United States General Accounting Office

GAO Testimony

Before the Subcommittee on Financial Institutions and

Consumer Credit, Committee on Banking and Financial

Services, House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

on Wednesday

October 8, 1997

Bank and Thrift

Examinations

Adoption of Risk-Focused

Examination Strategies

Statement of Thomas J. McCool

Director, Financial Institutions and Markets Issues

General Government Division

GAO/T-GGD-98-13

Summary 

Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

Bank supervision and examination today show evidence of lessons learned

from the bank and thrift crises of the 1980s and early 1990s. These

procedures are the primary basis for federal regulatory agencies to assess

the risks that banks and thrifts assume and to take actions to maintain a

safe and sound banking system and protect deposit insurance funds.

One critical lesson of the earlier crises was that excessive regulatory

forbearance contributed to the extent of the crises. The Federal Deposit

Insurance Corporation Improvement Act of 1991 (FDICIA) based regulatory

practices on a simple principle: if a depository institution fails to operate

in a safe and sound manner, it should be subject to timely and forceful

supervisory response, including, if necessary, prompt closure. FDICIA also

required that banks reform their corporate governance and accounting

practices and that the regulatory agencies improve their supervision of

insured banks and thrifts. In a November 1996 report, however, GAO noted

that questions remain about the effectiveness of FDICIA’s trip-wire

provisions which are intended to limit regulatory discretion. As

implemented, the trip-wire that enables regulatory action at early stage of

problems in a bank does little to limit regulatory discretion.

In several reports in the early 1990s, GAO also noted limitations in the

safety and soundness examinations conducted by the regulatory agencies.

The limitations included a lack of comprehensive internal control

assessments, insufficient review of loan quality and loan loss reserves,

weaknesses related to insider lending, and insufficient assessment of bank

holding company activities with insured bank subsidiaries. GAO

recommended actions to address these weaknesses, as well as weaknesses

in the documentation of the analysis that underlies the examination report

and in the supervisory review of examinations.

Regulators have made a number of changes in an effort to improve their

examinations. The changes respond, in part, to the dynamic banking

environment in which institutions can rapidly reposition risk exposures.

To ensure that banks and thrifts have the managerial ability and internal

control structure to effectively manage risk, the examination process is

evolving to put greater emphasis on risk management and internal

controls. An institution’s sensitivity to market risk is now a separate

component in its supervisory rating, for example. In general, these

changes appear appropriate and consistent with the recommendations GAO

has made. In its recent report on foreign banking organizations operating

in the United States, GAO noted that regulators have begun to put greater

emphasis on risk management processes and operational controls in

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Summary 

Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

examinations of these organizations. However, GAO has not fully assessed

the effectiveness of the changes for bank and thrift examination and notes

that they have been instituted during favorable economic conditions that

have contributed to strong bank and thrift profits. Also, several critical

tasks remain for the regulatory agencies: ensuring consistency in the

supervision and examination policies of multiple regulatory agencies,

ensuring staff expertise, and examining increasingly complex banking

organizations.

Page 2 GAO/T-GGD-98-13
Statement 

Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

Ms. Chairwoman and Members of the Committee:

We are pleased to be here today to discuss bank and thrift supervision and

examination.

Supervisory and examination procedures today show evidence of lessons

learned from the bank and thrift crises of the 1980s and early 1990s. These

procedures are the primary basis used by the federal regulatory agencies

to assess the risks that banks and thrifts assume and to take actions that

are needed to maintain a safe and sound banking system and protect the

deposit insurance funds.

A combination of regulatory and legislative changes, along with market

forces, has expanded the number and scope of activities undertaken by

insured depository institutions, particularly the largest ones, and thus the

risks that they assume. These expanded activities include offering and/or

dealing in a range of nontraditional bank products, such as mutual funds,

securities, derivatives, and other off-balance sheet products.1

 The resulting

complex institutions represent a major supervisory and regulatory

challenge. In keeping with the changes in the banking environment,

federal bank and thrift regulators have recently announced that bank

examinations will explicitly include an assessment of how effectively

banks manage risk and a rating on their sensitivity to risks posed by a

variety of market factors.

Although we have not yet fully assessed the implementation of most of the

recent changes to supervisory and examination policy, they appear to

address some of our concerns about examinations in the aftermath of

bank failures in the 1980s and early 1990s. Perhaps the most

important—yet unanswered—question to ask in assessing changes in bank

and thrift supervision is to what extent improvements in the detection of

problems can help ensure that regulators take timely and forceful

corrective action to prevent or minimize losses to the deposit insurance

funds.

In my testimony today, I would like to review some of our prior reports

and more recent work that

1

Off-balance sheet products represent wholesale activities and fall into two broad categories:

(1) derivative products and (2) contingent liabilities. Derivative products—such as futures, forwards,

options, and swaps—are financial instruments whose value depends on the value of another

underlying financial product. Contingent liabilities represent agreements by a banking institution to

provide funds when certain conditions are met.

Page 3 GAO/T-GGD-98-13
Statement 

Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

• describe the history of the bank and thrift crises of the late 1980s and early

1990s and the legislative response to these crises,

• highlight supervisory and examination weaknesses we have noted in the

past and improvement efforts that have been made or are under way, and

• identify continuing issues.

Bank and Thrift Crises

Highlighted

Shortcomings in

Supervision and

Resolution

From 1980 to 1994, record losses were absorbed by the federal deposit

insurance funds. In this period, nearly 1,300 thrifts failed, and 1,617

federally insured banks were closed or received FDIC financial assistance.

Losses to deposit insurance funds have been estimated at about

$125 billion.

Excessive Regulatory

Forbearance Contributed

to Problems of Thrifts and

Banks and Insurance Fund

Losses

Banks and thrifts failed during the 1980s for several reasons. A mismatch

between the income from fixed rate mortgages and the costs of borrowing

funds at market rates in competition with nondepository institutions were

among the reasons for large losses that led to the failure of thrifts. Banks

suffered losses from defaults on loans concentrated in several industries

that suffered economic downturns over the decade, including agriculture,

real estate, and developing nation loans.

One factor we and others cited as contributing to the problems of both

thrifts and banks during this period was excessive forbearance by federal

regulators. Regulators had wide discretion in choosing the severity and

timing of enforcement actions to correct unsafe and unsound practices.

They also had a common philosophy of trying to work informally and

cooperatively with troubled institutions. In a 1991 report, we concluded

that these conditions had resulted in enforcement actions that were

neither timely nor forceful enough to (1) correct unsafe and unsound

banking practices or (2) prevent or minimize losses to the insurance funds.

The regulators themselves have recognized that their supervisory practices

failed to adequately control risky practices that led to numerous thrift and

bank failures. We made specific recommendations for changes to the

supervisory process that would help ensure that institutions failing to

operate in a safe and sound manner would be subject to timely and

forceful supervisory response, including, if necessary, prompt closure.

Legislation Was Enacted to

Address Problems

Congress passed two major laws to address the thrift and bank crisis of

the 1980s. The first, the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), primarily responded to the bankruptcy

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Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

of the Federal Savings and Loan Insurance Corporation (FSLIC) and

troubles in the thrift industry. In addition to creating the Savings

Association Insurance Fund to replace FSLIC, FIRREA created a new thrift

industry regulator with increased enforcement authority—the Office of

Thrift Supervision. It also authorized FDIC to terminate a bank’s or thrift’s

deposit insurance for unsafe and unsound conditions.

The second law, the Federal Deposit Insurance Corporation Improvement

Act of 1991 (FDICIA), was enacted, in part, because of concerns that the

exercise of regulatory discretion during the 1980s did not adequately

protect the safety and soundness of the banking system or minimize

insurance fund losses. FDICIA contains several safety and soundness

provisions based on a simple principle: if a depository institution fails to

operate in a safe and sound manner, it should be subject to timely and

forceful supervisory response, including, if necessary, prompt closure.

Also, FDICIA requires a number of corporate governance and accounting

reforms to (1) strengthen corporate governance, (2) improve financial

reporting, and (3) aid early identification of safety and soundness

problems. Among the corporate governance and accounting reforms,

FDICIA establishes generally accepted accounting principles as the standard

for all reports to regulators; requires that management and auditors

annually report on the financial condition and management of the largest

depository institutions, including effectiveness of and compliance with

internal controls; and requires that institutions have independent audit

committees composed of outside directors.

In addition, FDICIA contains provisions for improving regulatory

supervision. FDICIA mandates annual on-site examinations of insured banks

and thrifts.2

 Also, consistent with specific recommendations we made, it

requires implementation of a “trip wire” approach to limit regulatory

discretion in key areas, including capital, by mandating specific regulatory

responses to safety and soundness problems. These changes, incorporated

in sections 38 and 39 of the Federal Deposit Insurance Act, were intended

to increase the likelihood of prompt regulatory action to prevent or

minimize loss to the insurance funds.

The Effectiveness of New Laws

in Safeguarding Deposit

Insurance Funds Could

Potentially Be Limited

In November 1996, we reported that inherent limitations of section 38

requirements and the regulatory implementation of section 39 raise

questions about their potential for effectively ensuring that regulators act

early and forcefully enough to prevent or minimize losses to the insurance

funds. Section 38 requires regulators to take specific, increasingly severe

2

An 18-month cycle is allowed for qualified smaller institutions with assets of less than $250 million.

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Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

regulatory action as an institution’s capital drops to lower levels. Although

this requirement should strengthen oversight in several ways,3

 it is

inherently limited as a tool for early intervention to correct problems and

thus safeguard the insurance funds. This is because impaired capital levels

often do not appear until after a bank has experienced problems in other

areas, such as asset quality and management.

Section 39 allows regulatory action before capital is impaired. However,

section 39, as implemented, appears to do little to reduce regulatory

discretion. The implementing guidelines and regulations did not

(1) establish clear and specific definitions of unsound conditions and

practices or (2) link such conditions or practices to specific mandatory

regulatory actions. As we noted in our 1996 report, the subjective nature of

the implementation continued the wide discretion that regulators had in

the 1980s over the timing and forcefulness of enforcement actions.

Other Weaknesses Were

Noted That Could Limit

Effectiveness or Reliability

of Examinations

Of course, before regulators can initiate an enforcement action, they must

first identify problems within an institution. The primary tool regulators

use for this is the full-scope safety and soundness examination.

Traditionally, such examinations have relied significantly on transaction

testing.4

 Transaction testing is used to evaluate the adequacy of the credit

administration process, assess the quality of loans, and ensure the

adequacy of the allowance for loan and lease losses. In past reviews of

bank and thrift examinations, we found limitations that could undermine

the reliability and effectiveness of examinations. These included the

following:

• A lack of comprehensive internal control assessments: In past work, we

found that weak internal controls were a common characteristic of failed

banks and thrifts.5

 Assessing the adequacy of internal controls is

important, because timely detection of inadequate controls can provide an

early warning of problems before they seriously erode asset quality and

capital. Our past reports on the examination process found that examiners

3

Section 38 should help prevent certain practices that rapidly eroded the capital of troubled

institutions and contributed to deposit insurance fund losses. Section 38 imposes growth restrictions

to prevent “undercapitalized” and “significantly undercapitalized” institutions from trying to “grow”

their way out of financial difficulty.

4

Regulatory guidance describes transaction testing as a reliable and essential examination technique

for use in the assessment of an institution’s condition and the verification of its adherence to internal

policies, procedures, and controls.

5

A financial institution’s system of internal control provides the framework for achieving management

objectives, protecting assets from loss, reporting financial information accurately, and complying with

pertinent laws and regulations.

Page 6 GAO/T-GGD-98-13
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Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

did not systematically test critical internal controls such as compliance

with loan underwriting policies. We recommended that a comprehensive

review of internal controls be a part of bank and thrift examinations and

that the condition of a bank’s or thrift’s system of internal controls receive

explicit consideration in a determination of an institution’s examination

rating.

• Insufficient review of loan quality and loan loss reserves: Effective loan

quality assessment is important, because loans generally make up the

majority of bank and thrift assets and involve the greatest risk.

Determining the adequacy of loan loss reserves is critical because without

such a determination, in combination with a proper assessment of loan

quality, examiners have no reliable basis to understand an institution’s

true financial condition. We recommended that examination policies

require a representative sampling of loans and better documentation of

loan quality and the development of a methodology to determine the

adequacy of loan loss reserves.

• Weaknesses in detecting and ensuring corrective actions related to insider

lending: Loans to insiders—such as bank directors, officers, or

principals—should pose no greater risk than transactions with other bank

customers. Abusive insider activities can be among the most insidious of

reasons for the deterioration of the health of a bank. In 1994, we reported

that examiners faced numerous impediments to determining the full

extent of insider problems at banks and that such problems were not

always corrected as a result of examinations. We recommended that bank

regulators review insider activities in their next examination of each bank,

partly by comparing data provided during the examination with

information from other sources. We also recommended that federal bank

regulators ensure that all directors understand their responsibility for

seeing that effective corrective action is taken.

• Insufficient assessment of actual and potential risks of bank holding

company activities to insured bank subsidiaries: In our reports, we have

found that transactions between a bank holding company and its insured

bank subsidiary were not always thoroughly reviewed. Such transactions

include loans from the bank to other, nonbank subsidiaries; fees charged

by the bank holding company to the bank subsidiary; and asset transfers

from nonbank subsidiaries to the bank subsidiary. We recommended that

the supervisors develop and require mandatory procedures for assessing

the actual and potential risks to insured bank subsidiaries of bank holding

company activities.

We also found in past reviews the need for improvements in important

elements of examination quality control. We regard these quality controls

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Risk-Focused Examination Strategies

as essential, because examiners have broad discretion and must exercise

considerable judgment in planning and conducting examinations and in

drawing conclusions about bank safety and soundness. Our findings led us

to recommend that regulators establish policies to ensure

• sufficient documentation of the analysis that underlies the examination

report, and

• thorough supervisory review of all examination and inspection procedures

Finally, we have noted in past reports that improved coordination among

federal and state banking supervisors could result in more efficient and

effective use of examination resources. Coordination is also critical for the

supervision of large banking institutions in that it could foster consistency

in examinations and reduce regulatory burden.

Regulators Have Made

Significant Efforts to

Improve

Examinations

Regulators have made a number of changes in an effort to improve their

examinations since the bank and thrift crises of the late 1980s, and I would

like to highlight some that seem most significant. In general, these changes

appear appropriate and consistent with recommendations we have made.

However, we have not fully assessed the effectiveness of their

implementation. When evaluating these changes, it is also important to

note that they have occurred during favorable economic conditions that

have contributed to strong bank and thrift profits. The most important test

for the changes will be whether the information they provide in

examination reports would lessen the severity of problems for banks and

thrifts during any future economic downturn.

A Changing Banking

Environment Has

Prompted Greater

Emphasis on Risk

Management and Internal

Controls

One of the most significant efforts at improvement involves changes in

examinations to account for a dynamic banking environment in which

institutions can rapidly reposition their portfolio risk exposures.

Regulators have recognized that in such an environment, periodic

assessments of the condition of financial institutions based on transaction

testing alone are not sufficient for ensuring the continued safe and sound

operation of financial institutions. To ensure that institutions have the

internal controls and processes in place necessary to identify, measure,

monitor, and control risk exposures that can change rapidly, the approach

regulators are taking to the examination process is evolving to emphasize

evaluations of the appropriateness of such internal controls and processes

instead of relying heavily on transaction testing.

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Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

Assessment of Risk

Management and Internal

Controls Is Reflected in New

Rating System

Regulators have changed the system they use to rate the safety and

soundness of banks and thrifts to reflect an increasing emphasis on risk

management and internal controls. Until January 1997, examiners used the

rating system known as CAMEL (capital adequacy, asset quality,

management and administration, earnings, and liquidity). Examiners were

instructed in 1996 to give greater emphasis to the adequacy of an

institution’s risk management processes, including its internal controls

when evaluating management under the CAMEL system.

On December 9, 1996, the Federal Financial Institution Examination

Council added an “S” to create a new CAMELS rating, with the S

representing an institution’s sensitivity to market risk. The S rating

component is to represent the result of a combined assessment of both the

institution’s level of market risk and its ability to manage market risk.6

Regulators expect the sophistication of an institution’s risk management

system to be commensurate with the complexity of its holdings and

activities and appropriate to its specific needs and circumstances.

I should mention that in regulators’ examinations of U.S. branches of

foreign banks, an emphasis on risk management and internal controls

began in 1994 with implementation of a rating system known as ROCA (risk

management, operational controls, compliance, and asset quality.)

As I noted earlier, we have recommended that the condition of a bank or

thrift’s system of internal controls receive explicit consideration in a

determination of the institution’s examination rating. We have also

recommended that the regulators develop and require minimum

mandatory procedures to assess the actual and potential risks of bank

holding company activities to insured bank subsidiaries. Increased

attention to internal controls and risk management, if effectively

implemented, should help enhance the regulators’ ability to keep pace

with a changing banking environment. The supervisors’ effective

implementation of these initiatives is essential to the success of their

examination programs. Regulators also told us that they believe that these

initiatives complement the prompt corrective action policies mandated by

FDICIA.

6

Market risk—the potential for losses due to changes in interest rates, foreign exchange rates,

commodity prices, or equity prices—can adversely affect a bank or thrift’s earnings or economic

capital. For many banks, market risk is largely the interest rate risk associated with their loan

portfolios.

Page 9 GAO/T-GGD-98-13
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Bank and Thrift Examinations: Adoption of

Risk-Focused Examination Strategies

Regulators Have Made

Other Improvement Efforts

Other improvement efforts I’d like to highlight that we regard as consistent

with our earlier recommendations include the following:

• Improvements in examination guidelines to detect insider lending

problems: The recommendations we made in this area have been adopted

by the Federal Reserve Board, FDIC, and the OCC. Specifically, examination

guidance now explicitly calls for reviewing insider activities and ensuring

that directors understand their responsibility for effective corrective

action.

• Improvements under way in examination documentation and supervisory

review of examination findings: Federal banking regulators have described

relevant improvement efforts. For example, according to the Federal

Reserve’s Framework for Risk-Focused Supervision of Large Complex

Institutions, the Federal Reserve has been working to refine its standards

for workpapers, especially for examinations of state member banks. Also,

the Federal Reserve and FDIC have recently implemented an automated

examination process to standardize documentation. Federal Reserve

officials said that about 25 U.S. states, to date, have also indicated they

will begin using this standardized work process. In addition, OCC issued a

new policy in February 1997 describing workpaper requirements for all of

its supervisory activities.

• Agreements to coordinate examinations by federal and state banking

regulators: The Federal Reserve Board, FDIC, and state banking

departments completed a single Nationwide State/Federal Supervisory

Agreement in November 1996 covering state-chartered banks that open

branches in other states. This agreement modifies an April 1996

State/Federal Protocol and Model Agreement by including the Federal

Reserve Board as a signatory. Together, these agreements set out, among

other things, the goals of supervision, division of responsibilities among

the various regulators, and common examination and application

processes. Federal Reserve and FDIC officials told us that implementation

to date has been successful. These officials also said the examination

process has been improved by assigning each institution a single case

manager who is responsible for coordinating all examinations of that

institution.

Continuing Issues Changes in examination procedures and in the banking industry will lead

to new challenges for the supervisory agencies. A key task will be ensuring

consistency in the supervisory and examination policies and practices of

the agencies. Further, the agencies face the tasks of ensuring staff

expertise and examining increasingly complex banking organizations.

Page 10 GAO/T-GGD-98-13
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Risk-Focused Examination Strategies

Supervisory Coordination

and Consistency

Nontraditional lines of business and interstate branching will bring

increasing numbers of depository institutions under the jurisdiction of

several regulatory agencies. One result of this will be a more complex task

of ensuring that the regulations and enforcement actions of multiple

agencies are consistent and that their examinations provide a complete

picture of the banks’ and thrifts’ operations.

The division of responsibilities among the bank and thrift regulatory

agencies is not generally based on specific areas of expertise, functions, or

activities of either the regulatory agency or the banks for which they are

responsible. Rather, responsibilities are divided according to the type of

charter—thrift or bank, national or state—and whether banks are

members of the Federal Reserve System. Some analysts, bank industry

representatives, and agency officials credit the current structure with

encouraging financial innovations and providing checks and balances to

guard against arbitrary oversight decisions or actions. We and others,

however, have identified concerns that arise from having four agencies

with similar responsibilities. These concerns include possible inconsistent

treatment of institutions in examination policies and practices,

enforcement actions, and regulatory standards and decisionmaking. In the

case of bank holding companies, with the Federal Reserve responsible for

the bank holding company and other federal regulators responsible for the

banking subsidiaries, divided supervisory responsibility may hinder

regulators from obtaining a complete picture of an entire banking

organization.

Although we recognize that only Congress can make the policy judgments

in deciding whether and how to restructure the bank oversight system, we

have recommended that Congress reduce the number of agencies with

primary responsibilities for bank oversight. If the current structure, with

multiple agencies, continues, coordinating their activities and ensuring

consistency in their regulations and enforcement actions will remain

difficult issues. The regulatory agencies have several initiatives under way

that are intended to better coordinate their activities and ensure

consistency, such as the automated examination process developed by the

Federal Reserve and FDIC. Ultimately, these initiatives should be judged by

their results, particularly including the quality of the examinations.

Supervisory Expertise As banking activities have become more complex, bank examinations

have required increasingly broader expertise. As a result, another issue

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Risk-Focused Examination Strategies

that the regulators will continue to face is the need to build and maintain

the expertise needed for supervising these more complex organizations.

Federal regulators have hired specialists, such as economists with

technical expertise in the quantitative methods and economic models

underlying banks’ risk management systems and specialists in electronic

banking, bank information systems, and risk management. Further, the

agencies have a number of initiatives to improve the scope and quality of

information that is provided to field examiners to help them understand

banking activities and the risks that banks undertake.

In addition, the supervisory agencies have recently completed training on

the risk-focused examination process and the new CAMELS rating system.

Previously, the Federal Reserve took steps to enhance examiner training

on internal controls by developing an Internal Controls School in 1995 that

was designed initially for examiners of U.S. branches and agencies of

foreign banks and expanded to meet the needs of examiners of U.S.

domestic banks. Federal Reserve officials told us that they also developed

a training seminar in 1996 for examiners and in-house international

supervisory staff that emphasizes ensuring the appropriate supervisory

strategy for the U.S. operations of foreign banks.

Examinations of Complex

Financial Institutions

With the passage of interstate banking and the increased reliance of banks

on lines of business other than traditional lending, we anticipate that the

task of bank management will become more difficult. The bank regulatory

agencies will face a similar challenge—ensuring that their examinations

and enforcement strategies lead to sound management practices as banks

increasingly rely on nontraditional lines of business. Since large, complex

bank organizations are likely to come under the regulatory jurisdiction of

several agencies, the problem of coordination that I mentioned earlier will

be relevant for these organizations. Several of our recent reports point to

other types of issues that are likely to become increasingly common as

banks move into more complex lines of business.

In our report on the operations of securities activities in banks and bank

holding companies, for instance, we noted that most banks provided

securities services in affiliates that are regulated primarily by securities

regulators. Some securities activities are overseen by the bank regulators,

however, so the potential for inconsistent oversight exists. Because

securities oversight would be enhanced by increased cooperation,

coordination, and sharing of regulatory expertise among bank and

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Risk-Focused Examination Strategies

securities regulators, we recommended that the bank regulators work with

the Securities and Exchange Commission and the National Association of

Securities Dealers to develop consistent standards for investor protection

and to ensure the safety and soundness of banks that are engaged in some

form of securities business.

In our report on the operations of foreign bank organizations in the United

States, we noted deficiencies in the internal controls of these

organizations. Although federal bank regulators are aware of these

deficiencies and have initiatives under way that they believe will address

these problems, we noted that the regulators do not have plans to evaluate

the results of these initiatives. We recommended that the Federal Reserve

Board develop a strategy for evaluating the outcomes of the efforts to

improve the internal controls of foreign bank organizations.

It will be important for the regulatory officials to develop a strategy,

including objective measures, for assessing the progress they are making

through their efforts to improve the examination process and to ensure

that the procedures and systems necessary to collect the data relevant to

those measures are in place and operating. Such objective evaluations

should be useful in determining whether the examinations are achieving

their intended results or whether additional initiatives may be needed.

At the same time, we are encouraged by some of the changes that the bank

regulatory agencies have made in their examination procedures, since they

appear to address a number of the shortcomings that we had addressed in

our earlier reports. As one official noted, the small number of banks in

difficulty has provided the regulatory agencies with an opportunity to

improve their operations. However, the business of banking has been

changing at the same time, and banks are taking on new risks. Also,

because of the differences in the responsibilities and the examination and

enforcement approaches among regulators, such as those for the security

activities of depository institutions, a key question is whether

improvement will be uniformly adopted by all regulators and consistently

implemented. Whether current examination strategies provide an adequate

basis for the regulatory agencies to anticipate problems and take

appropriate and prompt corrective actions to address those problems,

especially during any future economic downturn, is unknown.

Ms. Chairwoman, this concludes my statement. My colleagues and I would

be pleased to respond to any questions you may have.

Page 13 GAO/T-GGD-98-13
Page 14 GAO/T-GGD-98-13
Page 15 GAO/T-GGD-98-13
Related GAO Products

Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches

(GAO/GGD-97-181, Sept. 29, 1997).

Financial Regulation: Bank Modernization Legislation (GAO/T-OCE/GGD-97-103,

May 7, 1997).

Bank and Thrift Regulation: Implementation of FDICIA’s Prompt Regulatory

Action Provisions (GAO/GGD-97-18, Nov. 21, 1996).

Bank Oversight: Fundamental Principles for Modernizing the U.S.

Structure (GAO/T-GGD-96-117, May 2, 1996).

Financial Regulation: Modernization of the Financial Services Regulatory

System (GAO/T-GGD-95-121, Mar.15, 1995).

Bank Insider Activities: Insider Problems and Violations Indicate Broader

Management Deficiencies (GAO/GGD-94-88, Mar. 30, 1994).

Bank Regulation: Consolidation of the Regulatory Agencies

(GAO/T-GGD-94-106, Mar. 4, 1994).

Bank and Thrift Regulation: FDICIA Safety and Soundness Reforms Need to

Be Maintained (GAO/T-AIMD-93-5, Sept. 23, 1993).

Bank and Thrift Regulation: Improvements Needed in Examination Quality

and Structure (GAO/T-AFMD-93-2, Feb. 16, 1993).

Bank Examination Quality: OCC Examinations Do Not Fully Assess Bank

Safety and Soundness (GAO/AFMD-93-14, Feb. 16, 1993).

Bank and Thrift Regulation: Improvements Needed in Examination Quality

and Regulatory Structure (GAO/AFMD-93-15, Feb. 16, 1993).

Bank Examination Quality: FDIC Examinations Do Not Fully Assess Bank

Safety and Soundness (GAO/AFMD-93-12, Feb. 16, 1993).

Bank Examination Quality: FRB Examinations and Inspections Do Not

Fully Assess Bank Safety and Soundness (GAO/AFMD-93-13, Feb. 16, 1993).

Banks and Thrifts: Safety and Soundness Reforms Need To Be Maintained

(GAO/T-GGD-93-3, Jan. 27 1993).

Page 16 GAO/T-GGD-98-13
Related GAO Products

Bank Supervision: Prompt and Forceful Regulatory Actions Needed

(GAO/GGD-91-69, Apr. 15, 1991).

(233535) Page 17 GAO/T-GGD-98-13
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