: Number of Minority Banks, by Regulator, 2005:
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. 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. However, in
some cases minority banks not considered by their primary regulator to
be minority institutions were considered to be eligible for
participation in another regulator's efforts. We identified 10 FDIC-
regulated banks, 4 Federal Reserve-regulated banks, 3 OCC-regulated
banks, and 1 OTS-regulated bank fitting this description.
[End of table]
The federal regulators primarily focus on ensuring the safety and
soundness of banks and do so through on-site examinations and other
means. Regulators may also close banks that are deemed insolvent and
posing a risk to the Deposit Insurance Fund.[Footnote 9] FDIC is
responsible for ensuring that the deposits in failed banks are
protected up to established deposit insurance limits.
While the regulators' primary focus is bank safety and soundness, laws
and regulations can identify additional goals and objectives.
Recognizing the importance of minority banks, Section 308 of FIRREA
outlined five broad goals toward which FDIC and OTS, in consultation
with Treasury, are to work 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 insolvency of institutions
that are not currently insolvent;
* promoting and encouraging the creation of new minority banks; and:
* providing for training, technical assistance, and education programs.
Technical assistance is typically defined as one-to-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 also may provide technical assistance
to banks that is related to deficiencies identified in safety and
soundness examinations. In contrast, education programs typically are
open to all banks regulated by a particular agency or all banks located
within a regulator's regional office. For example, regulators may offer
training for banks to review compliance with laws and regulations.
Large Minority Banks Showed Profitability Close to That of Their Peers,
but Many Small and African-American Banks Have Been Less Profitable:
As shown in figure 1, our 2006 report found that, according to FDIC
data, 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 those of
their peers. 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. 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 10] By historical banking
industry standards, an ROA of 1 percent or more generally has been
considered to indicate an adequate level of profitability. We found
that profitability of the larger minority, 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.
Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005:
This figure is a combination pie and bar chart. The pie chart is
showing the minority banks by asset size, and the bar chart is showing
the average ROA for minority banks and peer groups by asset size, in
2005. The pie chart shows 32% minority banks $100 million-$300 million,
42% minority banks less than $100 million, 9% minority banks $300
million-$500 million,7% minority banks $500 million-$1 billion, 7%
minority banks $1 billion-$10 billion, and 3% minority banks greater
than $10 billion. The bar chart has asset sizes on the X axis, and ROA
on the Y axis.
[See PDF for image]
Source: GAO.
[End of figure]
In contrast, 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
generally were close to those of their peers, or ROAs of about 1
percent, and minority banks with assets of less than $100 million
showing greater differences with their peers.
The profitability of African-American banks generally has been below
that of their peers in all size categories (see fig. 2).[Footnote 11]
For example, 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.
Our analysis of FDIC data for 2000 and 1995 also found that African-
American banks of all sizes had lower ROAs than their peers.
Figure 2: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005:
This figure is a combination bar chart showing the average ROA of
African-American banks and peer banks by asset size, in 2005. The X
axis represents dollars in millions, and the Y axis shows ROA.
[See PDF for image]
Source: GAO analysis of FDIC data.
[End of figure]
Our analysis of 2005 FDIC data also suggests some possible reasons for
the differences in profitability between some minority banks and their
peers.[Footnote 12] 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 (see fig. 3).[Footnote 13]
Although having higher loan loss reserves may be necessary for the safe
and sound operation of any particular bank, they lower bank profits
because loan loss reserves are counted as expenses.
Figure 3: Average Loan Loss Reserves as a Percentage of Assets for
African-American and Peer Banks, 2005:
This figure is a bar chart showing average loan reserves as a
percentage of assets for African-American and peer banks, in 2005. The
X axis represents dollars in millions, and the Y axis represents
percentage.
[See PDF for image]
Source: GAO analysis of FDIC data.
[End of figure]
We also found some evidence that higher operating expenses might affect
the profitability of some minority banks. Operating expenses--
expenditures for items such as administrative expenses and salaries--
typically are compared to an institution's total earning assets, such
as loans and investments, to indicate the proportion of earning assets
that banks spend on operating expenses. As figure 4 indicates, many
minority banks with less than $100 million in assets had higher
operating expenses than their peers in 2005. Academic studies we
reviewed generally reached similar conclusions.
Figure 4: Average Operating Expenses Relative to Earning Assets of
Banks with Assets Less Than $100 million, 2005:
This figure is a bar chart showing average operating expenses relative
to earning assets of banks with assets less than $100 million, in 2005.
The X axis represents minority banks, and the Y axis represents
percentage.
[See PDF for image]
Source: GAO analysis of FDIC data.
[End of figure]
Officials from several minority banks we contacted also described
aspects of their operating environment, business practices, and
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, as part of their mission these banks
spend more time and resources on their customers per transaction than
other banks. 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.
Minority bank officials also cited other factors that may have limited
their profitability. In particular, in response to Community
Reinvestment Act (CRA) incentives, the officials said that larger banks
and other financial institutions were increasing competition for
minority banks' traditional customer base.[Footnote 14] The officials
said that larger banks could offer loans and other financial services
at more competitive prices because they could raise funds at lower
rates and take advantage of operational efficiencies. In addition,
officials from some African-American and Hispanic banks cited
attracting and retaining quality staff as a challenge to their
profitability.
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 the customers' primary language provided a competitive
advantage.
Regulators Adopted Differing Approaches to Supporting Minority Banks,
but Assessment Efforts Were Limited:
Our report found that FDIC--which supervises 109 of 195 minority banks-
-had developed the most extensive efforts to support minority banks
among the banking regulators (see fig. 5). FDIC had also 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. OTS had
developed a variety of support programs, including developing a
minority bank policy statement and staffing support structure. OCC had
also taken steps to support minority banks, such as developing a policy
statement. OCC and the Federal Reserve had also hosted events for some
minority banks.
Figure 5: Banking Regulators' Efforts to Support Minority Banks, as of
October 2006:
This figure is a chart showing banking regulators efforts to support
minority banks, as of October 2006.
[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 highlights some key support activities discussed in our
October 2006 report.
Policy Statements. FDIC, OTS, and OCC all have policy statements that
outline the agencies' efforts for minority banks. They 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, 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. While OCC and the Federal Reserve
did not have similar staffing structures, officials from these agencies
had contacted minority banks among their responsibilities.
Minority Bank Events and Training. FDIC has taken the lead role in
sponsoring, hosting, and coordinating events in support of minority
banks. For example, in August 2006 FDIC sponsored a national conference
for minority banks in which representatives from OTS, OCC, and the
Federal Reserve participated. FDIC also has sponsored the Minority
Bankers Roundtable (MBR) series, which agency 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. To
varying degrees, OTS, OCC, and the Federal Reserve also have held
events to support minority banks, such as Native American Institutions.
Technical Assistance. 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 from 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. OCC and the Federal Reserve provide technical
assistance to all of their banks, but had not established outreach
procedures for all their minority banks outside of the customary
examination and supervision processes. However, OCC officials told us
that they were in the process of developing an outreach plan for all
minority banks regulated by the agency. 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.
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 asked to bid on the assets of troubled minority banks that are
expected to fail. However, FDIC is required to accept the bids on
failing banks that pose the lowest expected cost to the Deposit
Insurance Fund.[Footnote 15] As a result, all bidders, including
minority bidders, are subject to competition. OTS and OCC have
developed written policies that describe how the agencies will work
with FDIC to identify qualified minority banks or investors to acquire
minority banks that are failing. While the Federal Reserve does not
have a similar written policy, agency officials say that they also work
with FDIC to identify qualified minority banks or investors. All four
agencies also said that they try to assist troubled minority banks
improve their financial condition before it deteriorates to the point
that a resolution through FDIC becomes necessary. For example, agencies
may provide technical assistance in such situations or try to identify
other minority banks willing to acquire or merge with the troubled
institutions.
At the Time of our Report, Regulators Did Not Assess Their Support
Efforts through Surveys or Performance Measures:
While FDIC was proactive in assessing its support efforts for minority
banks, none of the regulators 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
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.
As part of its assessment methods, FDIC conducted roundtables and
surveyed minority banks on aspects of its minority bank efforts. For
example, in 2005, FDIC requested feedback on its 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 16] 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.
While FDIC had taken steps to assess the effectiveness of its minority
bank support efforts, we identified some limitations in its approach.
For example, in FDIC's 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. None of the other regulators had surveyed
minority banks recently on support efforts or developed performance
measures.
By not taking such steps, we concluded that the regulators were not
well positioned to assess their support efforts or identify areas for
improvement. Further, the regulators could not 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 officials we surveyed 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. Some 36 percent of survey respondents described
their regulators' efforts as very good or good, 26 percent described
them as fair, and 13 percent described the efforts as poor or very poor
(see fig. 6). A relatively large percentage--25 percent--responded "do
not know" to this question.
Figure 6: Minority Banks' Ratings of Support Efforts, by Regulator:
This figure is a combination bar chart showing minority banks' ratings
of support efforts, by regular.
[See PDF for image]
Source: GAO.
[End of figure]
Banks' responses varied by regulator, with 45 percent of banks
regulated by FDIC giving very good or good responses, compared with
about 25 percent of banks regulated by other agencies. 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 "do not 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.
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 (see fig. 7). 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 that the information 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 7: Usefulness of FDIC's Roundtables and Conferences, by
Regulator:
This figure is a combination bar chart showing usefulness of FDIC's
roundtables and conferences, by regulator.
[See PDF for image]
Source: GAO.
[End of figure]
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 (see fig. 8). Minority banks regulated by OCC and the
Federal Reserve reported similarly low usage of 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 17] Further, although small minority banks and African-
American banks of all sizes have consistently faced financial
challenges and might benefit from certain types of assistance, the
banks also reported low rates of usage of the agencies' technical
assistance. While our survey did not address the reasons that
relatively few minority banks appear to use the 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 8: Minority Banks' Use of Technical Assistance, by Regulator:
This figure is a combination bar chart showing the 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:
More than 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 respondents mentioned this issue when
asked for suggestions about how regulators could improve their efforts
to support minority banks, and several minority banks that we
interviewed 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
relative to the Bank Secrecy Act's requirements for cash
transactions.[Footnote 18] 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.
Many survey respondents also said that a CRA provision that was
designed to assist their institutions was not effectively achieving
this goal. The provision allows bank regulators conducting CRA
examinations to give consideration to banks that assist minority banks
through capital investment, loan participation, and other ventures that
help meet the credit needs of local communities. Despite this
provision, only 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
(see fig. 9). Some minority bankers attributed their view that the CRA
provision has not been effective, in part, to a lack of clarity in
interagency guidance on the act's implementation. They said that the
interagency guidance should be clarified to assure banks that they will
receive CRA consideration in making investments in minority banks.
Figure 9: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions:
This figure is a bar chart showing minority banks' evaluation of the
extent to which CRA has encouraged partnerships with other
institutions.
[See PDF for image]
Source: GAO.
[End of figure]
Regulators Recently Have Taken Steps to Assess and Enhance Their
Minority Bank Support Efforts, but It Is Too Soon to Assess Their
Effectiveness:
Our 2006 report recommended that the bank regulators regularly review
the effectiveness of their minority bank support efforts and related
regulatory activities and, as appropriate, make changes necessary to
better serve such institutions. In conducting such reviews, we
recommended that the regulators consider conducting periodic surveys of
minority banks or developing outcome-oriented performance measures for
their support efforts. In conducting such reviews, we also suggested
that the regulators focus on the overall views of minority banks about
support efforts, the usage and effectiveness of technical assistance
(particularly assistance provided to small minority and African-
American banks), and the level of training provided to agency examiners
on minority banks and their operating environments.
Over the past year, bank regulatory officials we contacted identified
several steps that they have initiated to assess the effectiveness of
their minority bank support efforts or to enhance such support efforts.
They include the following actions:
* A Federal Reserve official told us that the agency has established a
working group that is developing a pilot training program for minority
banks and new banks. The official said that three training modules have
been drafted for different phases of a bank's life, including starting
a bank, operating a bank during its first 5 years of existence, and
bank expansion. The official said that the program will be piloted
throughout the U.S. beginning in early November 2007. Throughout the
course of developing, drafting, and piloting the program, Federal
Reserve officials said they have, and will continue to, consult with
minority bankers to obtain feedback on the effort.
* An OCC official said that the agency recently sent a survey to
minority banks on its education, outreach, and technical assistance
efforts that should be completed by the end of October. OCC also plans
to follow up this survey with a series of focus groups. In addition,
the official said OCC just completed an internal survey of certain
officials involved in supervising minority institutions, and plans to
review the results of the two surveys and focus groups to improve its
minority bank support efforts.
* FDIC officials told us that the agency has developed a survey to
obtain feedback on the agency's minority bank support efforts. They
estimate that the survey will be sent out to all minority institutions
(not just those minority banks FDIC supervises) in mid-December 2007.
* An OTS official told us that the agency will send out a survey to the
minority banks the agency supervises on its efforts in the next couple
weeks and that it has also conducted a series of roundtables with
minority banks in the past year.
The federal banking agencies have also taken some steps to address
other issues raised in our report. For example, Federal Reserve and
FDIC officials told us that that the agencies will provide additional
training on minority bank issues to their examiners. In addition, in
July 2007 the federal banking agencies published a CRA Interagency
Notice that requested comments on nine new "Questions and Answers"
about community reinvestment.[Footnote 19] One question covers how
majority banks may engage in and receive positive CRA consideration for
activities conducted with minority institutions. An OCC official said
that the comments on the proposed "Q and As" are under review.
While the regulators' recent efforts to assess and enhance their
minority bank support efforts and other activities are encouraging, it
is too soon to assess their effectiveness. For example, the Federal
Reserve's pilot training program for minority and new banks is not
scheduled to begin until later this year. Further, the other
regulators' efforts to survey minority banks on support efforts
generally also are at an early stage. We encourage agency officials to
ensure that they collect and analyze relevant data and take steps to
enhance their minority bank support efforts as warranted.
Mr. Chairman, this concludes my prepared statement. I would be happy to
address any questions that you or subcommittee members may have.
GAO Contacts:
For further information about this testimony, please contact George A.
Scott on (202) 512-7215 or at scottg@gao.gov.
Staff Acknowledgments:
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. Individuals
making key contributions include Wesley M. Phillips, Assistant
Director; Allison Abrams; Kevin Averyt; and Barbara Roesmann.
Footnotes:
[1] GAO, Minority Banks: Regulators Need to Better Assess Effectiveness
of Support Efforts, GAO-07-6 (Washington, D.C.: Oct. 4, 2006). The term
"minority banks" refers to all depository institutions--including
thrifts--that are considered minority-or women-owned by the Department
of the Treasury and the federal banking regulators--the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, and the Office
of Thrift Supervision.
[2] FIRREA, Pub. L. No. 101-73, § 308, 103 Stat. 183, 353 (1989).
[3] While Treasury convened interagency panels on minority bank issues
in the early 1990s, department officials said it no longer does so.
According to Treasury officials, the FIRREA consulting requirement is
open to some interpretation and the general view within the department
was that ongoing consultations were not required. However, Treasury
officials said that they do discuss minority bank issues with the
regulators as the need arises.
[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] Government Performance and Results Act of 1993, Pub. L. No. 103-62,
§7, 107 Stat. 285, 292, (codified at 39 U.S.C. § 2801(1)).
[6] The FDIC definition for peer groups includes all institutions of a
similar asset size, including minority and nonminority institutions.
[7] Examples of assets include loans and securities.
[8] Outcome-oriented performance measures assess the results of a
program against its intended purposes.
[9] FDIC administers the fund, which provides deposit insurance for
banks and thrifts.
[10] 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.
[11] In 2005, African-American banks did not occupy all asset size
categories. The largest African-American banks had less than $1 billion
in assets; thus, they did not populate in the two largest size
categories: $1 billion to $10 billion and greater than $10 billion.
[12] 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.
[13] 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.
[14] 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).
[15] Section 13(c) of the Federal Deposit Insurance Act (codified at 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 would incur in doing so would represent the least costly
alternative.
[16] The museum exhibition would have traced the history of minority
banks in the United States. However, after conducting additional
research on this proposal, FDIC decided not to pursue the project, in
part because of limited interest from some minority banks.
[17] The survey did find that minority banks that FDIC and OTS
regulated were more aware of the agencies' technical assistance
outreach efforts than institutions that OCC and the Federal Reserve
regulated. This finding is consistent with the fact that FDIC and OTS
have formalized technical assistance outreach efforts, while the other
regulators do not.
[18] 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.
[19] Community Reinvestment Act; Interagency Questions and Answers
Regarding Community Investment, 72 Fed. Reg. 37922 (notice and request
for comment Jul. 11, 2007).
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