United States General Accounting Office

GAO Report to the Honorable

Charles E. Schumer

House of Representatives

November 1996 BANK OVERSIGHT

STRUCTURE

U.S. and Foreign

Experience May Offer

Lessons for

Modernizing U.S.

Structure

G O A

years

1921 - 1996

GAO/GGD-97-23

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-259978 

November 20, 1996

The Honorable Charles E. Schumer

House of Representatives

Dear Mr. Schumer:

Proposals to consolidate U.S. bank regulatory agencies have raised questions about how other

countries structure and carry out their various bank regulation and central bank activities. You

asked us to provide you with information about the structure and operations of bank oversight

and central bank activities in five countries: Canada, France, Germany, Japan, and the United

Kingdom, which we have done. You then asked us to draw on these reports to identify potential

avenues for oversight modernization, and to identify the characteristics of the five countries’

regulatory structures that might be useful to consider in any U.S. oversight modernization

effort. This report responds to that request. It contains recommendations to Congress

concerning characteristics that should be included in any effort to modernize the U.S. bank

oversight structure.

We are sending copies of this report to the Chairman of the Board of Governors of the Federal

Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Comptroller

of the Currency, and the Acting Director of the Office of Thrift Supervision. We are also sending

copies to Members of the House and Senate banking committees, other interested committees

and subcommittees, and other interested parties.

This report was prepared under the direction of Mark J. Gillen, Assistant Director. If you have

any questions, please call me on (202) 512-8678. Other major contributors are listed in appendix

VIII.

Sincerely yours,

James L. Bothwell, Director

Financial Institutions

 and Markets Issues
Executive Summary

Purpose Many proposals have been made to restructure the multiagency system for

federal oversight of banking institutions in the United States. In five recent

reports, GAO reviewed how banks are regulated and supervised in Canada,

France, Germany, Japan, and the United Kingdom (U.K.). Although GAO

found that each country’s oversight structure and approach reflected a

unique history, culture, and banking industry, GAO believes that certain

aspects of these foreign regulatory systems may be useful for Congress to

consider in any future deliberations about how to modernize bank

oversight in the United States.

Several specific proposals to modernize and consolidate the U.S. bank

oversight structure were debated in the 103rd Congress. To obtain insight

into how banks are regulated in other major countries, Congressman

Charles E. Schumer asked GAO to review the structure and operation of

bank oversight in Canada, France, Germany, Japan, and the U.K., with a

particular focus on the regulatory roles of the central banks in these

countries. This report draws on these findings,1

 as well as previous GAO

work2 on the U.S. financial regulatory system, to discuss (1) aspects of the

five foreign systems GAO reviewed that may be useful for Congress to

consider in any future modernization efforts, (2) perceived problems with

federal bank oversight in the United States, and (3) principles for

modernizing the U.S. federal bank oversight structure.

Background In many respects, the structure of the U.S. banking system is unlike those

of the other major industrialized countries that GAO reviewed. For

example, the United States has a dual banking system composed of almost

12,000 commercial banks and savings and loan institutions (banking

institutions) that can be either state or federally chartered. As a result, all

50 states and the federal government are involved with bank oversight in

the United States. In contrast, the banking industries in the five foreign

countries were more concentrated, and bank oversight was generally the

responsibility of the national governments. Any regional or local

government involvement was typically limited to oversight of specialized

financial institutions, such as credit cooperatives.

1

See Bank Regulatory Structure: The Federal Republic of Germany (GAO/GGD-94-134BR, May 9, 1991);

Bank Regulatory Structure: The United Kingdom (GAO/GGD-95-38, Dec. 29, 1994); Bank Regulatory

Structure: France (GAO/GGD-95-152, Aug. 31, 1995); Bank Regulatory Structure: Canada

(GAO/GGD-95-223, Sept. 28, 1995); and Bank Regulatory Structure: Japan, which is currently a draft

report.

2

See listing of related products at the end of this report.

Page 2 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

Differences also existed in the predominant organizational structure of

banking institutions in the United States and these foreign countries.

Specifically, the bank holding company structure, consisting of a parent

company with one or more subsidiaries that may include banks, savings

and loans, and other financial entities providing services that are deemed

closely related to banking, is particular to the United States. Foreign bank

organizational structures generally consisted of banks and their directly

owned subsidiaries, with no parent holding companies. These

organizational differences exist partly because bank activities are

generally more restricted in the United States than in other countries.

Each of the five foreign countries, for example, allowed banks or bank

subsidiaries to conduct securities and, with the exception of Japan,

insurance activities. In the United States, such activities are generally

restricted to affiliates of banks within a holding company structure or

prohibited entirely. Banks in some of these foreign countries were also

permitted to own or affiliate with nonfinancial commercial firms, which is

generally prohibited in the United States.3

Most of the five countries GAO reviewed had substantially reformed their

bank oversight structures, or supervisory processes, to respond to

changing conditions in their financial services sectors or to some financial

crises. For example, Canada created a single federal banking supervisor in

1987 to improve bank supervision after a series of bank failures, and

France revised its bank oversight structure in 1984 to address perceived

regulatory inequities among financial institutions. Germany replaced its

system of state bank oversight in 1961 with a federal system, involving

both a single federal bank supervisor and the German central bank, to

better address the increasing complexity of the banking industry. And

bank oversight in the U.K. became more formal in nature, both as a result of

changes in financial markets and as a consequence of three banking crises

that prompted changes in British banking laws. In addition, both the U.K.

and Japan are currently considering reforms to their supervisory

structures and processes in the wake of recent financial institution

failures.

In contrast to these foreign experiences, the bank oversight structure in

the United States has evolved in a more piecemeal fashion and has not

changed significantly since the 1930s. At the federal level, four agencies

3

U.S. unitary thrift holding companies may be owned by or own any type of financial services or other

business.

Page 3 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

have supervisory responsibilities for different segments of the banking

industry, as shown in figure 1.4

Figure 1: Federal Responsibilities for

Bank Oversight

Developing laws

Developing and

issuing regulations

Licensing/chartering

Bank information

Bank

Enforcement 

Deposit 

Failure 

Lender of last 

Crisis 

Treasurya

OCC


OTS


Federal Reserve


FDICb

banks

reporting and analysis

 examinations

authority

insurance

resolution

resort

management

aOCC and OTS are within Treasury.

bThe Board of Directors of FDIC includes the heads of OCC and OTS as well as three

independent members, including the chairman and vice chairman, who are appointed by the

President and confirmed by the Senate.

Source: FDIC, FRS, OCC, OTS, and Treasury.

• The Office of the Comptroller of the Currency (OCC), established in 1864,

charters and supervises national banks and federal branches and agencies

of foreign banks.

• The Federal Reserve System (FRS), established in 1913, supervises bank

holding companies, state-chartered banks that are members of FRS, and the

U.S. operations of foreign banking organizations; it also regulates foreign

activities and investments of FRS member banks (both national and state

chartered), and Edge Act corporations.5

• The Federal Deposit Insurance Corporation (FDIC), established in 1933, is

the federal supervisor of federally insured, state-chartered banks that are

not FRS members.

• The Office of Thrift Supervision (OTS) charters and supervises national

thrifts and also supervises state-chartered thrifts and thrift holding

4

This report does not address federal oversight of credit unions—which are also classified as

depository institutions—because of their relatively small size, focus on consumer lending activities,

and the fact that they have not been included in most recent reform proposals.

5

Edge Act corporations are generally limited to international banking and certain incidental activities,

and are used primarily by U.S. banks to invest indirectly in foreign banks or financial institutions.

Page 4 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

companies. OTS assumed these functions in 1989 from the Federal Home

Loan Bank Board, which was established in 1932.

Congress created the Federal Financial Institutions Examination Council

(FFIEC) in 1979—comprising OCC, FDIC, FRS, OTS, and the National Credit

Union Administration representatives—to promote consistency among

these regulatory agencies, primarily in the area of financial examinations.

FRS and FDIC have other major responsibilities in addition to their bank

oversight functions. For FRS, these include responsibility for developing

and implementing monetary policy, liquidity lending, and operating and

overseeing the nation’s payments and clearance systems. For FDIC, these

include responsibility for administering the federal deposit insurance

funds, resolving failing or failed banks, and disposing of failed bank assets.

Organizationally, OCC and OTS are within the Department of the Treasury

(Treasury), which has a major role in developing legislative and other

policy initiatives regarding regulation of U.S. financial institutions and

markets. Treasury also performs certain limited banking-related functions

directly, such as approving resolutions of depository institutions whose

failure could threaten the stability of the financial system.

GAO reviewed the bank oversight structures in Canada, France, Germany,

Japan, and the U.K. to identify aspects that could be useful for Congress to

consider if it decides to modernize the federal bank oversight structure in

the United States. Although GAO did not attempt to assess the comparative

effectiveness of these foreign oversight structures, GAO notes that (1) the

major goals of bank oversight in these countries are similar to those in the

United States; (2) the oversight structures and processes in these

countries have evolved to keep pace with changing banking conditions

and activities; and (3) the increasing consolidation of the U.S. banking

industry and the growing importance of nontraditional banking activities

for many U.S. banks are bringing it closer to its foreign counterparts.

Results in Brief Several aspects of the bank oversight systems that GAO reviewed in

Canada, France, Germany, Japan, and the U.K. may be useful for Congress

to consider if it decides to modernize federal bank oversight in the United

States. First, these foreign systems had less complex and more

streamlined oversight structures. In all five countries, fewer national

agencies were involved with bank regulation and supervision than in the

United States. In all but one of these countries, both the central bank and

Page 5 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

the ministry of finance had some role in bank oversight, and several of

these countries relied on the work of the banks’ external auditors to

perform certain oversight functions. Second, in those countries with more

than one national oversight entity, various mechanisms and procedures

existed so that banking institutions were generally subject to a single set

of rules, standards, or guidelines. Third, in all cases, there was one entity

that was clearly responsible and accountable for consolidated oversight of

banking organizations as a whole.

In contrast to these foreign systems, the bank oversight structure in the

United States is relatively complex, with four different federal agencies

having the same basic oversight responsibilities for those banks under

their respective purview. GAO’s prior work has shown that these agencies

have often differed on how laws should be interpreted, implemented, and

enforced; how banks should be examined; and how to respond to troubled

institutions.6

 Industry representatives and expert observers have

contended that multiple examinations and reporting requirements

resulting from the shared oversight responsibilities of four different

regulators contribute to banks’ regulatory burden, and that the federal

oversight structure is inherently inefficient. Furthermore, having one

agency responsible for examining all U.S. bank holding companies, with a

different agency or agencies responsible for examining the holding

companies’ principal banks, can result in overlap and a lack of clear

responsibility and accountability for consolidated oversight of the

operations of U.S. banking organizations.

GAO’s work on these foreign systems underscored the relevance of four

basic principles that GAO believes Congress could use to help guide its

decisionmaking if Congress considers modernizing the U.S. bank

regulatory structure in the future. Following these principles, which GAO

previously identified based on prior extensive work on the federal bank

regulatory agencies, any modernized structure should provide for

(1) clearly defined responsibility and accountability for consolidated and

comprehensive oversight of entire banking organizations, with

coordinated functional regulation and supervision of individual

components; (2) independence from undue political pressure, balanced by

appropriate accountability and adequate congressional oversight

(3) consistent rules, consistently applied for similar activities; and

(4) enhanced efficiency and reduced regulatory burden, consistent with

maintaining safety and soundness.

6

See list of related products at the end of this report.

Page 6 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

Principal Findings

Foreign Oversight Systems In general, the foreign oversight systems GAO reviewed had less complex

structures, better defined mechanisms to coordinate policies and

procedures, and clearer responsibility and accountability for consolidated

oversight than that of the United States. Typically, foreign central banks,

finance ministries, and sometimes a federal supervisory agency, had some

role in these foreign oversight processes. Deposit insurers in these foreign

countries usually had narrower roles than that of FDIC in the United States.

Bank Oversight Involved Fewer

National Entities, but Generally

Included Central Banks and

Finance Ministries

The number of national entities involved with bank oversight in the five

countries GAO reviewed ranged from one to three, with no more than two

national agencies ever significantly involved in any one major aspect of

bank oversight, such as chartering, regulation, supervision, or

enforcement. Commercial bank chartering, for example, was the direct

responsibility of only one entity in each country. In those countries where

two entities were involved in oversight, the division of oversight

responsibilities generally was based on whichever entity had the required

expertise.

Central banks generally had significant oversight roles. While no two

countries had identical oversight roles for their central banks, the central

bank in each country had the ability to influence bank behavior either

formally or informally and had access to information about the banking

industry. In all five countries except Canada, central bank staff were

directly involved in bank oversight. In large part, central bank involvement

was based on the premise that traditional central bank responsibilities for

monetary policy, payment systems, liquidity lending, and crisis

intervention are closely interrelated with bank oversight.

Each of the five countries recognized that its national government had the

ultimate responsibility for maintaining public confidence in, and the

stability of, the financial system, and thus provided the ministry of finance,

or its equivalent, with a role in bank oversight. In at least one country, the

finance ministry had a more substantial oversight role than did the central

bank, and in all five countries the finance ministries had influence over

bank oversight and access to information about the financial condition of

the industry. While finance ministries were generally included in bank

oversight, most of these countries also incorporated unique checks and

balances into their systems to guard against undue political influence.

Page 7 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

Deposit Insurers Generally Had

More Narrow Roles and Often

Were Not Government Funded

or Administered

While central banks and finance ministries generally had substantial roles

in bank oversight, deposit insurers, with the exception of the Canada

Deposit Insurance Corporation, did not. Their less substantial oversight

roles may be attributable to the fact that there were no explicit guarantees

of deposit insurance funds by the national governments in most of these

countries and that deposit insurers were often industry administered.

Thus, in most of these countries, deposit insurers were viewed primarily

as a source of funds to help resolve bank failures—either by covering

insured deposits or by helping to finance acquisitions of failed or failing

institutions by healthy institutions. Supervisory information was generally

not shared with these deposit insurers, and resolution decisions for failed

or failing banks were commonly made by the primary bank oversight

entities.

Mechanisms and Procedures

Were Used to Help Ensure

Consistent Oversight and

Reduce Burden

Most of the foreign structures with multiple oversight entities

incorporated mechanisms and procedures to help ensure consistent

oversight and reduce regulatory burden. As a result, banking institutions

that were conducting the same lines of business were generally subject to

a single set of rules, standards, or guidelines. Oversight coordination

mechanisms included having oversight committees or commissions with

interlocking boards, shared staff, or mandates to share information. Some

countries also relied on the work of the banks’ external auditors, at least

in part, to increase efficiency and reduce burden. Supervisors in two

countries used external auditors as the primary source of monitoring

information. In Germany, the use of external auditors was part of an

explicit plan to minimize agency staffing and duplication of effort between

examiners and auditors. In the U.K., their use was seen as the most efficient

way of producing the necessary checks on banks’ systems of controls and

as being compatible with the Bank of England’s traditional supervisory

approach “based on dialogue, prudential returns, and trust,” according to

Bank of England staff. In part, the use of external auditors’ work was also

facilitated because bank oversight in these countries was focused almost

exclusively on assessing the safety and soundness of banking institutions,

and not on consumer protection issues.

Clear Responsibility and

Accountability Existed for

Consolidated Oversight

In the five countries GAO reviewed, banking organizations typically were

subject to consolidated oversight, with one oversight entity clearly being

legally responsible and accountable for an entire banking organization,

including its subsidiaries. For example, if securities or insurance activities

were permissible in bank subsidiaries, functional regulation of those

subsidiaries was generally to be provided by the supervisory authority

with the requisite expertise. Bank supervisors commonly relied on those

Page 8 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

functional regulators for information but remained responsible for

ascertaining the safety and soundness of the consolidated banking

organization as a whole.

U.S. Bank Oversight

System

In contrast to the five foreign oversight systems GAO reviewed, the U.S.

bank oversight system has a more complex structure, involves less

coordination and more varied policies and procedures, and lacks clear

responsibility and accountability for consolidated oversight of entire

banking organizations.

Four Federal Agencies Have

Similar Oversight

Responsibilities

In the United States, the division of oversight responsibilities among the

four bank regulatory agencies is not generally based on specific areas of

expertise, functions, or activities, of either the regulator or the banks for

which they are responsible. Instead, it is based primarily on the type of

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

members of FRS. Consequently, the four agencies have similar oversight

responsibilities for developing and implementing regulations, taking

enforcement actions, and conducting examinations and off-site

monitoring, for those banking institutions that are under their respective

purview.

Supervisory Information Is

Used to Help Fulfill

Nonoversight Duties

Officials from both FRS and FDIC told GAO that they relied on information

obtained under their respective supervisory authorities to help fulfill their

important, nonsupervisory duties. As GAO has stated in the past, the extent

to which FRS needs supervisory authority over financial institutions to

obtain the knowledge and influence necessary to carry out its other

important functions is a question involving policy judgments that Congress

should make.7 GAO believes that past experience, as well as evidence from

the five foreign oversight structures GAO reviewed, supports the need for

central banks, like FRS, to have direct access to supervisory information

and to have some influence over banking institutions and regulatory

decisionmaking.

GAO has also previously stated its support for a strong, independent

deposit insurer to help protect the taxpayers’ interest in insuring more

than $2.5 trillion in deposits. Prior GAO work suggested that this can be

achieved by providing FDIC with (1) the capability to assess the financial

condition of insured institutions by having access to examinations and

being able to independently assess the quality of those examinations;

(2) the ability to go into problem institutions without having to obtain

7

Bank Regulation: Consolidation of the Regulatory Agencies (GAO/T-GGD-94-106, Mar. 4, 1994).

Page 9 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

prior approval from another regulatory agency; and (3) backup

enforcement authority over all federally insured depositories.8

Treasury also has several important responsibilities that require it to

regularly obtain information about the financial condition of the banking

industry and, at certain times, supervisory information about specific

problem institutions. According to Treasury officials, Treasury’s current

level of involvement, through its housing of OCC and OTS and the

representation of these two agencies on the FDIC board of directors, and

the information it receives from other agencies as needed, is sufficient for

carrying out its responsibilities.

Perceived Problems and

Advantages With the U.S.

Oversight System

Analysts, legislators, industry representatives, and numerous past and

present agency officials have identified both weaknesses and strengths in

the current federal bank oversight system. Some have broadly

characterized the federal system as redundant, inconsistent, inefficient,

and burdensome. Some have also raised concerns about negative effects

of the oversight structure on supervisory effectiveness and believe that the

multiplicity of federal regulators, despite FFIEC and other interagency

coordination efforts, has resulted in inconsistent treatment in

examinations, enforcement actions, and regulatory standards and

decisionmaking. During the period 1990 to 1993, GAO identified significant

inconsistencies in examination policies and practices among FDIC, OCC, OTS,

and FRS, including differences in (1) examination scope, frequency, and

documentation; (2) loan quality and loss reserve evaluations; (3) bank and

thrift rating systems; and (4) examination guidance and regulations.

Furthermore, divided supervisory authority, with FRS being responsible for

overseeing bank holding companies and other federal regulators being

responsible for the major bank subsidiaries of holding companies,

obscures supervisory responsibility and accountability for banking

organizations as a whole and may hinder regulators from obtaining a

complete picture of an entire banking organization. Despite these

weaknesses, some analysts and agency and banking institution officials

credit the current structure with encouraging financial innovations and

providing checks and balances to guard against arbitrary oversight

decisions or actions.

Principles for

Modernizing U.S.

Oversight Structure

On the basis of the extensive work GAO has done in areas such as bank

supervision, enforcement, failure resolution, and innovative financial

activities—such as derivatives—GAO previously identified the following

four fundamental principles that it believes Congress could use when

8

GAO/T-GGD-94-106.

Page 10 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

considering the best approach for modernizing the current regulatory

structure.9 GAO’s studies of the five foreign oversight structures reinforced

the relevance of these principles. Specifically, GAO believes that any

modernized bank oversight structure should provide for

• clearly defined responsibility and accountability for consolidated and

comprehensive oversight of entire banking organizations, with

coordinated functional regulation and supervision of individual

components;

• independence from undue political pressure, balanced by appropriate

accountability and adequate congressional oversight;

• consistent rules, consistently applied for similar activities; and

• enhanced efficiency and reduced regulatory burden, consistent with

maintaining safety and soundness.

Recommendations GAO’s work on the five foreign oversight systems showed that there are a

number of different ways to simplify bank oversight in the United States in

accordance with the four principles of consolidated oversight,

independence, consistency, and enhanced efficiency and reduced burden.

GAO recognizes that only Congress can make the ultimate policy judgments

in deciding whether, and how, to restructure the existing system. If

Congress does decide to modernize the U.S. system, GAO recommends that

Congress:

• Reduce the number of federal agencies with primary

responsibilities for bank oversight. GAO believes that a logical step

would be to consolidate OTS, OCC, and FDIC’s primary supervisory

responsibilities into a new, independent federal banking agency or

commission. Congress could provide for this new agency’s independence

in a variety of ways, including making it organizationally independent like

FDIC or FRS. This new independent agency, together with FRS, could be

assigned responsibility for consolidated, comprehensive supervision of

those banking organizations under its purview, with appropriate functional

supervision of individual components.

• Continue to include both FRS and Treasury in bank oversight. To

carry out its primary responsibilities effectively, FRS should have direct

access to supervisory information as well as influence over supervisory

decisionmaking and the banking industry. The foreign oversight structures

9

Bank Oversight: Fundamental Principles for Modernizing the U.S. Structure (GAO/T-GGD-96-117,

May 2, 1996).

Page 11 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

GAO reviewed showed that this could be accomplished by having FRS be

either a direct or indirect participant in bank oversight. For example, FRS

could maintain its current direct oversight responsibilities for state

chartered member banks or be given new responsibility for some segment

of the banking industry, such as the largest banking organizations.

Alternatively, FRS could be represented on the board of directors of a new

consolidated banking agency or on FDIC’s board of directors. Under this

alternative, FRS’ staff could help support some of the examination or other

activities of a consolidated banking agency to better ensure that FRS

receives first hand information about, and access to, the banking industry.

To carry out its mission effectively, Treasury also needs access to

supervisory information about the condition of the banking industry as

well as the safety and soundness of banking institutions that could affect

the stability of the financial system. GAO’s reviews of foreign regulatory

structures provided several examples of how Treasury might obtain access

to such information, such as having Treasury represented on the board of

the new banking agency or commission and perhaps on the board of FDIC

as well.

• Continue to provide FDIC with the necessary authority to protect

the deposit insurance funds. Under any restructuring, GAO believes FDIC

should still have an explicit backup supervisory authority to enable it to

effectively discharge its responsibility for protecting the deposit insurance

funds. Such authority should require coordination with other responsible

regulators, but should also allow FDIC to go into any problem institution on

its own without the prior approval of any other regulatory agency. FDIC

also needs backup enforcement power, access to bank examinations, and

the capability to independently assess the quality of those examinations.

• Incorporate mechanisms to help ensure consistent oversight and

reduce regulatory burden. Reducing the number of federal bank

oversight agencies from the current four should help improve the

consistency of oversight and reduce regulatory burden. Should Congress

decide to continue having more than one primary federal bank regulator,

GAO believes that Congress should incorporate mechanisms into the

oversight system to enhance cooperation and coordination between the

regulators and reduce regulatory burden.

Although GAO does not recommend any particular action, such

mechanisms—which could be adopted even if Congress decides not to

restructure the existing system—could include

Page 12 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

• expanding the current mandate of FFIEC to help ensure consistency in

rulemaking for similar activities in addition to consistency in

examinations;

• assigning specific rulemaking authority in statute to a single agency, as has

been done in the past when Congress gave FRS statutory authority to issue

rules for several consumer protection laws that are enforced by all of the

bank regulators;

• requiring enhanced cooperation between examiners and banks’ external

auditors; (While GAO strongly supports requirements for annual full-scope,

on-site examinations for large banks, GAO believes that examiners could

take better advantage of the work already being done by external auditors

to better plan and target their examinations.)

• requiring enhanced off-site monitoring to better plan and target

examinations as well as to identify and raise supervisory concerns at an

earlier stage.

Agency Comments FRS, FDIC, OCC, and OTS provided written comments on a draft of this report,

which are discussed in chapter 4 and reprinted in appendixes IV, V, VI, and

VII. Treasury also reviewed a draft and provided oral comments of a

technical nature, which GAO incorporated where appropriate.

The agencies generally believed that GAO’s information and observations

about the five foreign oversight systems could be useful to Congress in its

consideration of a potential modernization of the bank oversight structure

in the United States. Each of the agencies also provided some additional

insights from its own unique oversight role and responsibilities, which GAO

summarizes below and discusses further in the report where appropriate.

GAO believes the agencies’ perspectives will be helpful for Congress in any

consideration of changes to the U.S. bank oversight structure.

FRS agreed with GAO’s recommendation that it continue to be included in

bank oversight. However, it felt that GAO should be specific in stating that

FRS needs “active supervisory involvement in the largest U.S. banking

organizations and a cross-section of other banking institutions” to carry

out its key central bank functions. To clarify what was meant by this

statement, a senior FRS official advised GAO that FRS’ current regulatory

authority gives it the access and influence FRS believes it needs. However,

if the regulatory structure were changed so that there is only one federal

regulator for each banking organization—both holding company and bank

subsidiaries—then FRS believes that it would have to be the regulator for

the largest banking organizations, as well as a cross-section of others.

Page 13 GAO/GGD-97-23 Bank Oversight Structure
Executive Summary

FDIC provided four fundamental principles for an effective bank regulatory

structure, which are generally consistent with the principles and

recommendations that GAO set forth. These principles include providing

FDIC with explicit backup supervisory authority, backup enforcement

power, and the capability to assess the quality of bank examinations. FDIC

also noted that the broader regulatory responsibilities related to the role of

the deposit insurer require current and sufficient information on the

ongoing financial condition and operations of financial institutions. In

FDIC’s judgment, periodic on-site examinations by FDIC staff remain an

essential tool by which such information may be obtained.

OCC described GAO’s report as comprehensive and conveying more about

the foreign regulatory structures than has been available to the public. OCC

agreed with GAO that the foreign structures are not readily adaptable to the

United States. OCC also suggested that, given the complexity of the subject,

Congress should consider further information before deciding on making

any changes to the existing oversight structure in the United States. OCC

agreed with GAO that the central banks in the five foreign countries had

substantial oversight roles, but noted that GAO’s analysis showed that

central banks do not necessarily need a direct role in bank supervision in

order to have direct access to supervisory information as well as influence

over supervisory decisionmaking and the banking industry. OCC also stated

that supervisory methods contribute to the overall effectiveness of

oversight structures and that, although the five countries may not have

explicit government guarantees of deposit insurance funds, they do

convey some guarantee.

OTS generally concurred with GAO’s recommendations and reiterated its

position that consolidation will make the bank oversight system more

efficient and effective.

FRS, FDIC, and OTS also commented on recent steps that have been taken to

enhance regulators’ cooperation and coordination and reduce regulatory

burden. GAO discussed these actions in the report as appropriate.

Page 14 GAO/GGD-97-23 Bank Oversight Structure
Page 15 GAO/GGD-97-23 Bank Oversight Structure
Contents

Executive Summary 2

Chapter 1 

Introduction

20

Overview of the U.S. Banking Industry 20

Current U.S. Oversight Structure Is Complex 25

Goals of Bank Oversight Include Safety and Soundness, Stability,

and Fairness to Consumers

28

Agencies Have

Other Major Oversight-Related Responsibilities

28

Various Federal and State Agencies Oversee Activities of

Nonbank Subsidiaries of Banks and Bank Holding Companies

32

Objectives, Scope, and Methodology 34

Chapter 2 

Bank Oversight

Structure Is

Redundant

36

Federal Agencies Overseeing Banks and Thrifts Share Several

Oversight Responsibilities

36

FRS and FDIC Rely on Supervisory Information to Fulfill

Nonoversight Duties; Treasury Obtains Information Primarily

Through OCC and OTS

45

Analysts, Regulators, and Legislators Have Identified

Disadvantages and Advantages of the Oversight Structure

47

Principles for Bank Oversight Modernization 53

Chapter 3 

Aspects of Foreign

Bank Oversight

Systems May Be

Useful to Consider in

Efforts to Modernize

U.S. Bank Oversight

55

Foreign Systems Had One to Three Oversight Entities 55

Oversight Entities Were Typically Responsible and Accountable

for Entire Banking Organizations, Including Subsidiaries

62

Other Countries’ Oversight Systems Generally Included Roles for

Central Banks and Finance Ministries

63

Deposit Insurers Generally Had More Narrow Roles Than That of

FDIC

67

Foreign Structures Incorporated Mechanisms and Procedures to

Ensure Consistent Oversight and Efficiency

70

Page 16 GAO/GGD-97-23 Bank Oversight Structure
Contents

Chapter 4 

Conclusions,

Recommendations,

and Agency

Comments

74

Conclusions 74

Recommendations 78

Agency Comments and Our Evaluation 80

Appendixes Appendix I: History of U.S. Bank and Thrift Oversight 84

Appendix II: External Audits of Banking Institutions 95

Appendix III: Description of Three Recent Bank Oversight

Reform Proposals

102

Appendix IV: Comments From the Board of Governors of the

Federal Reserve System

110

Appendix V: Comments From the Federal Deposit Insurance

Corporation

115

Appendix VI: Comments From the Office of the Comptroller of

the Currency

121

Appendix VII: Comments From the Office of Thrift Supervision 125

Appendix VIII: Major Contributors to This Report 128

Related GAO Products 131

Tables Table 1.1: Assets Held by Insured Banking Institutions, as of

December 31, 1995

21

Table 1.2: Overview of the Primary Jurisdictions of the Four

Federal Banking Institution Oversight Agencies

27

Table 3.1: Overview of Other Countries’ Bank Oversight Systems 57

Table III.1: Basic Structure in the Proposed Plan of the

Administration

103

Table III.2: Alignment of Responsibilities for Federal Agencies

Overseeing Banks and Thrifts Under the Leach Proposal

104

 Table III.3: Alignment of Responsibilities for Oversight of Banks

and Thrifts Under the LaWare Proposal

105

Table III.4: Comparison of the Number of Federal Bank Agencies

in the Three Reform Proposals

106

Figures Figure 1: Federal Responsibilities for Bank Oversight 4

Figure 1.1: Simplified Structure of a Hypothetical Bank Holding

Company

22

Page 17 GAO/GGD-97-23 Bank Oversight Structure
Contents

Figure 2.1: Responsibility for U.S. Bank Oversight Functions 36

Figure 2.2: Regulation of a Hypothetical Bank Holding Company 52

Abbreviations

BIF Bank Insurance Fund

CBO Congressional Budget Office

CFTC Commodity Futures Trading Commission

CPA Certified Public Accountant

CRA Community Reinvestment Act

FBA Federal Bank Agency

FBC Federal Banking Commission

FDIC Federal Deposit Insurance Corporation

FDICIA Federal Deposit Insurance Corporation Improvement Act of

1991

FFIEC Federal Financial Institutions Examination Council

FHLBB Federal Home Loan Bank Board

FHLBS Federal Home Loan Bank System

FIRREA Financial Institution Reform, Recovery, and Enforcement

Act of 1989

FRS Federal Reserve System

FSLIC Federal Savings and Loan Insurance Corporation

GAAP Generally Accepted Accounting Principles

NAIC National Association of Insurance Commissioners

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

OTS Office of Thrift Supervision

SAIF Savings Association Insurance Fund

SEC Securities and Exchange Commission

U.K. United Kingdom

Page 18 GAO/GGD-97-23 Bank Oversight Structure
Page 19 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

The nearly 12,000 federally insured banks and thrifts1 in the United States,

which hold more than $5 trillion in assets, are regulated and supervised by

four federal agencies with similar and sometimes overlapping regulatory

and supervisory responsibilities. Although many industry representatives,

legislators, and regulators have in the past recognized the need for

consolidation and modernization of federal bank oversight, major reform

proposals changing the structure of bank and thrift oversight have not

been adopted. This report was prepared in response to a request from

Congressman Charles E. Schumer that we provide information to help

evaluate efforts to modernize the U.S. system of financial industry

oversight and identify potential avenues for such modernization. Much of

the information in this report is based on our studies of the structures and

operations of bank regulation and supervision (oversight)2

 activities in

Canada, France, Japan, Germany, and the United Kingdom.3

Overview of the U.S.

Banking Industry

This report focuses on the oversight of two major categories of depository

institutions: commercial banks and thrifts. Commercial banks and thrifts

originally served very different purposes and markets. Commercial banks

issued debt payable on demand, which was backed by short-term

commercial loans. The customers of commercial banks tended to be

businesses and wealthy individuals seeking liquid deposit accounts.

Savings and loan associations, however, used deposits to fund home

mortgages of their members. But, because of the long terms of mortgages,

members were restricted in their ability to withdraw their funds. Savings

banks were initially designed to provide a range of financial services to the

small saver. Their asset portfolios were generally more diversified than

those of savings and loan associations to enable them to provide more

flexible deposit terms. Despite the historical differences between these

institutions, the powers and services of banks and thrifts have converged

over time with few practical differences remaining in their authorities,

except that these institutions continue to be subject to different regulatory

1

Thrifts include FDIC-insured savings and loan associations and savings banks.

2

In this report, we use the term oversight to mean both regulation and supervision. Regulation includes

any rulemaking activities, and supervision includes examinations and off-site monitoring of

institutions and enforcement actions to ensure compliance with laws and regulations. The term

regulator is used when referring to an agency or individual conducting (1) general oversight activities

not specified as either supervisory or regulatory, or (2) specific regulatory activities. The term

supervisor is used when referring to an agency or individual conducting supervisory activities.

3

See Bank Regulatory Structure: Canada (GAO/GGD-95-223, Sept. 28, 1995); Bank Regulatory

Structure: France (GAO/GGD-95-152, Aug. 31, 1995); Bank Regulatory Structure: The Federal Republic

of Germany (GAO/GGD-94-134BR, May 9, 1994); Bank Regulatory Structure: The United Kingdom

(GAO/GGD-95-38, Dec. 29, 1994), and Bank Regulatory Structure: Japan, which is currently a draft

report.

Page 20 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

schemes.4 (See app. I for more information on the history of U.S. bank and

thrift oversight.)

At the end of 1995, the United States had nearly 12,000 banking

institutions. In this report, we refer to commercial banks and thrifts

collectively as banking institutions.5

 These institutions held about $5.3

trillion in loans and other assets (see table 1.1).

Table 1.1: Assets Held by Insured

Banking Institutions, as of

December 31, 1995

Dollars in billions

Types of institutions

Number of

institutions

Amount of

assets

Percentage of

total assets

Commercial banksa 9,941 $4,313 81%

Thriftsb 2,029 1,026 19

Total 11,970 $5,339 100%

aCommercial banks do not include 39 insured U.S. branches of foreign banks with $12 billion in

assets.

bThrifts include Federal Deposit Insurance Corporation (FDIC) insured savings and loans

associations and savings banks.

Source: FDIC Quarterly Banking Profile, Fourth Quarter 1995.

As shown in table 1.1, the 9,941 commercial banks held 81 percent of total

bank and thrift assets at the end of 1995. The 2,029 thrifts held 19 percent.

Holding Companies Are

the Dominant Banking

Structure in the

United States

Holding companies, which are established for a variety of business,

regulatory, and tax reasons, are the dominant form of banking structure in

the United States. In fact, 96 percent of the assets of all U.S. commercial

banks are in banks that are part of a holding company. As of December 31,

1995, about 6,122 bank holding companies and 895 thrift holding

companies were operating in the United States. Of those, 4,494 bank

holding companies and 833 thrift holding companies each held only 1 bank

or thrift.

4

Unlike bank holding companies, whose business is restricted to that which is “closely related to

banking,” unitary thrift holding companies may be owned by or own any type of financial services or

other business. Thrifts also have broader powers than banks in areas such as insurance and real estate

development.

5

For the sake of simplicity, the oversight structure for supervising and regulating banks and thrifts is

referred to as the bank oversight structure and the four oversight agencies as bank oversight agencies,

bank regulators, or bank supervisors.

Page 21 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

Holding companies may consist of a parent company, banking

subsidiaries, nonbanking subsidiaries, and even other holding

companies—each of which may have its own banking or nonbanking

subsidiaries. Figure 1.1 is a simplified illustration of a hypothetical holding

company with wholly owned banking and nonbanking subsidiaries.

Figure 1.1: Simplified Structure of a Hypothetical Bank Holding Company

National bank


State 


nonmember


bank


Parent thrift 


holding company


State member


bank


Securities


broker-


dealer

Real estate


subsidiary

Mortgage


company

State savings


and loan


association

National savings


and loan


association

Parent bank


holding company


Source: GAO.

Parent companies own or control subsidiaries through the ownership of

voting stock and generally are “shell” corporations—that is, they do not

have operations of their own. Banking subsidiaries are separately

chartered banks subject to the same regulation and capital requirements

that apply to other banking institutions. Nonbanking subsidiaries are

companies that may be engaged in a variety of businesses other than

banking; however, any nonbanking activities of a bank holding company

subsidiary must be closely related to the business of banking and produce

Page 22 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

a public benefit.6 Thrift holding companies may be owned by or own any

type of financial services or other business. Many bank holding companies

have established nonbank subsidiaries engaged in consumer finance, trust

services, leasing, mortgage lending, electronic data processing, insurance

underwriting, management consulting services, and securities brokerage

services.

Holding companies in the United States may also have multiple tiers. For

example, as we mentioned above, holding companies may have subsidiary

holding companies that have their own banking or nonbanking

subsidiaries. Banking subsidiaries may also have their own subsidiaries.

However, the activities of these bank subsidiaries are limited to those

allowable for their parent institution. The largest holding companies in the

United States often have very complex, multitiered structures.

Bank and thrift holding companies are particular to the U.S. financial

system. In many other countries, nonbanking activities may be conducted

either in a bank or in subsidiaries of a bank rather than in subsidiaries of a

parent company.

U.S. Banking Industry

is Consolidating and

Changing Its Product

Focus

The structure of the U.S. banking industry has changed substantially over

the past 10 years. The industry is consolidating in response to the removal

of legal barriers to geographic expansion, advancing technologies, and the

globalization of wholesale banking, among other things. Between 1985 and

1995, the number of banks and thrifts in the United States fell by about

34 percent due to consolidation through mergers and also bank and thrift

failures. The number of banks decreased by 4,476—from 14,417 to 9,941.

The number of thrifts decreased by 1,597—from 3,626 to 2,029.7

Industry consolidation has been characterized by a greater concentration

of deposits among the largest banking companies in the country. For

example, the 10 largest bank holding companies controlled 17.4 percent of

bank deposits in 1984; they increased this share to 25.6 percent in 1994.

Similarly, the 10 largest thrift institutions increased their share of deposits

from 12.4 percent to 17 percent. However, although nationwide

6

Section 4 of the Bank Holding Company Act of 1956 generally prohibits bank holding companies from

owning or controlling any company that is not a bank. The law, however, lists several exemptions from

this rule. The most important of these authorizes the Federal Reserve Board to approve the acquisition

of a nonbank affiliate where the board determines that the activities of the affiliate are “so closely

related to banking . . . as to be a proper incident thereto” and would produce a public benefit. 12 U.S.C.

S 1843. Under this authority, the board promulgated in its regulation Y the nonbanking activities that

are or may be approved.

7

GAO analysis of FDIC data.

Page 23 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

concentration has been increasing over the past 10 years, increases in

local market concentration have been much more modest relative to the

changes at the national level.8

 According to industry analysts, this has

occurred because banking institutions not located in the same local

market have merged, and constraints imposed by antitrust laws have

helped to prevent increases in concentration at the local level.

The nature of the activities that banking institutions engage in has also

changed drastically over the past several decades. Although traditional

lending still dominates banking institutions’ balance sheets, banking

institutions have been moving toward more nontraditional products, such

as mutual funds, securities, and derivatives and other off-balance sheet

products.9

Banking Institutions’ Share

of Total Assets Held in the

Financial Services Industry

Has Decreased

Banking institutions, with about $5.3 trillion in assets at the end of 1995,

constitute the largest single segment of the financial services industry.

However, banking institutions’ share of the financial services industry

shrank from about 45 percent in 1985 to about 30 percent in 1995.10 This

decrease has been attributed to greater competition in the financial

services industry. Consumers can now choose from a variety of providers

in obtaining financial services once offered only by commercial banks and

thrifts. For example, money market mutual funds, securities firms, and

insurance companies all now offer interest-bearing transaction accounts.

Further, although banks and thrifts were long regarded as the primary

providers of consumer credit, such credit is now routinely provided by

finance companies as well as by a wide variety of retail firms through

credit cards and other means.

8

Concentration refers to the market share of deposits held by certain institutions. Concentration

statistics were published in an article by Dean F. Amel, “Trends in the Structure of Federally Insured

Depository Institutions, 1984-94” in the January 1996 Federal Reserve Bulletin, (Vol. 82, No. 1, pp.

1-15).

9

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. They have been used, in part, to replace traditional

loans from banks.

10GAO analysis of FRS Flow of Funds Accounts data. Some academic studies have shown that when

asset figures are adjusted to incorporate some measures of the new off-balance sheet activities

banking institutions are now engaging in, the rate of decline of banking institutions’ share of the

industry is reduced.

Page 24 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

Current U.S.

Oversight Structure Is

Complex

The federal system of oversight of banking institutions in the United States

is a highly complex system. Federal responsibilities for bank

authorization, regulation, and supervision are assigned to three bank

regulators and one thrift regulator that have jurisdiction over specific

segments of the banking industry (see table 1.2).11 Although Treasury plays

no formal role in bank oversight, it has some related responsibilities.

Office of the Comptroller

of the Currency

The Office of the Comptroller of the Currency (OCC)12 currently has

primary responsibility for regulating and supervising national banks—that

is, banks with a federal charter. OCC also has primary responsibility for

regulating and supervising federal branches and agencies of foreign banks

operating in the United States. As of December 31, 1995, OCC was the

primary federal supervisor of 2,861 of the 11,970 banking institutions in the

United States. Those banks held about 45 percent of the total U.S. banking

assets in the United States.

Federal Reserve System The Federal Reserve System (FRS)13 is the federal regulator and supervisor

for bank holding companies and their nonbank subsidiaries, and it is the

primary federal regulator for state-chartered banks that are members of

FRS. It is also a federal regulator for foreign banking organizations

operating in the United States.14 In addition, it regulates foreign activities

and investments of FRS member banks (national and state), Edge

11Each state also has its own agency to regulate and supervise the banks, thrifts, and credit unions it

charters. The organization of these agencies varies from state to state.

12OCC, a bureau of the Treasury Department, is headed by the Comptroller of the Currency, who is

appointed by the President to a 5-year term. OCC has six district offices in addition to its Washington,

D.C., headquarters. At the end of 1995, OCC data show that it had 3,556 staff members, including 2,051

examiners. About 147 of OCC’s examiners are part of OCC’s Multinational Division, which oversees

the activities of the largest banks.

13FRS is headed by a seven-member Board of Governors, appointed by the President to 14-year terms.

One Governor is designated by the President as Chairman with a 4-year, renewable term. The major

components of FRS include the Board, located in Washington, D.C.; and 12 Federal Reserve Banks,

with 25 Reserve Bank branches located throughout the country. Each Federal Reserve Bank has a

board of nine directors, six elected by member banks and three appointed by the Board of Governors.

As of December 31, 1995, FRS data show that it had 25,288 staff members, including 1,546 examiners.

14In addition, FRS has the authority to regulate all foreign branches of U.S. banks. All national banks

and state member banks must receive permission from FRS before they can open a foreign branch.

Although FRS has primary regulatory authority for foreign branches of U.S. banks, it defers its

examination authority to OCC concerning foreign branches of national banks because OCC is the

primary federal regulator of national banks.

Page 25 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

corporations, and holding companies.15 As of December 31, 1995, FRS had

primary supervisory responsibility for 1,041 of the 11,970 banking

institutions in the United States. The assets of these banks represented

about 18 percent of the total U.S. banking assets. As of December 31, 1995,

FRS also had responsibility for regulating 6,122 bank holding companies,

393 foreign branches, and 153 foreign agencies operating in the United

States.

Federal Deposit Insurance

Corporation

The Federal Deposit Insurance Corporation (FDIC)16 is the primary federal

regulator and supervisor for federally insured state-chartered banks that

are not members of FRS and for state savings banks whose deposits are

federally insured. FDIC is also responsible for administering the Bank

Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).17

Additionally, FDIC is responsible for resolving failed banks and for the

disposition of assets from failed banking institutions.18 At the end of 1995,

FDIC was the primary federal regulator and supervisor for 6,632 of the

11,970 insured banking institutions. These banking institutions

represented 22 percent of the total U.S. banking assets.

Office of Thrift Supervision The Office of Thrift Supervision (OTS)19 is the primary regulator of all

federally- and state-chartered thrifts whose deposits are federally insured

and their holding companies. At the end of 1995, it was the primary federal

15Edge corporations are generally limited to international banking and certain incidental activities and

are used primarily by U.S. banks to invest indirectly in foreign banks or financial institutions. However,

Edge corporations historically have also been used to offer international banking services in U.S.

markets, which interstate banking restrictions would otherwise have prohibited. With the increased

opportunities for interstate banking, the significance of the latter has markedly declined.

16FDIC is an independent federal agency. It is managed by five directors, one of whom is the

Comptroller of the Currency and another is the Director of the Office of Thrift Supervision—the

national regulator of thrifts. Three others are appointed by the President for 6-year terms, with one

appointed as Chairman and another as Vice-Chairman. FDIC’s main office is in Washington, D.C., and

it has eight regional supervisory offices and several other regional offices that liquidate assets from

failed banks.

17BIF member institutions are predominantly commercial banks, but they also include some state and

federal savings banks and certain savings and loan associations. SAIF members are predominantly

savings and loan associations, but they also include some state and federal savings banks and certain

commercial banks.

18As of December 31, 1995, FDIC officials said FDIC had 2,311 examiners in its Division of Supervision.

It also had 476 total staff members in its Division of Compliance and Consumer Affairs, including

examiners, management, and clerical staff. FDIC data show that it had 12,059 staff as of December 31,

1995.

19OTS, like OCC, is a bureau of the U.S. Department of the Treasury. The Director of OTS is appointed

by the President for a 5-year term. OTS has five regional offices. As of December 31, 1995, OTS data

show that it had about 1,463 staff members, including 716 examiners.

Page 26 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

regulator of 1,436 institutions, whose assets represented 14 percent of the

total assets held by banking institutions.20

The Department of the

Treasury

The Department of the Treasury (Treasury) is one of 14 executive

departments that make up the Cabinet. It is headed by the Secretary of the

Treasury21 and performs four basic functions, of which formulating and

recommending economic, financial, tax, and fiscal policies is the one most

directly related to bank oversight.22 Ultimately, Treasury is responsible for

financially backing up the U.S. guarantee of the deposit insurance funds23

and may also approve special resolution options for financial institutions

whose failure “could threaten the entire financial system.”24 In addition,

Treasury is a principal player in the development of legislation and

policies affecting the financial services industries. Treasury also shares

responsibility for managing any systemic financial crises, coordinating

financial market regulation, and representing the United States on

international financial markets issues.

Table 1.2: Overview of the Primary

Jurisdictions of the Four Federal

Banking Institution Oversight

Agencies

Agency Primary jurisdiction

OCC National banks, federal branches, and agencies of foreign banks.

FRS State-chartered, FRS member banks. Bank holding companies and their

nonbank subsidiaries. Foreign banking organizations operating in the

United States.

FDIC State-chartered, non-FRS member banks. State savings banks.

OTS Federally and state-chartered thrifts. Thrift holding companies.

Source: GAO analysis.

20As shown in table 1.1, there were 2,029 thrifts as of December 31, 1995. However, 593 of these thrifts

were state savings banks supervised by FDIC.

21The Secretary is appointed by the President and confirmed by the U.S. Senate.

22Treasury’s other three functions are serving as financial agent for the U.S. government, enforcing the

law, and manufacturing coins and currency.

23Subsequent to the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of

1989, all obligations issued by BIF or SAIF were backed by the full faith and credit of the United States

(section 15(d) of the Federal Deposit Insurance Act).

24Section 13(3)(4)(g) of the Federal Deposit Insurance Act. Such a resolution is permissible only if the

Federal Reserve Board and FDIC’s Board of Directors both recommend the exception to the Secretary

of the Treasury, with at least two-thirds of each board’s members voting for the recommendation.

Page 27 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

Goals of Bank

Oversight Include

Safety and Soundness,

Stability, and Fairness

to Consumers

A primary objective of banking institution regulators is to ensure the safe

and sound practices and operations of individual banking institutions

through regulation, supervision, and examination.25 The intent of

regulators under this objective is primarily to protect depositors and

taxpayers from loss, not to prevent banking institutions from failing. To

help accomplish this goal, the government has chosen to protect deposits

through federal deposit insurance, which provides a safety net to

depositors.

Financial market stability is also considered a primary goal of banking

institution regulators. Because banking institutions play an important role

as financial intermediaries that borrow and lend funds, public confidence

in banking institutions is critical to economic stability at local and national

levels. In support of market stability, regulators seek to resolve problems

of financially troubled institutions in ways that maintain confidence in

banking institutions and thus prevent depositor runs that could jeopardize

the stability of financial markets.

Regulators are also aware that the stability of the banking industry

depends both on the ability of banking institutions to compete in an

increasingly competitive environment and on maintaining competition

within the industry. Regulators recognize that although their supervisory

oversight should be sufficient to oversee safe and sound bank operations

and practices, it should not be so onerous as to stifle the industry and

impair banks’ ability to remain competitive with financial institutions in

other industries and in other countries. Bank regulators also seek to

maintain competition by assessing compliance with antitrust laws.

Fairness in, and equal access to, banking services is also an important goal

of banking institution regulators. Bank regulators seek to ensure access by

assessing institutions’ compliance with consumer protection laws. This

goal of the banking regulators is unique to the U.S. bank regulatory

structure.

Agencies Have

Other Major

Oversight-Related

Responsibilities

While the four federal banking regulators share many oversight

responsibilities, some of the principal responsibilities of FDIC and FRS fall

outside direct regulation and supervision but are related to the goals of

bank oversight. For FDIC these include responsibility for administration of

the federal deposit insurance funds, resolution of failing and failed banks,

25Regulation is the authority for rulemaking. Supervision is the responsibility for off-site monitoring

and on-site examination. Examination consists of reviewing banking practices and operations.

Page 28 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

and disposition of failed bank assets. For FRS, these include responsibility

for monetary policy development and implementation, liquidity lending,

and payments and settlements systems operation and oversight. In

addition, all four federal regulators may play a role in the management of

financial crises, depending on the nature of the crisis.

FDIC’s Principal Function

Is As Deposit Insurer

Although FDIC supervises a large number of banking institutions, its

primary function is to insure banking institutions’ deposits up to $100,000.26

FDIC administers BIF—which predominantly protects depositors of

commercial banks—and SAIF—which predominantly protects depositors of

thrift institutions. FDIC receives no appropriated government funding. BIF is

funded wholly through premiums paid on the deposits of member

institutions and with some borrowing authority from the government

under prescribed conditions, such as liquidity needs of the insurance

funds. SAIF is primarily funded through premiums paid on the deposits of

thrift institutions and has similar borrowing authority. Both BIF and SAIF

are required by statute to have a minimum reserve ratio of 1.25 percent of

insured deposits. According to FDIC, as of December 31, 1995, BIF’s fund

balance exceeded the ratio 1.30, but SAIF was not fully capitalized.

FDIC relies on primary regulators to verify that institutions outside its

direct supervisory jurisdiction are operating in a safe and sound manner.

Examinations are to be done by the institution’s primary regulators on all

the institutions FDIC insures, and FDIC is to receive copies of all

examination reports and enforcement actions. However, FDIC may also

protect its interest as the deposit insurer through its backup authority.

This allows FDIC to examine potentially troubled banking institutions and

take enforcement actions, even when FDIC is not the institution’s primary

regulator.

In Conjunction With Deposit

Insurance Function, FDIC Has

Primary Role in Failure

Resolution and Failed Bank

Asset Disposition

Regardless of an institution’s primary regulator, only its chartering

authority—the state banking commission, OCC, or OTS—has the formal

authority to declare that the banking institution is insolvent. Once the

chartering authority becomes aware that one of its institutions has

26All accounts owned by an individual in a single banking institution are aggregated for deposit

insurance purposes and covered up to $100,000 per depositor per insured institution. If a depositor has

both checking and savings accounts in the same institution, both accounts taken together would be

insured up to $100,000. However, if an individual has a joint account with another person in the same

bank, this joint account would be separately insured up to $100,000. An individual can thus

significantly increase his or her insurance coverage in a single banking institution by establishing

multiple accounts with different family members. There is also no limit to the number of insured

accounts an individual may have in different banking institutions.

Page 29 GAO/GGD-97-23 Bank Oversight Structure
Chapter 1 

Introduction

deteriorated to the point of insolvency or imminent insolvency, it is to

notify FDIC, which is responsible for arranging an orderly resolution.

FDIC is required by law to generally select the resolution alternative it

determines to be the least costly to BIF and SAIF. To make this least-cost

determination, FDIC must (1) consider and evaluate all possible resolution

alternatives by computing and comparing their costs on a present-value

basis, using realistic discount rates; and (2) select the least costly

alternative on the basis of that evaluation.27 If, however, the least-cost

resolution would create a systemic problem—as determined by FDIC’s

Board of Directors with the concurrence of the Federal Reserve Board and

the Secretary of the Treasury, then, under the Federal Deposit Insurance

Corporation Improvement Act (FDICIA), another resolution alternative

could be selected. As of June 30, 1996, no systemic problem had been

raised by FDIC in making its resolution decisions.

Typically—and particularly in the case of large, known to be troubled,

institutions—active communication has taken place among the chartering

authorities, primary regulators, FDIC, and FRS as liquidity provider. The

interaction and coordination typically includes the sharing of examination

information, strategies, and economic information, for example. This

communication most commonly takes place when the primary regulator

considers failure likely so that all regulatory parties can discharge their

responsibilities in an orderly manner. When banks fail, FDIC is appointed

receiver, directly pays insured claims to depositors or the acquiring bank,

and liquidates the remaining assets and liabilities not assumed by the

acquiring bank.

FRS Has Several

Responsibilities

One of the principal responsibilities of FRS is conducting monetary policy.

As stated in the Federal Reserve Act, FRS is “to promote effectively the

goals of maximum employment, stable prices, and moderate long-term

interest rates.” FRS conducts monetary policy by (1) using open market

operations,28 the primary tool of monetary policy; (2) determining the

reserve requirements that banking institutions must hold against deposits;

27In selecting the least costly resolution alternative, FDIC’s process is to compare its estimated cost of

liquidation—basically, the amount of insured deposits paid out minus the net realizable value of an

institution’s assets—with the amounts that potential acquirers bid for the institution’s assets and

deposits. FDIC’s Division of Resolutions then is to estimate the net realizable value of an institution’s

assets by performing an on-site Asset Valuation Review or, when time or other constraints exist, by

using a computer model based on FDIC’s historical recovery experience, to value the institution’s

assets. To solicit the greatest number of bids, FDIC normally offers various marketing options to

potential acquirers, such as offering the whole institution, select pools of assets, or deposits.

28Open market operations involve the buying and selling of securities by FRS.

Page 30 GAO/GGD-97-23 Bank Oversight Structure
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Introduction

and (3) determining the discount rate charged banking institutions when

they borrow from FRS. FRS is to act independently in conducting its

monetary policy.

FRS also is to act as lender-of-last-resort to ensure that a temporary

liquidity problem at a banking institution does not threaten the viability of

the institution or the financial system. Using the discount window, FRS may

lend to institutions that are experiencing liquidity problems—for example,

when these institutions cannot meet deposit withdrawals.29 However,

when acting in this capacity, FRS requires the lending to be collateralized,

and it is to be assured by the banking institution’s primary regulator that

the institution is solvent. According to FRS officials, institutions generally

do not approach FRS for liquidity loans unless they have no alternative.

Liquidity lending may be perceived as a sign that an institution is in

trouble, despite the fact that FRS is prohibited from lending to nonviable

institutions.

In addition, FRS has broad responsibility in the nation’s payments and

settlements systems.30 It is mandated by Congress to act as an

intermediary in clearing and settling interbank payments by maintaining

reserve or clearing accounts for the majority of banking institutions. As a

result, it settles the payment transactions by debiting and crediting the

appropriate accounts of banking institutions making payments. In

addition, FRS also collects checks, processes electronic fund transfers, and

provides net settlement services to private clearing arrangements.

Crisis Management Depending on the nature of the situation, federal regulators may play a

role in financial system crisis management. FRS, for example, often has a

significant role in crisis management in its role as a major participant in

financial markets through its liquidity lending, payments and settlements,

and other responsibilities. A key role of any central bank is to supply

sufficient liquidity to the financial system in a crisis. For example, during

the 1987 stock market crash, FRS provided liquidity support to the financial

system, encouraged major banks to lend to solvent securities firms,

coordinated with Treasury, and encouraged officials to keep the New York

29Banks may also approach FRS to manage liquidity needs that arise from regular, seasonal swings in

loans and deposits, such as those at agricultural banks.

30The Monetary Control Act of 1980 required all depository institutions to maintain reserves in

accounts at the Reserve Banks and granted them all access to FRS payment services. Recently, the

Expedited Funds Availability Act of 1987 gave the Federal Reserve Board authority over private

clearing arrangements. Through these actions, Congress has made it clear that it holds FRS

responsible for ensuring the integrity and the efficiency of the U.S. dollar payments system.

Page 31 GAO/GGD-97-23 Bank Oversight Structure
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Introduction

Stock Exchange open. During the Ohio Savings and Loan crisis in 1985, FRS

intervened with liquidity support until a permanent solution to the

instability could be developed. Treasury is also involved in resolving major

financial crises, while OCC, OTS, and FDIC have played significant roles

involving large bank or thrift failures.

Various Federal and

State Agencies

Oversee Activities of

Nonbank Subsidiaries

of Banks and Bank

Holding Companies

Many nonbank subsidiaries of banks and bank holding companies are

engaged in securities, futures, or insurance activities. These activities are

subject to the oversight of the Securities and Exchange Commission (SEC),

the Commodity Futures Trading Commission (CFTC), and state insurance

regulators, respectively. These regulators may provide information to the

Federal Reserve about nonbank subsidiaries of bank holding companies.

They may also provide information about nonbank subsidiaries of banks

to the responsible primary federal regulator of the parent bank.

SEC and CFTC The primary goals of SEC and CFTC are to maintain fair and orderly markets

and public confidence in the financial markets by protecting investors

against manipulation, fraud, or other irresponsible practices. The

aftermath of the stock market crash of 1929 created a demand for federal

oversight of securities and futures activities.31 The Securities Exchange

Act of 1934 created SEC with powers to oversee the securities market

exchanges—also called self-regulatory organizations—and to intervene if

the exchanges did not carry out their responsibilities for protecting

investors. The Commodity Exchange Act of 1936, as amended, governs the

trading of commodity futures contracts and options. The Commodity

Futures Trading Commission Act of 1974 created the current regulatory

structure, consisting of industry self-regulation with government oversight

by CFTC.

Securities broker-dealers must register with SEC and comply with its

requirements for regulatory reporting, minimum capital, and

examinations. They must also comply with requirements of the

self-regulatory organizations, such as the New York Stock Exchange and

the National Association of Securities Dealers. SEC is to monitor

broker-dealer capital levels through periodic reporting requirements and

regular examinations.

31The first regulation of commodity futures markets on a limited basis began in the 1920s, when falling

commodity prices, farm depression, and speculative excesses on the grain exchanges led to demands

for federal regulation of the grain exchanges. The Grain Futures Act of 1922 was designed to allow the

federal government, through the Department of Agriculture, to license these exchanges and require the

exchanges to take responsibility for preventing price manipulation by their members.

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CFTC is to review exchange rules, ensure consistent enforcement, and

monitor the positions of large traders. CFTC also regulates the activities of

various market participants, including futures commission

merchants—which must comply with CFTC’s requirements for regulatory

reporting, minimum capital, and examinations. In addition, they must

comply with the rules imposed by the various exchanges, such as the

Chicago Mercantile Exchange and the Chicago Board of Trade as well as

the National Futures Association, all of which act as self-regulatory

organizations.

State Insurance Regulators Regulation of the insurance industry and administration of insurance

company receiverships and liquidations are primarily state

responsibilities.32 In general, state legislatures set the rules under which

insurance companies must operate. Among their other responsibilities,

state insurance departments are to monitor the financial condition of

insurers. States use a number of basic methods to assess the financial

strength of insurance companies, including reviewing and analyzing

annual financial statements, doing periodic on-site financial examinations,

and monitoring key financial ratios.

State insurance departments are generally responsible for taking action in

the case of a financially troubled insurance company. If the insurance

company is based in another state, the insurance department can suspend

or revoke its license to sell insurance in the department’s state. If a

home-based company is failing, the department can put it under state

supervision or, in cases of irreversible insolvency, place a company in

liquidation. State insurance regulators have established a central structure

to help coordinate their activities. The National Association of Insurance

Commissioners (NAIC) consists of the heads of the insurance departments

of 50 states, the District of Columbia, and 4 U.S. territories. NAIC’s basic

purpose is to encourage uniformity and cooperation among the various

states and territories as they individually regulate the insurance industry.

To that end, NAIC promulgates model insurance laws and regulations for

state consideration and provides a framework for multistate “zone”

examinations of insurance companies.

32In 1868, the U.S. Supreme Court upheld the constitutionality of a state statute regulating insurance

agents on the grounds that the insurance business is not commerce that the federal government may

regulate under the commerce clause. [Paul v. Virginia, 75 U.S. 168 (1868)] In 1944, the court abandoned

the proposition that insurance is not commerce and upheld the application of federal antitrust laws to

the insurance industry [United States v. South-Eastern Underwriters Assoc., et. al., 322 U.S. 533

(1944)]. In 1945, Congress reestablished the primacy of state regulation by enacting the

McCarran-Ferguson Act, which strictly limited the extent to which federal law, including federal

antitrust law, preempted state insurance law.

Page 33 GAO/GGD-97-23 Bank Oversight Structure
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Objectives, Scope,

and Methodology

Congressman Charles E. Schumer asked us to provide information to help

Congress evaluate efforts to modernize the U.S. system of federal

oversight of banks and thrifts. Our objectives were to (1) discuss

previously reported problems with the bank oversight structure in the

United States, (2) summarize those characteristics of the five countries’

regulatory structures that might be useful for Congress to consider in any

U.S. modernization efforts, and (3) identify potential avenues for

modernizing the U.S. banking oversight structure.

This report does not address federal oversight of credit unions by the

National Credit Union Administration (NCUA), which are also classified as

depository institutions. Credit unions hold only a small percentage of all

depository institution assets—about 5.5 percent. Also, although the legal

and practical distinctions between thrifts and banks have all but

disappeared in recent years, the core of credit union business remains

traditional consumer lending activities. Finally, the most recent proposals

to modernize oversight of financial institutions have not included

oversight of credit unions within their scope.

To address the objectives of this report, we conducted interviews with

senior supervisory officials from the Board of Governors of FRS, Federal

Reserve Bank of New York, FDIC, OCC, OTS, and SEC. They also provided us

with various documents and statistics, including bank and thrift

examination manuals, guidance to examiners and banking industry

officials, and statistics on the banking industry.

In addition to our interviews with U.S. supervisory officials, we met with

officials representing the banking industry, including officials from the

American Bankers Association, Independent Bankers Association of

America, and Conference of State Bank Supervisors. We also met with

officials from the accounting profession, including officials from the

American Institute of Certified Public Accountants.

In conducting our work we also gathered information from many other

sources. These include studies of the history of the banking industry;

records from congressional hearings related to regulatory restructuring;

and professional literature concerned with the industry structure,

regulation, and external audits. We also reviewed relevant banking acts

and regulations. This review does not constitute a formal legal opinion on

the requirements of the laws.

Page 34 GAO/GGD-97-23 Bank Oversight Structure
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Much of this report was based on our reports of the structures and

operations of bank regulation and supervision activities in Canada, France,

Japan, Germany, and the United Kingdom.33 When preparing these reports,

we interviewed regulatory and industry officials in each country and

reviewed relevant banking laws, regulations, industry statistics, and other

industry studies. These reports did not assess the effectiveness or

efficiency of bank oversight in the countries studied.

This report also draws on extensive work that we have done over the past

several years on depository institutions, the deposit insurance program,

the securities and insurance industries, international competitiveness, and

other aspects of the financial services system in the United States. A

comprehensive list of our products addressing issues related to the

financial services industry is included at the end of this report. (See

Related GAO Products.)

We conducted our work from July 1995 through June 1996 in accordance

with generally accepted government auditing standards. We provided a

draft of this report for comment to the heads of FRS, FDIC, OCC, OTS, and

Treasury. FRS, FDIC, OCC, and OTS provided written comments, which are

discussed at the end of chapter 4 and reprinted in appendixes IV to VII.

Treasury did not provide written comments. Each agency also provided

technical comments, which we incorporated where appropriate.

33See Bank Regulatory Structure: The Federal Republic of Germany (GAO/GGD-94-134BR, May 1991);

Bank Regulatory Structure: The United Kingdom (GAO/GGD-95-38, Dec. 1994); Bank Regulatory

Structure: France (GAO/GGD-95-152, Aug. 1995); Bank Regulatory Structure: Canada

(GAO/GGD-95-223, Sept. 1995); and Bank Regulatory Structure: Japan, which is currently a draft

report.

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All four federal oversight agencies share several supervisory and

regulatory responsibilities, including developing and implementing

regulations, taking enforcement actions, conducting examinations, and

off-site monitoring. Chartering is the responsibility of 2 federal agencies,

as well as all 50 states. This structure of shared responsibilities has been

characterized by some observers as being inherently inefficient.

Furthermore, our work has shown that despite good faith efforts to

coordinate their policies and procedures, the four federal bank oversight

agencies have often differed on important issues of bank supervision and

regulation.

Federal Agencies

Overseeing Banks and

Thrifts Share Several

Oversight

Responsibilities

The division of primary oversight responsibilities among the four oversight

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

activities, either of the regulator or the banks for which they are

responsible, but based on institution type—thrift or bank, bank charter

type—national or state, and FRS membership. Consequently, the four

oversight agencies share responsibility for developing and implementing

regulations, taking enforcement actions, and conducting examinations and

off-site monitoring.

Figure 2.1: Responsibility for U.S.

Bank Oversight Functions

Developing laws

Developing and

issuing regulations

Licensing/chartering

Bank information

Bank

Enforcement 

Deposit 

Failure 

Lender of last 

Crisis 

Treasurya

OCC


OTS


Federal Reserve


FDICb

banks

reporting and analysis

 examinations

authority

insurance

resolution

resort

management

aOCC and OTS are within Treasury.

bThe Board of Directors of FDIC includes the heads of OCC and OTS as well as three

independent members, including the chairman and vice chairman, who are appointed by the

President and confirmed by the Senate.

Source: FDIC, FRS, OCC, OTS, and Treasury.

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All Four Regulators

Develop and Implement

Regulations and Guidelines

Regulations are the primary vehicle through which regulators elaborate on

what the laws mean, clarify provisions of the laws, and provide guidance

on how the laws are to be implemented.1

 Regulations typically have the

force of law—that is, they can be enforced through a court of law.

Regulators have, in some cases, issued guidelines rather than regulations

because guidelines provide them greater flexibility to change or update as

experience dictates. Guidelines, however, are not directly enforceable in

court.2

In most cases, each regulator is responsible for issuing its own regulations

for the banking institutions under its jurisdiction. This may result in four

sets of regulations implementing essentially the same provision of the law.

Unless regulatory coordination in developing regulations is mandated by

law, the regulators may develop regulations independently. Even if the

regulators develop regulations jointly, on an interagency basis, they each

still issue similar individual regulations under their own legal authority. In

some instances, law designates a specific regulator to write the regulation

for all banking institutions. For instance, FRS has sole rulemaking

responsibility for many consumer protection laws.

All Four Regulators May

Take Enforcement Actions

Each regulator has the authority to take enforcement actions against

financial institutions under its jurisdiction. Regulators may initiate

informal or formal enforcement actions to get bank management to

correct unsafe and unsound practices or conditions identified during the

banking institution examination.3

 Regulators have broad discretion in

deciding which, if any, regulatory action to choose, and they typically

make such decisions on a case-by-case basis. Regulators have said that

they prefer to work with cooperative banking institution managers to

bring about necessary corrective actions as opposed to asserting formal

actions. However, bank regulatory officials have also said that they may

take more stringent action when the circumstances warrant it.

1

In issuing regulations, regulators must publish proposed drafts in the Federal Register to request

public comments, after which they consider comments and finalize the regulations.

2

Banking guidelines typically do not serve as the basis for agency enforcement actions.

Noncompliance with guidelines may be cited by regulators in enforcement actions to encourage

banking institution managers to take necessary actions.

3

The enforcement process for regulators begins when they notify institution management and directors

of financial weaknesses, operational problems, or violations of banking laws or regulations identified

during an examination. Regulatory concerns are to be brought to a bank’s attention through meetings

with management upon completion of the examination. A report of the examination findings is also to

be provided to the bank’s board of directors, management, and principal ownership interests.

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Under agency guidelines, the regulators are to use informal actions for

banking institutions if (1) the institution’s overall strength and financial

condition make failure a remote possibility and (2) management has

demonstrated a willingness to address supervisory concerns. Informal

actions generally include

• meeting with banking institution officers or board of directors to obtain

agreement on improvements needed in the safety and soundness of the

institution’s operations,

• requiring banks to issue resolutions to issue commitment letters to the

regulators specifying corrective actions to be taken, and

• initiating memorandums of understanding between regulators and banking

institution officers on actions that are to be taken.

Informal actions typically are used to advise banking institutions of noted

weaknesses, supervisory concerns, and the need for corrective action. The

regulators assume that banking institutions understand that if they do not

comply with informal actions, regulators may take stronger enforcement

actions.

Under agency guidelines, the regulators use formal enforcement actions

that are authorized in banking laws when informal actions have not been

successful in getting management to address supervisory concerns,

management is uncooperative, or the institution’s financial and operating

weaknesses are serious and failure is more than a remote possibility.

Formal enforcement actions generally include such actions as

• formal written agreements between regulators and bankers;

• orders to cease and desist unsafe practices or violations;

• assessments of civil money penalties; and

• orders for removal, suspension, or prohibition of individuals from banking

institution operations.

In addition, OCC and OTS may revoke national banking institutions’ charters

and place institutions in conservatorship; FDIC may remove an institution’s

deposit insurance.

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Each Regulator Is To

Examine Banking

Institutions Under its

Jurisdiction

Under FDICIA, all insured banking institutions are to be examined once

every 12 months by federal regulators.4

 These examinations are to be

conducted by the regulators with primary jurisdiction over the banking

institutions. In addition, FDIC may conduct backup examinations of any

bank, if necessary, for the purpose of protecting BIF.

The full-scope examinations5

 required under law are usually called

safety-and-soundness examinations because their primary purpose is to

assess the safety and soundness of a banking institution’s practices and

operations. The objectives of these on-site examinations are to

• test and reach conclusions about the reliability of banking institutions’

systems, controls, and reports;

• investigate changes or anomalies disclosed by off-site monitoring and

analysis; and

• evaluate those aspects of the institution’s operations for which portfolio

managers cannot rely on the banks’ own systems and controls.

CAMEL Ratings for Banks

and Thrifts

Examinations have historically been extensive reviews of loan portfolios.

Currently, according to officials with whom we spoke, regulators are

moving toward a risk-management approach and concentrating on

institutions’ risk profiles6

 and internal controls. Examiners rate five critical

areas of operations—capital adequacy (C), asset quality (A), management

(M), earnings (E), and liquidity (L)—to determine an overall rating

(CAMEL). They use a five-point scale (with one as the best rating and five

as the worst) to determine a CAMEL rating that describes the condition of

the institution.

As a part of the examination process, regulators are to meet with banking

institution officials after every examination.7

 In addition, regulators are to

4

The Federal Deposit Insurance Act allows for examinations of small well-capitalized institutions (less

than $250 million in assets) to be extended to every 18 months and allows state examinations to

alternate with federal examinations for state-chartered institutions.

5

Full-scope examinations include examining asset quality, assessing systems and internal controls,

judging capital adequacy and reserves, and assessing compliance with laws and regulations.

6

Under this approach, the examiner is to look at the bank’s portfolio, balance sheet, and other

activities, like derivatives, to see whether there is adequate risk management, including policies and

procedures to effectively manage the risk being taken by the institution.

7

Examiners are also encouraged to communicate with banking institution management often, and

directors as needed, to discuss current significant issues about the bank. This communication can take

the form of a meeting or telephone contact. Typical discussion topics may include financial

performance and trends, new lines of business or other operating changes, management concerns

about the bank, and other issues that could affect the bank’s risk profile.

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hold separate meetings with the bank’s audit committee and management

after each examination to discuss the results of the examination.

Holding Company

Inspections

FRS and OTS also conduct holding company inspections. Holding company

inspections differ from bank examinations in that the focus of the

inspection is to ascertain whether the strength of a bank holding company

is being maintained and to determine the consequences of transactions

between the parent company, its nonbanking subsidiaries, and the

subsidiary banks. According to FRS and OTS guidelines, the major

components of an inspection include

• an assessment of the financial condition of the parent company, its

banking subsidiaries, and any nonbanking subsidiaries;

• a review of intercompany transactions and relationships;

• an evaluation of the current performance of the company and its

management; and

• a check of the company’s compliance with applicable laws and

regulations.

BOPEC Ratings for Bank

Holding Companies

Examiners are to rate five critical areas of the bank holding

company—bank subsidiaries (B), other nonbank subsidiaries (O), parent

company (P), earnings (E), and capital adequacy (C)—to determine an

overall rating referred to as BOPEC. Examiners use a five-point rating

scale, similar to that used for CAMEL ratings on banks and thrifts. They

also rate management separately as satisfactory, fair, or unsatisfactory.

Consumer Compliance and

Community Reinvestment

Act Examinations Are

Done Separately From

Safety and Soundness

Examinations

In addition to safety and soundness examinations, regulators are to

conduct examinations of banking institutions focusing on compliance with

various consumer protection laws and the Community Reinvestment Act

(CRA). A consumer compliance examination results in a compliance rating

for an institution’s overall compliance with consumer protection laws to

ensure that the provision of banking services is consistent with legal and

ethical standards of fairness, corporate citizenship, and the public interest.

A compliance rating is to be given to the institution based on the

numerical scale ranging from 1 for top-rated institutions to 5 for the

lowest-rated institutions.

Although the regulators may do a CRA compliance examination separately

from a consumer compliance examination, officials from all four

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regulators said that they generally do both examinations at the same time.

The purpose of the CRA examination is to evaluate the institution’s

technical compliance with a set of specific rules and to qualitatively

evaluate the institution’s efforts and performance in serving the credit

needs of its entire community. The CRA examination rating consists of a

four-part descriptive scale including “outstanding,” “satisfactory,” “needs

to improve,” and “substantial noncompliance.” Under the Financial

Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA), CRA

was amended to require that the regulator’s examination rating and a

written evaluation of each assessment factor be made publicly

available—unlike the safety and soundness or compliance examination

ratings, which are not made public by regulators.

Off-Site Monitoring and

Analysis Supplements

Examinations

In addition to on-site examinations of banking institutions, each of the

regulators engages in off-site monitoring activities. These

activities—which generally consist of a review and analysis of

bank-submitted data, including call reports, and discussions with bank

management—are to help the regulators identify trends, areas of concern,

and accounting questions; monitor compliance with requirements of

enforcement actions; and formulate supervisory strategies, especially

plans for on-site bank examinations. According to examination guidance

issued by the regulators, off-site monitoring involves review and analysis

of, among other things, quarterly financial reports that banks prepare for

and submit to regulators8

 and reports and management letters prepared

for banking organizations by external auditors of banks. In general,

meetings are not regularly held with banking institution management as

part of normal off-site monitoring activities. If off-site monitoring reveals

significant changes or issues that could have an impact on the bank, then

examiners may meet with management or contact management by

telephone to discuss relevant issues.

Oversight agencies are focusing more on risk assessment in their off-site

monitoring efforts. FDIC officials said that their off-site monitoring

programs, such as quarterly reports and off-site reviews, help provide an

early indication of a change in an institution’s risk profile. They also said

that FDIC has developed new initiatives to improve identifying and

8

The reports for banks are called the Consolidated Reports of Condition and Income (Call Reports).

The reports for bank holding companies are called the Consolidated Financial Statements for Bank

Holding Companies (Y-9 reports), and similar quarterly reports on thrifts and thrift holding companies

are to be submitted to OTS. The reports are to be prepared by bank management and submitted to the

primary regulator on a quarterly basis. The reports consist of a balance sheet, income statement, and

various supporting detailed analyses of balances and related activities.

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monitoring risk. One initiative is the development of decision flowcharts

that aid examiners in identifying risks in an institution as well as possible

approaches to address them. Another initiative has included increasing the

use of technology through the development of an automated examination

package and expanding the access that examiners have to internal and

external databases in order to provide relevant data to examiners prior to

on-site examinations, enabling the examiner to identify specific risks

areas.

External auditors’ reports, originally prepared to ensure the accuracy of

information provided to a banking organization’s shareholders, attest to

the fairness of the presentation of the institution’s financial statements

and, in the case of large institutions, to management’s assertions about the

institution’s financial reporting controls and compliance with certain laws

and regulations. Management letters describe important, but less

significant, areas in which the banking institution’s management may need

to improve controls to ensure reliable financial reporting.

Supervisors generally require banking institutions that have an

audit—regardless of the scope of the audit—to send the reports, including

management letters and certain other correspondence, to the supervisor

within a specified time period.9

 Reviews of this information could lead

examiners to focus on-site examinations on specific aspects of an

institution—such as parts of an institution’s internal control system—or

even to eliminate some procedures from the examination plan. The

purposes of external audits and safety and soundness examinations differ

in important respects and are guided by different standards,

methodologies, and assumptions. Even so, external auditors and

examiners may review much of the same information.10 To the extent that

examiners could avoid duplicating work done by external auditors,

9

Bank and thrift regulators have either required or strongly encouraged all institutions to have annual

external audits. Large banks and thrifts—with total assets in excess of $500 million—are required to

have annual independent audits; and smaller banks are generally required to have audits for the first 3

years after obtaining FDIC insurance. Some state banking regulators also require such external audits

for institutions chartered in their states. Additionally, the Federal Reserve requires bank holding

companies with total consolidated assets of $150 million or more to have annual, independent financial

audits; and OTS requires annual audits of holding companies whose subsidiary savings associations

have aggregate assets of $500 million or more. SEC also has a financial audit requirement for all public

companies, including bank holding companies that are SEC-registrants and all banking institutions that

are subject to SEC reporting requirements.

10For example, an auditor may issue an unqualified opinion on an institution after determining that its

transactions and balances are reported in accordance with Generally Accepted Accounting Principles

(GAAP). This does not necessarily mean, however, that the transactions reflect sound business

judgment, that the associated risks were managed in a safe or sound manner, or that the asset balances

could be recovered upon disposition or liquidation.

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examinations could be more efficient and less burdensome for financial

institutions.

Supervisors’ Use of External

Auditors’ Work Has Been

Limited by Various Factors

Supervisors’ actual use of external auditors’ work has varied by agency as

well as by individual examiner, according to supervisory officials we

interviewed. Primary factors in limiting use, according to some officials we

interviewed, include skepticism among examiners about the usefulness of

the work of external auditors and concerns that the findings of an external

audit could be outdated by the time the financial institution is examined

by its federal supervisor.

Recent Initiatives May Help

Increase Supervisory Use of

External Auditors’ Work

OCC and FDIC recently have undertaken initiatives to improve cooperation

between external auditors and examiners and potentially to identify areas

in which examiners could better use the work of external auditors. One

impetus for improvement efforts was a 1995 report by the Group of

Thirty—“Defining the Roles of Accountants, Bankers and Regulators in the

United States.”11 This report recommended, among other things, joint

identification by the accounting profession and regulators of areas of

reliance on one another’s work; actions by independent audit committees

to encourage interaction among regulators, external auditors, and banking

institution management; routine use by examiners of audit workpapers;

and a permanent board consisting of representatives from each of the

federal banking agencies, SEC, the accounting profession, and the banking

industry to recommend improvements in the relationship between

regulators and external auditors. Regulatory officials we interviewed

disagreed with some of the recommendations set out by the Group of

Thirty report, and some officials said the report did not give sufficient

credit to regulators’ past efforts to work with external auditors. However,

regulators generally agreed that this report helped provide some needed

momentum for their initiatives.

In November 1995, OCC announced plans for a 1-year pilot program to

promote greater cooperation between examiners and external auditors

and reduce wasteful duplication and oversight burden. The program,

which is to involve at least 10 large regional and multinational banks, is

expected to result in nonmandatory guidelines on how and under what

circumstances examiners and external auditors should work together and

use each others’ work. Officials said that certain process-oriented

functions where external auditors and examiners are tabulating or

verifying the same information—such as documenting and flow-charting

11The Group of Thirty is made up of officials from accounting firms, banks, securities firms, academia,

and other private sector firms.

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Bank Oversight Structure Is Redundant

internal controls or confirming the existence and proper valuation of bank

assets—may be an area where examiners could use the work of external

auditors.

FRS is also in the process of trying to establish procedures for cooperating

more closely with external auditors. As of June 1996, FRS staff had

prepared a draft recommendation for the FRS Board to explore

opportunities to share information and analytic techniques with external

auditors and to seek opportunities to benefit from the work of external

auditors.

According to FDIC officials, representatives of FDIC have regular meetings

with external auditors, and examiners have also recently begun reviewing

selected external auditors’ workpapers. Examiners we spoke with told us

that information found in the workpapers can be useful because

information considered immaterial for financial accounting purposes

(which is therefore not discussed in the audit report) can be useful for

regulatory purposes. They further found the auditors’ work useful for

identifying issues needing management’s attention and providing

indicators of management willingness or ability to address those issues.

Finally, one of the most important benefits of this workpaper review,

according to examiners, is that these reviews promoted expanded

communication and interaction between examiners and external auditors

and helped acquaint examiners and auditors with each other’s techniques,

policies, procedures, and objectives. FDIC officials told us they plan to

issue examiner guidance to implement procedures to expand their review

of internal and external audit workpapers of institutions that have

substantial exposure to higher risk activities, such as trading activities.

Officials also said examiners will be expected to contact an institution’s

auditor to solicit information that the auditor may have gained from his or

her work at the institution since the last examination. Finally, they said

that this guidance will require that all Division of Supervision Regional

Offices institute a program whereby annual meetings are held between

regulators and local accountants to informally discuss accounting,

supervisory, and examination policy issues.

According to industry officials, OTS—and its predecessor the Federal

Home Loan Bank Board (FHLBB)—has had a long-standing history of

working with external auditors, and its examiners frequently use the work

of external auditors to adjust the scope of examinations. (See app. II for

additional information on the use of external auditors in bank

supervision.)

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Chartering of Banking

Institutions Is Limited to

States, OTS, and OCC

Banking institutions have a choice of three chartering authorities: (1) state

banking authorities, which charter state banks and thrifts and license state

branches and agencies of foreign banks; (2) OTS, which charters national

thrifts; and (3) OCC, which charters national banks and licenses federal

branches and agencies of foreign banks.12 FRS and FDIC have no chartering

authority. However, according to FDIC, all deposit-taking institutions are

required to apply to FDIC for federal deposit insurance before they are

chartered. Thus, FDIC may have a powerful influence over chartering

decisions.

Although the authority to charter is limited, each regulator has

responsibility for approving mergers, branching, and change-of-control

applications. FRS, FDIC, and OTS share their authority to approve branching

and mergers of banking institutions under their jurisdictions with state

authorities, while OCC alone reviews national bank branch and merger

applications.13 FRS is responsible for approving bank holding company

mergers even though the major banking institutions in the merging holding

companies may be supervised by OTS, OCC, or FDIC. Likewise, OTS approves

thrift holding company mergers.

FRS and FDIC Rely on

Supervisory

Information to Fulfill

Nonoversight Duties;

Treasury Obtains

Information Primarily

Through OCC and

OTS

As described in chapter 1, in addition to their primary bank oversight

functions, FRS and FDIC have other major responsibilities that include

administration of the federal deposit insurance funds; failed or failing bank

resolution; and asset disposition for FDIC and, for FRS, monetary policy

development and implementation, payments and settlements systems

operation and oversight, and liquidity lending.

FRS and FDIC officials told us that to fulfill their duties, they rely on

information obtained under their respective supervisory authorities. FRS

officials said that to carry out their responsibilities effectively, they must

have hands-on supervisory involvement with a broad cross-section of

banks. FRS officials also said that the successful handling of financial crises

often depends upon a combination of the insights and expertise gained

through banking supervision and those gained from the pursuits of

macroeconomic stability.

12Bank and thrift holding companies are not chartered but are incorporated by the state chartering

authority where they are headquartered or by OTS for national thrift holding companies.

13For other supervisory decisions such as changes of control, the deposit-taking institution is to notify

its primary regulator and meet its requirements.

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Experience suggests that in times of financial stress, such as the 1987

stock market crash, FRS needs to work closely with the Department of the

Treasury and others to maintain market stability. As we have pointed out

in the past, the extent to which FRS needs to be a formal supervisor of

financial institutions to obtain the requisite knowledge and influence for

carrying out its role is an important question that involves policy

judgments that only Congress can make.14 Nevertheless, past experience,

as well as evidence from the five foreign oversight structures we studied

(see ch. 3 for further discussion) provides support for the need for FRS to

obtain direct access to supervisory information. In its comment letter, FRS

stated that it needs active supervisory involvement in the largest U.S.

banking organizations and a cross-section of others to carry out its key

central banking functions.

FDIC officials said that their formal supervisory responsibility enables them

to maintain staff that can supervise and assess risk. In their view, this

gives FDIC the expertise it requires when it needs to intervene to

investigate a problem institution. In addition, FDIC officials said that the

agency’s supervision of healthy institutions is useful because it increases

their awareness of emerging and systemic issues, enabling them to be

proactive in carrying out FDIC’s insurance responsibilities. In its comment

letter, FDIC reiterated its need for information on the ongoing health and

operations of financial institutions and stated that periodic on-site

examination remains one of the essential tools by which such information

may be obtained.

Under FDICIA, FDIC was given backup examination and enforcement

authority over all banks.15 On the basis of an examination by FDIC or the

appropriate federal banking agency or “other information,” FDIC may

recommend that the appropriate agency take enforcement action with

respect to an insured depository institution. FDIC may take action itself if

the appropriate federal banking agency does not take the recommended

action or provide an acceptable plan for responding to FDIC’s concerns and

if FDIC determines that

• the institution is in an unsafe or unsound condition,

• the institution is engaging in unsafe or unsound practices and the action

will prevent it from continuing those practices, or

• the institution’s conduct or threatened conduct poses a risk to the deposit

insurance fund or may prejudice the interests of depositors.

14Bank Regulation: Consolidation of the Regulatory Agencies (GAO/T-GGD-94-106, Mar. 4, 1994).

15Under FIRREA, FDIC was given similar backup enforcement authority for thrifts.

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We are on record as favoring a strong, independent deposit insurance

function to protect the taxpayers’ interest in insuring more than $2.5

trillion in deposits.16 Previous work we have done suggests that a strong

deposit insurance function can be ensured by providing FDIC with (1) the

ability to go into any problem institution on its own, without having to

obtain prior approval from another regulatory agency; (2) the capability to

assess the quality of bank and thrift examinations, generally; and

(3) backup enforcement authority.17

As described in chapter 1, Treasury also has several responsibilities

related to bank oversight, including being the final decisionmaker in

approving an exception to FDIC’s least-cost rule and a principal participant

in the development of financial institution legislation and policies. These

responsibilities require that Treasury regularly obtain information about

the financial and banking industries, and, at certain times,

institution-specific information. According to Treasury officials, Treasury’s

current level of involvement, through its housing of OCC and OTS and their

involvement on the FDIC Board of Directors, and the information it receives

from the other agencies, like FDIC and FRS, as needed, is sufficient for it to

carry out these responsibilities. For example, according to Treasury,

officials at OCC and OTS meet regularly with senior Treasury officials to

discuss general policy issues and market conditions. In addition, the

Secretary of the Treasury meets regularly with the FRS Chairman, and

other senior Treasury officials meet regularly with members of the FRS

Board. Furthermore, Treasury officials are in frequent contact with FDIC

officials about issues relevant to both organizations.

Analysts, Regulators,

and Legislators Have

Identified

Disadvantages and

Advantages of the

Oversight Structure

Analysts, legislators, banking institution officials, and numerous past and

present regulatory agency officials have identified weaknesses and

strengths in the structure of the federal bank oversight system. Some

representatives of these groups have broadly characterized the federal

system as redundant, inconsistent, and inefficient. Some banking

institution officials have also raised concerns about negative effects of the

structure on supervisory effectiveness. At the same time, some agency and

institution officials have credited the current structure with encouraging

financial innovations and providing checks and balances to guard against

arbitrary oversight decisions or actions.

16GAO/T-GGD-94-106.

17GAO/T-GGD-94-106.

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Bank Oversight Structure

Has Contributed to

Inefficiencies and Could

Cloud Accountability to

Congress, According to

Regulators and Industry

Officials and Analysts

A principal concern associated with four regulators essentially conducting

the same oversight functions for various segments of the industry is that

the system is inefficient in numerous respects. For example, each agency

has its own internal support and administrative functions, such as

facilities, data processing, and training to support the basic regulatory and

supervisory tasks it shares with three other agencies.

Concerns about inefficiency have also been raised by banking industry

officials and analysts because a number of federal regulatory agencies may

oversee the banking and nonbanking subsidiaries in a bank holding

company. Inefficiencies could result to the extent that the regulator

responsible for supervision of the holding company itself, FRS, might

duplicate work done by the primary regulator of the holding company

subsidiaries—that is, OTS, OCC, or FDIC.

18

According to SEC officials, another area of potential inefficiency is the lack

of uniform regulations of bank securities activities. For example, banking

institutions that are not part of a holding company are exempted from SEC

filing requirements, such as registering their securities offerings and

making periodic filings with SEC. This means that there is a duplication of

expertise that both SEC and the federal banking institutions’ regulators

must develop and maintain to oversee securities offerings and related

activities.

Overlapping authority and responsibility for examination of subsidiaries

could also have the effect of clouding accountability to Congress in cases

of weaknesses in oversight of such subsidiaries. According to testimony by

the Comptroller of the Currency in 1994, “it is never entirely clear which

agency is responsible for problems created by a faulty, or overly

burdensome, or late regulation.”19

Regulators have also raised concerns about FDIC’s backup examination

authority. The backup authority remains open to interpretation and,

according to regulatory officials, gives FDIC the authority to examine

banking institutions regardless of the examination coverage or

conclusions of the primary regulator. Regulatory officials said that they

were concerned about FDIC’s backup authority because of the possible

18As the primary supervisor of bank holding companies, FRS collects and reviews information on

nonbank subsidiaries. If FRS determines, on the basis of its own information or information of other

regulatory and supervisory agencies, that the nonbank subsidiary needs an on-site inspection, FRS

examiners may inspect the nonbank subsidiary. In addition, OCC can examine nonbank subsidiaries of

national banks and FDIC can examine those of state-chartered nonmember banks.

19Testimony of Eugene A. Ludwig, Comptroller of the Currency, Mar. 2, 1994.

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duplication of effort and the resulting regulatory burden on the affected

banks. FDIC’s Board of Directors has worked with FDIC officials in efforts to

establish a policy statement clarifying how this authority will be applied in

order to avoid inefficiency or undue burden while allowing FDIC to

safeguard deposit insurance funds.

Multiplicity of Regulators

Creates Inconsistencies

Regulators, banking officials, and analysts alike assert that the multiplicity

of regulators has resulted in inconsistent treatment of banking institutions

in examinations, enforcement actions, and regulatory decisions, despite

interagency efforts at coordination. For example, in previous studies,20 we

have identified significant inconsistencies in examination policies and

practices among FDIC, OCC, OTS, and FRS, including differences in

examination scope, frequency, documentation, loan quality and loss

reserve evaluations, bank and thrift rating systems, and examination

guidance and regulations. To address some of these problems, the federal

agencies have operated under a joint policy statement since June 1993

designed to improve coordination and minimize duplication in bank

examination and bank holding company inspections. According to OTS, the

oversight agencies have adopted a common examination rating system and

have improved coordination of examinations, and some conduct joint

examinations when feasible.

Some of the differences among banking institution regulators result from

differences in the way they interpret and apply regulations. Banking

officials told us that the agencies sometimes apply different rules to

similar situations and sometimes apply the same rules differently. A 1993

Congressional Budget Office (CBO)21 study cited frequent disagreements

between OCC and FRS on the interpretation of laws governing the

permissible activities of national banks. These disagreements resulted in a

failed attempt by FRS to prevent one national bank from conducting

OCC-approved activities in a bank subsidiary.22 The CBO study also detailed

historical differences between the two agencies in other areas, such as

merger approvals.

20GAO/T-GGD-94-106. Bank and Thrift Regulation: Improvements Needed in Examination Quality and

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

21Congressional Budget Office Staff Memorandum Options for Reorganizing Federal Banking Agencies,

September 1993.

22The Federal Reserve Board argued that it had jurisdiction over the bank subsidiary since it was

responsible for the holding company as a whole.

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In addition to interpreting regulations differently, the regulatory agencies

sometimes enforced them differently as well. For example, we observed

that regulatory agencies have given different priority to enforcing

consumer protection and community lending legislation.23 Similarly, in our

examination of regulatory impediments to small business lending we also

found that the agencies had given conflicting advice to their institutions

about the procedures for taking real estate as collateral to support

traditional small business working capital and equipment loans.24

Inconsistency among the regulators in examinations as well as in

interpreting, implementing, and enforcing regulations may encourage

institutions to choose one charter over another to take advantage of these

differences. For example, a merger of banking institutions with differing

charters may be purposefully structured to place the application decision

with the agency deemed most likely to approve the merger and expand

permissible activities. According to some former agency officials, a

regulatory agency’s desire to maintain or increase the number of

institutions under its jurisdiction could inhibit the agency from taking the

most appropriate enforcement action against an institution because that

action could prompt a charter switch.

Although the statutory mandates that define responsibilities of federal

regulators help produce a common understanding of the principal goals of

bank regulation, bank regulators may prioritize these goals differently,

according to the mission of the particular regulatory agency, among other

factors. As a result, a banking organization overseen by more than one of

the regulators can have different, and sometimes conflicting, priorities

placed on its institutions.

Various functions within an agency may also differ in the priority they

assign oversight goals. For instance, safety-and-soundness examiners from

one agency focus on the goals of safety and soundness and the stability of

the system and may emphasize high credit standards that could conflict

with community development and investment goals. Other examiners from

the same agency focus on consumer protection and community

reinvestment performance of banking institutions. According to industry

officials, the two types of examiners may have different priorities when

assessing banking institution activities, even though each represents the

same regulatory agency. As a result, industry officials have said that they

23GAO/T-GGD-94-106.

24Bank Regulation: Regulatory Impediments to Small Business Lending Should Be Removed

(GAO/GGD-93-121, Sept. 7, 1993.

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are sometimes confused about how consistently the goals are applied to

individual institutions as well as across the industry.

Regulatory Coordination Is

Not Always Efficient

Coordination among regulators to ensure consistent regulation and

supervisory policies has been encouraged by Congress in FIRREA and FDICIA

and, according to agency officials, has taken place through the Federal

Financial Institutions Examination Council (FFIEC),25 various interagency

committees or subcommittees, interagency task forces or study groups, or

through agency officials working together. Many joint policies and

regulations have been developed in this way. Currently, for example,

according to several of the oversight agencies, the federal agencies are

working to develop consistent regulations and guidelines that implement

common statutory or supervisory policies, pursuant to Section 303 of the

Riegle Community Development and Regulatory Improvement Act. How

they are to coordinate and the degree to which coordination takes place is

to be decided on a case-by-case basis.

Although acknowledging the need for agency coordination, bank oversight

officials have said that efforts to develop uniform policies and

procedures—regardless of the coordination means used—can take

months, involve scores of people, and still fail to result in uniformity.

Further, they said the coordination process has often caused long delays

in decisions on important policy issues. Implementation of FDICIA is such a

case. Numerous staff from each of the regulatory agencies were involved

over an extended period. However, despite this effort, the agencies missed

the statutory deadline for the noncapital tripwire provision authorizing

closure of banking institutions even when they still have positive capital

levels (section 132 of the act) by several months.26 In addition, banking

institution officials have stated that efforts to coordinate have usually led

to what too often becomes the “least common denominator” agreement

rather than more explicit uniform regulatory guidance.

25FFIEC was created by Congress in 1979 to promote consistency in the examination and supervision

of financial institutions. The Council is composed of the Comptroller of the Currency, one FRS

Governor, the OTS Director, the FDIC Chairman, and the Chairman of the NCUA board. FFIEC was

principally designed to address duplication in examination procedures and has had some success in

this area. For example, with the passage of FIRREA, FDICIA, and the Riegle Community Development

and Regulatory Improvement Act of 1994, regulators have worked more actively on an interagency

basis to develop examination policies and procedures and to coordinate examinations, much of which

was done through FFIEC.

26GAO/T-GGD-94-106.

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Current Structure May

Hamper Effectiveness of

Oversight

Certain aspects of the U.S. banking oversight structure may also negatively

affect regulatory effectiveness. According to FRS testimony, as of April 30,

1996, about 60 percent of the nation’s bank and thrift organizations were

supervised by at least two different federal banking agencies.27 Some

holding companies may be subject to oversight by three or all four of the

federal oversight entities (see fig. 2.2).

Figure 2.2: Regulation of a Hypothetical Bank Holding Company

National bank


(OCC)

State member bank


(FRS and state)

State nonmember


bank


(FDIC and state)

Parent thrift holding


company


(OTS)

State savings and


loan association


(OTS and state)

National savings and


loan association


(OTS)

Parent bank


holding company


(FRS)

Source: GAO.

The overlapping authority in bank holding company supervision has

sometimes been a problem, according to regulatory officials, because each

regulator examines only a segment of the holding company and so must

rely upon other regulators for information about the remaining segments.

Banking officials have said this not only results in a fragmented approach

to supervising and examining institutions but also ignores how the

banking organization operates and hinders regulators from obtaining a

complete picture of what is going on in the organization. According to

these officials, the regulatory structure may result in potential blind spots

27Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System

before the Committee on Banking and Financial Services, U.S. House of Representatives, Apr. 30, 1996.

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in supervisory oversight and, therefore, may not be the most effective way

to guard against risk to banking institutions or the banking system as a

whole. Work that we have done supports these assessments.28

Multiagency System Has

Been Credited With

Encouraging Financial

Innovations and Providing

Checks and Balances to

Ensure Banks Are Treated

Fairly

Although banking officials have acknowledged weaknesses in the

structure of the U.S. bank oversight system, they have also found

strengths. For example, some regulatory officials believe that regulatory

monopolies or single regulators run the risk of being inflexible and

myopic; are slow to respond to changes in the marketplace; and, in the

long term, are averse to risktaking and innovation by banking institutions.

These officials have stated that having multiple federal regulators in the

U.S. system has resulted in the diversity, inventiveness, and flexibility in

the banking system that is important for responding to changes in market

share and in technology. These officials consider the present system to be

flexible enough to allow market-driven changes and innovations. The same

officials have said that the present system of multiple regulators—with the

ability of banking institutions to change charters—provides checks and

balances against arbitrary actions and rigid and inflexible policies that

could stifle healthy growth in the banking industry.

Principles for Bank

Oversight

Modernization

On the basis of the extensive work we have done in areas such as bank

supervision, enforcement, failure resolution, and innovative financial

activities—such as derivatives—we have previously identified four

fundamental principles that we believe Congress could use when

considering the best approach for modernizing the current regulatory

structure.29 We believe that the federal bank oversight structure should

include

• consolidated and comprehensive oversight of companies owning federally

insured banks and thrifts, with coordinated functional regulation and

supervision of individual components;

• independence from undue political pressure, balanced by appropriate

accountability and adequate congressional oversight;

28See, for example, Bank Supervision: OCC’s Supervision of the Bank of New England Was Not Timely

or Forceful (GAO/GGD-91-128, Sept. 16, 1991).

29Bank Oversight: Fundamental Principles for Modernizing the U.S. Structure (GAO/T-GGD-96-117,

May 2, 1992).

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• consistent rules, consistently applied for similar activities; and

• enhanced efficiency and as low a regulatory burden as possible consistent

with maintaining safety and soundness.

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May Be Useful to Consider in Efforts to

Modernize U.S. Bank Oversight

Aspects of bank oversight systems in Canada, France, Germany, Japan,

and the United Kingdom (U.K.) may be useful to consider when addressing

bank oversight modernization. All of the foreign systems had fewer total

entities overseeing banking institutions than did the U.S. system of bank

oversight—ranging from one (U.K.) to three (France).1

 No more than two

oversight entities in the foreign countries were responsible for any single

major oversight activity—chartering,2

 regulation, supervision, or

enforcement. In all five countries we studied, banking organizations

typically were subject to consolidated oversight, with one oversight entity

being legally responsible and accountable for the entire banking

organization, including its banking and nonbanking subsidiaries. The

oversight systems in the countries we reviewed generally included roles

for both central banks and finance ministries. This reflects a close

relationship of traditional central bank responsibilities with oversight of

commercial banks as well as the national government’s ultimate

responsibility to maintain public confidence and stability in the financial

system. At the same time, most of the foreign countries incorporated

checks and balances to guard against undue political influence and to

ensure sound supervisory decisionmaking. The other countries’ deposit

insurers had narrower roles than that of FDIC and often were not

government entities. Finally, foreign systems incorporated a variety of

mechanisms and procedures to ensure consistent oversight and improve

efficiency.

Foreign Systems Had

One to Three

Oversight Entities

Compared to the U.S. bank oversight structure, with four federal agencies

performing many of the same oversight functions, the other countries’

structures looked less complex (see table 3.1 for a brief overview of the

other countries’ oversight systems). The total number of bank oversight

entities in each of the countries we studied ranged from one (U.K.) to three

(France). At one end of the spectrum was the Bank of England, which

performed all bank oversight functions. At the other end, in France, were

the three independent decisionmaking committees—chartering,

regulating, and supervising—all of which were supported by central bank

staff. The foreign systems also had fewer oversight entities engaged in

chartering, regulation, supervision, and enforcement activities compared

to the U.S. system. Although all four U.S. agencies issue rules, conduct

examinations, and take enforcement actions—OCC and OTS are the only

federal chartering authorities in the United States—the foreign systems

1

The discussion in this report is limited to national-level oversight entities, unless otherwise noted.

2

Chartering is sometimes also referred to as authorization in some countries.

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May Be Useful to Consider in Efforts to

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had authorized no more than two agencies to perform each of those

functions.

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Table 3.1: Overview of Other

Countries’ Bank Oversight Systems Country Overview of system characteristics

Canada The system is dominated by a federal supervisor whose top official is

appointed by the cabinet and reports directly to the Minister of Finance,

a member of the government’s cabinet. A federal deposit insurer plays a

secondary role in bank oversight. Canada’s central bank, the Bank of

Canada, whose primary function is monetary policy, maintains a data

reporting system on the financial system and individual institutions. It

also sits on two oversight coordination committees with the supervisor

and insurer and on the insurance Board of Directors with the supervisor

and Department of Finance representatives.

France Three separate, independent committees are responsible for bank

regulation, supervision, and authorization; each is supported primarily by

staff of the central bank, the Bank of France. A general purpose of the

three-committee system is to prevent an overconcentration of power by

any individual or institution in government oversight of banking. The

Bank of France and the French Ministry of Economic Affairs are the key

members of all three committees, which also include a representative of

the banking industry.

Germany The system consists of both public and private participants—with two

federal agencies (a supervisor and the central bank, the Bundesbank)

sharing certain responsibilities with external auditors and private banking

associations. De jure, the primary German bank regulatory and

supervisory authority, is the federal bank supervisor, which reports to the

Ministry of Finance and is held accountable for its actions to the German

parliament. However, the supervisor and the central bank work closely

together and are generally considered partners in the formulation of

regulatory and supervisory policies. In addition, the central bank has the

most active role in day-to-day supervision.

Japan The system involves two primary parties—the Ministry of Finance and the

Bank of Japan, Japan’s central bank. The Ministry of Finance has sole

formal authorization to charter banks and issue and enforce

governmental bank regulations and is principally responsible for

collecting reports and financial statements from banks. Japan’s central

bank derives its authority principally from the contractual agreements it

makes with financial institutions. It may also issue guidance to banks to

ensure the safety and soundness of the financial system. Both the

Ministry of Finance and the Bank of Japan conduct—generally on an

alternating basis—examinations of banks.

U.K. The system is dominated by its central bank, the Bank of England, which

is the primary regulator and sole supervisor of authorized banks in the

United Kingdom. The central bank is formally governed by its

16-member Court of Directors but is managed by the Governor of the

Bank, his deputy, and four executive directors responsible for monetary

and financial stability. The Bank is subordinate to Her Majesty’s Treasury

and accountable to Parliament but has been accorded a high degree of

independence in bank regulation and supervision.

(Table notes on next page)

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Source: The Canadian Office of the Superintendent of Financial Institutions, French Banking

Commission, German Bank Supervisory Office, Japanese Ministry of Finance, and the Bank of

England.

Other Countries Had One

Entity to Charter Banking

Institutions

In each of the countries we studied, chartering of commercial banking

institutions was the responsibility of only one entity.3

 This differs

markedly from the U.S. system, in which banking institutions may be

chartered by state banking commissions, OTS, or OCC.

4

 As in the United

States, the chartering entities in the other countries assessed applications

on the basis of several factors.5

 The most universal of the factors

considered were the adequacy of capital resources and the expertise and

character of financial institution management.

In the United States, as noted in chapter 1, a banking institution’s federal

oversight agency is largely determined by the institution’s charter, and

under most circumstances an institution may switch its charter in order to

come under the jurisdiction of an agency it may favor. Such switching of

regulators is not a possibility in the countries we studied.

In Most Other Countries,

Regulations Were Issued

by One Entity

In contrast to the U.S. system, in which each of the four banking

institution oversight entities is generally authorized to issue its own

regulations or regulatory guidelines, responsibility for issuing regulations

in the countries we studied was usually limited to one entity.6

 In France,

this responsibility was assigned to the Bank Regulatory Committee; in

Germany, to the Federal Bank Supervisory Office (FBSO); in Japan, to the

Ministry of Finance; and in the U.K., to the Bank of England. In Canada,

however, the bank supervisor and the deposit insurer were both

authorized to issue regulations or standards. The insurer had the authority

to issue standards pertaining to its operations and functions and those of

its members. To guard against monolithic decisionmaking, the regulatory

processes in all five countries were designed to include the views of other

3

In some countries, other kinds of banking institutions, such as trusts, were chartered at the local level.

4

U.S. chartering authority is further complicated by FDIC’s responsibility to approve federal deposit

insurance for institutions at the time of chartering. In effect, this gives FDIC veto power over

chartering decisions.

5

The Banking Acts of 1933 and 1935 require U.S. federal banking agencies to consider capital

adequacy, earnings prospects, managerial character, and community needs before chartering a bank.

6

Many regulations in European Union member countries—including France, Germany, and the

U.K.—are written in response to European Union directives that are to be transposed into national law

by the member countries. Any regulations to implement such laws are the responsibility of the

member countries’ national oversight agencies.

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agencies involved in bank, securities and insurance oversight, and those of

the regulated industry.

The single-regulator approach in four of the foreign countries we studied

and the coordination of regulation between the federal regulator and the

deposit insurer in Canada meant that in all five countries, all banking

institutions conducting the same lines of business were subject to the

same safety and soundness standards, including rules related to

permissible activities. This contrasts with the four regulator system in the

United States, as discussed in chapter 2.

Supervisory

Responsibilities Were

Shared by No More Than

Two Entities, and Only One

Had Formal Enforcement

Authority

In the countries we studied, major supervisory activities were never

shared by more than two entities. For purposes of our analysis, we defined

these activities as (1) monitoring banks’ financial condition and operations

through on-site examinations or inspections, (2) monitoring through the

collection and analysis of data in reports filed by banks and through

meetings with bank officials and others, and (3) enforcing laws and

regulations through formal or informal actions. In Canada, both the bank

supervisor and the deposit insurer performed supervisory duties. In

France, the supervisory duties were performed by the committee called

the Banking Commission; in Germany, by the federal bank supervisor and

the central bank; in Japan, by the Ministry of Finance and the Bank of

Japan;7

 and in the U.K., by the Bank of England.

In four of the five countries we studied, the responsibility for taking formal

enforcement actions was limited to one supervisor.8

 For instance, in the

U.K., the Bank of England was solely responsible for formal enforcement

actions. In Germany, the federal supervisor was responsible for

enforcement actions; in France, the Banking Commission; and, in Japan,

the Ministry of Finance in Japan. Canada’s deposit insurer could take

specific, narrowly defined enforcement actions to protect the deposit

insurance fund, such as levying a premium surcharge on individual

members or terminating an insured institution’s deposit insurance.

7

The Bank of Japan derives its authority for such duties mostly from bilateral contracts with individual

banks.

8

Formal actions can include revoking a bank’s authorization; removing bank managers or directors; or

imposing conditions on the bank, such as limiting deposit taking to current depositors, restricting the

bank’s scope of business, prohibiting the bank from entering into certain transactions, and requiring

the bank to cease and desist particular practices or activities.

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Most Foreign Bank Supervisors

Said They Conducted On-Site

Examinations Less Frequently

Than Did U.S. Supervisors

Most of the other countries’ bank supervisors said they conducted on-site

examinations less frequently than U.S. bank supervisors, and they said that

the examinations conducted were often narrower in scope than U.S.

examinations. In France, on-site examinations were conducted on average

less frequently than every 4 years, depending on the institutions being

examined. In Japan, examinations were conducted approximately every 1

to 3 years. Canada’s frequency of on-site examinations, like that of U.S.

supervisors’, was to be once a year. Supervisors in Germany and the U.K.

said they relied on information collected for them by external auditors

rather than conducting their own regularly scheduled on-site

examinations.9

In the three countries that conducted regular on-site examinations, the

examinations were to primarily assess the safety and soundness of bank

operations and verify the accuracy of data submitted for off-site

monitoring purposes. Special purpose examinations, in Canada and

elsewhere, were also to be conducted across the industry to determine

how specific issues—such as corporate governance—were being handled

across the banking system.

Supervisors in Other Countries

Relied Extensively on

Information Provided in

Periodic Reports and Meetings

In monitoring the financial conditions and operations of banks, most of

the supervisory entities in other countries said they generally relied more

extensively than supervisors in the United States on off-site information,

primarily information in periodic reports submitted by banking

institutions. Reporting by banks included information on assets, liabilities,

and income, as is the case in the United States, as well as more detailed

information. In France, for example, the Banking Commission had

implemented a new reporting system for credit institutions for the purpose

of collecting and analyzing information for prudential, monetary, and

balance of payments purposes. The system was intended to provide an

early warning of potential problems in individual banks or in the banking

system as a whole.10 Indicators of potential safety and soundness

problems were typically to be discussed with bank officials, whether in

meetings or correspondence, and could trigger an on-site examination.

Banks in several of the countries were also required to submit information

on their major credit exposures, which the regulators could analyze for

9

The only routine examinations conducted by the central bank in Germany were foreign exchange

examinations.

10The reporting could include several hundred pages of information on balance sheets, profit and loss

statements, solvency, liquidity, concentration risk, large exposures, exchange rate positions, and other

areas. Appendixes include information on risks associated with activities, such as market making,

trading, and derivatives. The database allowed the Commission to conduct peer group comparisons,

analyze individual banks’ break-even points, and forecast trends in the industry.

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excessive growth or concentrations that might indicate safety and

soundness problems for either the individual bank or the banking system.

Other important sources of information included meetings with bank

management. For example, supervisors said they often met with

management to follow up on information collected through their off-site

monitoring. Such meetings could include questions about potential

informational discrepancies and any business implications, or they could

provide an opportunity for discussions about the institution’s operations.

In three countries (Canada, Germany, and the U.K.), work performed by

banks’ external auditors also contributed significantly to supervisory

information (see discussion below on the contribution of external auditors

to bank supervision).

As discussed in chapter 2, U.S. federal bank supervisors also monitor the

condition of banks using information contained in periodic reports and

discussions with bank management. However, U.S. regulators do not

collect some of the information that is used for risk assessment purposes

overseas, such as the reporting of large credit exposures.

Other Countries Used

Informal Enforcement

Actions More Than Formal

Actions

As has often been true in the United States, supervisors in each of the

countries we reviewed said they preferred to rely principally on informal

enforcement actions, such as warnings or persuasion and encouragement.

Informal actions generally were regarded by supervisors as easier and

faster to put into effect and sufficiently flexible to ensure that the

institutions took timely corrective actions. Supervisors also told us that

banking institutions understood that if they did not comply with informal

actions and recommendations, formal actions were sure to follow.

While authorization to take formal actions in most of the foreign countries

was limited to the primary supervisor, informal actions sometimes could

be taken by more than one oversight entity. In Germany, for example, the

central bank could suggest to banks remedies for perceived shortcomings

and recommend enforcement actions to the federal supervisor. In Japan,

the Bank of Japan also could recommend informal enforcement actions,

such as suggested remedies to perceived problems. In Canada, the deposit

insurer could recommend enforcement actions to the supervisor as well as

take some limited enforcement actions on its own if the insurance fund

was considered at risk.

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The financial services industries in the five countries have, over time,

experienced serious failures, control problems, or other financial

difficulties that have resulted in significant changes or at least the

consideration of such changes to bank oversight structures. These changes

include a strengthened on-site examination capability and an increased

formality in the supervisory process and use of enforcement actions in

several countries.

Oversight Entities

Were Typically

Responsible and

Accountable for

Entire Banking

Organizations,

Including Subsidiaries

In the five countries we studied, banking organizations typically were

subject to consolidated oversight, with an oversight entity responsible and

accountable for an entire banking organization, including banking and

nonbanking subsidiaries. For instance, if a bank had nonbank subsidiaries

regulated by securities or insurance regulators, bank regulators

nonetheless were responsible for supervisory oversight of the bank as a

whole.11 The bank regulators would generally rely on the nonbank

regulators’ expertise in overseeing the bank’s subsidiaries. For example, in

France, the Banking Commission was responsible for the supervision of

the parent bank and the consolidated entity, even though securities or

insurance activities in bank subsidiaries were the responsibility of other

regulators in those areas.

In Canada, the federal supervisor was responsible for all federally

incorporated financial institutions, such as banks, insurance companies,

and trust companies. Securities subsidiaries of banks were the

responsibility of provincial securities regulators who shared information

with the bank regulator for purposes of consolidated oversight.

Regulators in the U.K. also operated under the consolidated oversight

approach. For a bank that owned nonbank subsidiaries, the Bank of

England remained the lead regulator and had responsibility for the entity

as a whole. However, it relied on the expertise of securities and insurance

supervisors to provide information on subsidiaries conducting such

activities. If the major top-level entity was a securities firm that owned a

bank, then the securities regulator was the lead regulator of the entire

entity and would rely on the bank regulator for information about the

bank.

11The United States is unique in its bank holding company structure. None of the countries we studied

had multiple bank subsidiaries in a single company, as can be the case in the United States. Further,

those nonbanking activities that were not permitted in the bank itself were conducted in bank

subsidiaries, not holding company subsidiaries.

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If banks conducted securities or other activities within the bank

department rather than in a nonbank subsidiary, then the bank regulator

retained supervisory responsibility. In Germany, for example, where

universal banks were able to conduct an array of activities from deposits

to securities activities within the banking institutions, the federal

supervisor was responsible for all bank and nonbank activities conducted

within a bank.

Other Countries’

Oversight Systems

Generally Included

Roles for Central

Banks and Finance

Ministries

The oversight systems in the countries we reviewed generally included

roles for both central banks and finance ministries, reflecting the close

relationship of traditional central bank responsibilities with oversight of

commercial banks as well as the national government’s ultimate

responsibility to maintain public confidence and stability in the financial

system.

Central Banks Usually

Played Significant Roles in

Supervision and

Regulatory

Decisionmaking

Central banks generally played significant roles in supervision and

regulatory decisionmaking in the countries we studied, largely based on

the premise that central bank responsibilities for monetary policy and

other functions, such as crisis intervention, oversight of clearance and

settlements systems, and liquidity lending, are interrelated with bank

oversight. Although no two countries had identical structures for including

central banks in bank oversight, they each accorded their central banks

roles that ensured access to, and certain influence over, the banking

industry. The central bank’s role was most direct in the U.K., where the

Bank of England had sole responsibility for the authorization, regulation,

and supervision of banks.

Canada had a far less direct role for its central bank in supervision and

regulation. Even so, the Bank of Canada influenced supervisory and

regulatory decisionmaking as a member of (1) the deposit insurance

board; (2) the Financial Institutions Supervisory Committee, an

organization established to enhance communication among participants in

financial institution regulation and supervision; and (3) the Senior

Advisory Committee, which was to meet to discuss major policy changes

or legislative proposals affecting bank oversight.12 However, it had no

direct authority over supervisory or regulatory decisionmaking.

12The committees’ other members are the bank supervisor, the Deputy Minister of Finance, and the

chairman of the deposit insurer.

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In France, Germany, and Japan the central bank was one of two principal

oversight agencies, but the countries had different structures for involving

the central banks in bank oversight. In Germany, the primary supervisor,

not the central bank, was authorized to issue banking regulations and,

with few exceptions, issue or revoke bank licenses and take enforcement

actions against banks. However, a sharp contrast existed between the

legally assigned responsibilities of the central bank and its de facto sharing

of oversight responsibilities with the federal bank supervisor. The central

bank and the federal bank supervisor worked closely together and were

considered partners in the formulation of regulatory and supervisory

policies. The supervisor was to consult the central bank about all

regulations; the central bank was substantively involved in the

development of most of the regulations and could veto some. It also had

the most active role in day-to-day bank supervision of banks and was very

influential in determining the enforcement actions to be taken by the

federal bank supervisor. The influence of the central bank in bank

oversight arises from its detailed knowledge about banks in Germany,

certain legal requirements that it be consulted before supervisory or

regulatory action was taken, and the general perception that its

nonoversight responsibilities were closely linked with bank oversight.

The central bank of France was also very involved in bank oversight, but

the structural basis for its involvement differed significantly from that in

Germany. The decisionmaking responsibilities for supervision and

regulation of banking institutions in France were divided among three

different but interrelated oversight committees: one for chartering, one for

regulation, and one for supervision. The Bank of France was a member of

each of these committees. Its influence over bank oversight stemmed from

its chairmanship of two of the three oversight committees—the committee

for chartering and the committee for supervision (the Banking

Commission); the fact that it staffed all three oversight committees and the

examination teams; its authority in financial crises; and its importance in

and influence over French financial markets.

The Japanese central bank also had some oversight responsibilities

derived principally from the contractual agreements it made with financial

institutions that opened accounts with the Bank of Japan—including all

commercial banks. As a result, it examined these banks on a rotational

basis with the Ministry of Finance and also met regularly with bank

management. Although only the Ministry had the legal authority to take

formal enforcement actions, the central bank provided guidance that

banks usually interpreted as binding.

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Finance Ministries

Included in Oversight

Structures, Although Roles

Varied

In all of the countries we reviewed finance ministries were included in

oversight structures, although their roles varied. In some countries, the

bank supervisors reported to the finance ministries and the finance

ministries had final approval authority for regulations or enforcement

actions. In other cases, the finance ministry acted as the principal

supervisor or a representative of the finance ministry participated as a

member of a decisionmaking committee. In most countries, the finance

ministries received industrywide information to assist in discharging fiscal

policy and other responsibilities. They often did not receive bank-specific

information unless the regulator believed an institution to be a potential

threat to system stability. In such situations, the finance ministry was to be

apprised for crisis management and information purposes, as were the

central bank and deposit insurer in order to ensure each could effectively

carry out its respective responsibilities.

In Canada and Germany, the principal bank supervisor reported to the

Minister of Finance. The oversight entities that reported to the finance

ministries said that on day-to-day issues they had a significant amount of

independence—the government was generally informed only of key

regulatory or supervisory decisions. However, the agreement of the

finance ministry was usually necessary for these decisions to be carried

out.

In France, the Ministry of Economic Affairs was represented on each of

the three independent oversight committees and chaired one of them.

According to oversight and banking officials with whom we spoke, its

influence over bank oversight was derived primarily from its chairmanship

of the bank regulatory committee and its membership on the chartering

and oversight committees, as well as from its position of power in the

French cabinet, including its powers of final approval with regard to bank

regulations.

In Japan, the Minister of Finance was the formal supervisor of banking

institutions. It was solely responsible for chartering banking institutions,

taking formal enforcement actions, and developing and issuing

regulations. In addition, it also examined banks and conducted off-site

monitoring.

In the U.K., the Bank of England reports to the Chancellor of the

Exchequer, who heads the Treasury. The Treasury has no formal role in

banking supervision, although it would expect to be consulted on any

major regulatory or supervisory decision. The Chancellor does have the

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power to issue directions to the Bank of England after consultation with

the Governor of the Bank, ensuring that the government would have the

final say in the event of a disagreement. Historically, the Bank of England

has been accorded a high degree of independence in bank regulation and

supervision.

Foreign Systems Had

Checks and Balances to

Guard Against Undue

Political Influence and

Ensure Sound

Decisionmaking

Other countries’ systems of bank oversight incorporated various checks to

guard against undue political influence in bank oversight and to ensure

sound decisionmaking. These checks included shared responsibilities and

decisionmaking and the involvement of banking institutions in the

development of bank oversight policies and other decisionmaking.

According to Canadian officials, a degree of overlapping authority of the

federal supervisor and the deposit insurer (whose governing board is to

include four directors from the private sector) plays a useful role in

ensuring integrity in bank oversight. For example, the independent

assessments of the deposit insurer could provide a constructive second

look at the bank supervisor’s oversight practices. Similarly, the

interactions of the supervisor with banking institutions could help the

insurer assess risks of particular banking practices. Finally, the federal

supervisor is required to consult extensively with banking industry

representatives in developing regulations and guidelines. In Canada, the

large size and small number of banks enabled banks to be influential

players in the financial system, according to supervisory and central bank

staff. The large banks believed they had a special responsibility for helping

to ensure the stability of the financial system, as well as a self-interest in

that stability. We were told by management of some of the major banks

that they often related concerns and offered comments about other banks

or financial institutions to the federal supervisor or the central bank.13

In France, a rationale for the committee oversight structure—with the

Bank of France and the Ministry of Economic Affairs participating jointly

on the committees—was to ensure that no single individual or agency

could dominate or dictate oversight decisionmaking, according to Bank of

France officials. In addition, the committee structure ensures that the

interests of banks are represented. Each of the three bank oversight

committees includes four members, including representatives of the

banking industry, drawn from outside the Bank of France and the Ministry

of Economic Affairs.

13However, the banks have no express legal responsibility for informing regulators about specific

problems with individual banks.

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In Germany, the decisionmaking power of the politically accountable

federal bank supervisor was checked by the participation in bank

oversight of the very independent central bank. Without the central bank’s

accord, very few, if any, important supervisory or regulatory actions would

be taken. The central bank’s express approval was legally required for

certain regulations, such as those affecting liquidity and capital

requirements, to take effect. In addition, the federal supervisor was

required by law to consult with banking associations when changes to

banking law or regulations were being considered and before banking

licenses were issued.

In Japan, the Ministry of Finance typically developed policy by consensus,

according to Ministry officials—a process that usually involved the input

of many parties, such as the central bank, other government agencies,

industry groups, and governmental policy councils. In addition, the

Japanese central bank’s participation in bank oversight could provide a

second opinion on some oversight issues.

In the U.K., the Banking Act of 1987 formally established an independent

body, known as the Board of Banking Supervision, to bring independent

commercial banking experience to bear on banking supervisory decisions

at the highest level. In addition to three exofficio members from the Bank

of England, the Board’s members are to include six independent members

who are to advise the exofficio members on policymaking and

enforcement issues. If the Bank decides not to accept the advice of the

independent members of the Board, then the exofficio members are to

give written notice of that fact to the Chancellor of the Exchequer.

Deposit Insurers

Generally Had More

Narrow Roles Than

That of FDIC

Deposit insurers in the countries we studied generally had more narrow

roles than that of FDIC. This less substantial oversight role may be

attributable to the fact that national governments provided no explicit

guarantees of deposit insurance and that deposit insurers were often

industry administered.

Deposit Insurers Viewed

Primarily as Sources of

Funds and Were Not

Explicitly Guaranteed by

National Governments

The foreign deposit insurers we studied did not have a role in bank

oversight as substantial as FDIC’s. As discussed in chapter 1, FDIC is the

administrator of federal deposit insurance, the primary federal regulator

and supervisor for state-chartered banks that are not members of FRS, and

the entity with primary responsibility for determining the least costly

resolution of failed banks. In most countries, by contrast, deposit insurers

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were viewed primarily as a source of funds to help resolve bank

failures—either by covering insured deposits or by helping to finance

acquisitions of failed or failing institutions by healthy institutions.14

Supervisory information was generally not shared with these deposit

insurers, and resolution decisions for failed or failing banks were

commonly made by the primary bank oversight entities with the insurer

frequently involved only when its funds were needed to help finance

resolutions.

The broader role of FDIC as compared to deposit insurers in other

countries may be attributable in part to the fact that deposit insurance is

federally guaranteed in the United States. For example, FDIC’s involvement

in bank resolutions—particularly its responsibility to determine the least

costly of resolution methods—helps protect the interests of both the

industry and potentially of taxpayers when a bank fails. None of the

governments of the other countries we studied provided such an explicit

guarantee.15 Four of the five deposit protection programs—Germany is the

exception—also provide less coverage than does the U.S. system.16

Banking Industries

Generally Had Important

Roles in Administration of

Deposit Protection

Systems

In Germany and France, deposit protection systems were administered by

banking associations, with no direct government involvement. The

German commercial banking association administered Germany’s deposit

protection plan for commercial banks. The association obtained

independent information about its members through external audits

conducted by an accounting firm affiliate. It also could play a significant

role in resolving troubled institutions. It had the power to intervene and

attempt to resolve a member bank’s difficulties and could be pressured by

the central bank or bank supervisor to do so.17 Thus, the German banking

14In every country we studied, as in the United States, deposit insurance (or protection) funds were

obtained from the insured or protected banks in the form of deposit-based premiums or other types of

assessment.

15In Canada, the deposit insurer is a crown corporation with semiofficial government status. As a

result, even though the government provides no explicit guarantee of the deposit insurance fund, it is

expected, by both depositors and the government itself, that the government would provide funding

when necessary to protect the integrity of the fund.

16Coverage in France is about $68,000; in Canada it is approximately $42,000; in the U.K., 75 percent of

approximately $30,000; and in Japan, about $95,000. Deposits in commercial banks in Germany are

covered up to 30 percent of liable capital—defined as the paid-up endowment capital and the reserves

plus up to 25 percent of tier 2 capital. This means that a depositor in one of Germany’s largest banks

could be protected for almost $1 billion.

17The central bank and the bank supervisor are to work together to resolve potential bank failures that

could have systemwide ramifications. In the past, for example, the central bank has played influential

roles in persuading creditor banks to forgive some of their debts and to delay repayment of other

debts, thereby giving institutions an opportunity to dissolve in an orderly fashion.

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industry generally resolved its own problems. In France, the deposit

protection system—a loss-sharing agreement among member banks—was

administered by the French Bank Association. The French Bank

Association itself played a relatively minor role in resolving bank

problems. Instead, the Banking Commission was responsible for resolving

troubled institutions.18

In the U.K. and Japan, the responsibility for the administration of deposit

insurance was shared by government and the banking industry. Deposit

insurers were independent bodies whose boards of directors were headed

by government officials and included members from the banking

industries. In these countries, the government, not the banking

associations, resolved banking institutions’ problems.19

Canada’s oversight system was most similar to that of the United States.

The Canadian deposit insurer did not act as a primary supervisor for any

banking institutions; however, like FDIC, it had examination and

rulemaking authority—although its powers were more limited than those

of FDIC’s. It could take limited enforcement action and was represented on

two of Canada’s oversight-related committees. The Canadian deposit

insurer generally relied on the primary banking supervisor for examination

information it needed to safeguard insurance funds. Until a financially

troubled institution was declared insolvent and was placed in liquidation,

the bank supervisor had the lead role in resolving that institution.

However, the supervisor was to continuously inform the deposit insurer of

the institution’s status. The deposit insurer could order a special

examination to determine its exposure and possible resolution options if

the institution failed. In the case of a failure, the deposit insurer was

responsible for developing resolution alternatives and for implementing

the chosen resolution plan.

18Once it became clear that an institution could not be rescued, the Banking Commission was

responsible for withdrawing an institution’s authorization, appointing an acting manager, and, in most

cases, helping the institution develop a self-liquidation plan.

19In Japan, the Ministry of Finance and the Bank of Japan are to work together to assist troubled

financial institutions. The Ministry of Finance usually is to take the lead by establishing policy and

providing directions for a resolution, and the Bank of Japan usually finances loans as necessary. In the

U.K., the Bank of England was the driving force in determining if, when, and how a bank would be

closed or acquired by a merger partner, even though the courts officially had the responsibility for

deciding whether a troubled institution should be placed into administration, receivership, or

liquidation.

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Foreign Structures

Incorporated

Mechanisms and

Procedures to Ensure

Consistent Oversight

and Efficiency

Most of the foreign structures with multiple oversight entities

incorporated mechanisms and procedures that could ensure consistent

and efficient oversight. Some countries relied on the work of external

auditors, at least in part, for purposes of efficiency. Unlike in the United

States, bank oversight in these countries generally did not include

consumer protection or social policy issues.

Foreign Oversight Entities

Often Shared Staff,

Information, and

Committee Assignments

Coordination mechanisms designed to ensure consistency and efficiency

in oversight in the countries we studied included oversight committees or

commissions with interlocking boards, shared staff, and mandates or

mechanisms to share information and avoid duplication of effort.

In Canada, the federal bank supervisor, central bank, and finance ministry

each had a seat on the deposit insurer’s board of directors and

participated with the deposit insurer on various advisory committees.

Also, the Canadian deposit insurer, which had backup supervisory

authority to request or undertake special examinations of high-risk

institutions, was required to rely for much of its information on the

primary supervisor, whose examiners conducted all routine bank

examinations and engaged in other data collection activities.

In France, central bank employees staffed all three committees charged

with oversight responsibilities for chartering, rulemaking, and supervision.

In addition, the central bank and the Ministry of Economic Affairs were

represented on each of the three oversight committees.

In Germany, the central bank and the federal bank supervisor used the

same data collection instruments. They were also legally required to share

information that could be significant in the performance of their duties.

Three of the Foreign

Countries’ Supervisors

Used External Auditors’

Work to Enhance

Efficiency

Bank supervisors in three of the five countries whose systems we

reviewed used the work of the banks’ external auditors as an important

source of supervisory information. In the most striking contrast with the

United States’ system, supervisors in Germany and the U.K. used external

auditors as the primary source of monitoring information. In Canada, as in

the United States, the primary supervisor conducted examinations;

information from the banks’ external auditors was to be used to

supplement and guide these examinations. Supervisors in all three

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countries recognized that auditors’ objectives for reviewing a bank’s

activities could differ from those of a supervisor, and they also recognized

that a degree of conflict could exist between the external auditors’

responsibilities to report to both their bank clients and to the bank

supervisory authorities. However, they generally believed that their

authority over auditors’ engagements was sufficient to ensure that the

external auditors properly discharged their responsibilities and openly

communicated with both their bank clients and the oversight authorities.

In both Germany and the U.K., supervisors’ use of external auditors’ work

was adopted at least in part for purposes of efficiency. In Germany, the

use was part of an explicit plan to minimize agency staffing and

duplication of effort between examiners and auditors. In the U.K., the use

was seen as the most efficient way of introducing the necessary checks on

systems controls and as a method compatible with the Bank of England’s

traditional approach of supervising banks “based on dialogue, prudential

returns, and trust,” according to Bank of England officials.

Canada, Germany, and the U.K. differed from the United States in three

other important ways:

• All banking institutions in the three foreign countries were required to

have external audits. As discussed in chapter 2, large U.S. banks are

required by U.S. oversight agencies to have external audits, and others are

encouraged to do so.

• Bank supervisors in the three foreign countries had more control than U.S.

bank supervisors over the work performed by external auditors. In

Germany and the U.K., external audits were conducted using specific

guidelines developed by the bank regulators, and the scope of individual

audits could be expanded by all three regulators, or special audits ordered,

to address issues of regulatory concern. By contrast, U.S. supervisors have

more limited authority over the scope of external audits.20

• External auditors in the three foreign countries had affirmative obligations

to report findings of concern to supervisors. In Canada, external auditors

are required to report simultaneously to the institution’s CEO and the bank

supervisor anything discovered that might affect the viability of the

20Under FDICIA, the banking agencies in the United States have some authority to set standards for

external auditors. For example, external auditors have been directed by FDIC to provide information

on large banks’ compliance with safety and soundness regulations related to loans to insiders and

dividend restrictions. The primary standards that certified public accountants follow in auditing U.S.

financial institutions are promulgated by the American Institute of Certified Public Accountants.

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financial institution. In Germany, external auditors are required by law to

immediately report to the bank supervisor information that might result in

qualification of the report or a finding of a significant problem. In the U.K.,

external auditors are required to report to the central bank any breaches

in the minimum authorization criteria as well as expectations of a qualified

or adverse report. In the United States, however, external auditors are

required merely to notify the appropriate banking agency if they withdraw

from an engagement.21 External auditors are required to withdraw from an

audit engagement if identified problems are not resolved or if bank

management refuses to accept their audit report.

Further detail about the role of external audits in U.S. bank supervision is

provided in appendix II.

Supervisors in Other

Countries Generally Did

Not Focus on Consumer

Protection or Social Policy

Issues

Bank oversight in the countries we studied, was focused almost

exclusively on ensuring the safety and soundness of banking institutions

and the stability of financial markets and generally did not include

consumer protection or social policy issues. The national governments of

the countries we studied used other mechanisms to address these issues

or to promote these goals.

Consumer protection and antidiscrimination concerns were addressed in

many of the other countries by industry associations and government

entities other than bank regulators and supervisors. In addition, some of

the policy mechanisms used to encourage credit and other services in lowand moderate-income areas in these countries included the chartering of

specialized financial institutions and direct government subsidies for

programs to benefit such areas. In Canada, for example, the banking

industry developed voluntary guidelines related to consumer and small

business lending, partly to prevent the need for legislated solutions to

perceived problems. Similarly, the banking industries in France and the

U.K. also developed industry guidelines on issues such as consumer

protection. Bank supervisors in Canada and the U.K. were not responsible

for enforcing compliance with these guidelines and best practices, but the

bank supervisor in France did have such responsibility. In addition, bank

supervisors in the countries we studied were not expressly responsible for

assessing compliance with other consumer protection laws, like those

involving discrimination or antitrust; but they were responsible, in some

countries, for advising their Justice Department equivalents of potential

21A recent amendment to the Securities Exchange Act requires independent public accountants to

report to SEC certain illegal acts they detect if the audited company does not take appropriate

remedial action.

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violations identified in carrying out their bank oversight duties. Officials in

these countries suggested that concern and attention to various consumer

issues were increasing, but they did not anticipate bank regulators would

assume any new responsibilities in this area.

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Agency Comments

Conclusions The division of responsibilities among the four federal bank oversight

agencies in the United States—FDIC, FRS, OCC, and OTS—is not based on

specific areas of expertise, functions or activities, either of the regulator or

the banks for which they are responsible, but based on institution

type—bank or thrift, bank charter type—national or state, and whether

banks are members of the FRS. Consequently, the four oversight agencies

share responsibility for developing and implementing regulations, taking

enforcement actions, and conducting examinations and off-site

monitoring.

Analysts, legislators, banking institution officials, and numerous past and

present agency officials have identified weaknesses and strengths in this

oversight structure. Some representatives of these groups have broadly

characterized the federal system as redundant, inconsistent, and

inefficient. Some banking institution officials have also raised concerns

about negative effects of the structure on supervisory effectiveness. Some

regulators, banking institutions, and analysts alike have asserted that the

multiplicity of regulators has resulted in inconsistent treatment of banking

institutions in examinations, enforcement actions, and regulatory

decisions, despite interagency efforts at coordination. We have cited

significant inconsistencies in examination policies and practices among

FDIC, OCC, OTS, and FRS, including differences in examination scope,

frequency, documentation, loan quality and loss reserve evaluations, bank

and thrift rating systems, and examination guidance and regulations. At

the same time, some agency and institution officials have credited the

current structure with encouraging financial innovations and providing

checks and balances to guard against arbitrary oversight decisions or

actions.

As a result of concerns about the current oversight structure, many

proposals have been made to restructure the multiagency system of bank

regulation and supervision. These proposals have not been implemented,

partly as a result of assertions by FRS and FDIC officials that they rely on

information obtained under their respective supervisory authorities to

fulfill their nonoversight duties: monetary policy development and

implementation, liquidity lending, and operation and oversight of the

nation’s payment and clearance systems for FRS; administration of the

deposit insurance funds, resolution of failing or failed banks, and

disposition of failed bank assets for FDIC. As we have pointed out in the

past, the extent to which FRS needs to be a formal supervisor of financial

institutions to obtain the requisite knowledge and influence for carrying

out its role is an important question that involves policy judgments that

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Agency Comments

only Congress and the President can make.1 Nevertheless, past experience,

as well as evidence from the five foreign oversight structures we studied

(see below for further discussion) provides support for the need for FRS to

obtain direct access to supervisory information. We have also favored a

strong, independent deposit insurance function to protect the taxpayers’

interest in insuring more than $2.5 trillion in deposits.2

 Nonetheless,

previous work we have done suggests that a strong deposit insurance

function can be ensured by providing FDIC with (1) the ability to go into

any problem institution on its own, without having to obtain prior

approval from another regulatory agency; (2) the capability to assess the

quality of bank and thrift examinations, generally; and (3) backup

enforcement authority.3

Treasury also has several responsibilities related to bank oversight,

including being the final decisionmaker in approving an exception to FDIC’s

least-cost rule. In addition, Treasury plays a major role in developing

legislative and other policy initiatives with regard to financial institutions.

Such responsibilities require that Treasury regularly obtain information

about the financial and banking industries and, at certain times,

institution-specific information. According to Treasury officials, Treasury’s

current level of involvement, through its housing of OCC and OTS and their

involvement on the FDIC Board of Directors, and the information it receives

from the other agencies as needed, is sufficient for it to carry out these

responsibilities.

On the basis of the work we have done in areas such as bank supervision,

enforcement, failure resolution, and innovative financial activities—such

as derivatives—we have previously identified four fundamental principles

that we believe Congress could use when considering the best approach

for modernizing the current regulatory structure. We believe that the

federal bank oversight structure should include: (1) clearly defined

responsibility for consolidated and comprehensive oversight of entire

banking organizations, with coordinated functional regulation and

supervision of individual components; (2) independence from undue

political pressure, balanced by appropriate accountability and adequate

congressional oversight; (3) consistent rules, consistently applied for

similar activities; and (4) enhanced efficiency and reduced regulatory

burden, consistent with maintaining safety and soundness.

1

Bank Regulation: Consolidation of the Regulatory Agencies (GAO/T-GGD-94-106, Mar. 4, 1994).

2

GAO/T-GGD-94-106.

3

GAO/T-GGD-94-106.

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Agency Comments

In five recent reports, we reviewed the structure and operations of bank

regulation and supervision activities in Canada, France, Germany, Japan,

and the U.K. Each of the oversight structures of these five countries reflects

a unique history, culture, and banking industry, and, as a result, no two of

the five oversight structures are identical. Also, all of the countries we

reviewed had more concentrated banking industries than does the United

States, and all but Japan had authorized their banks to conduct broad

securities and insurance activities in some manner. Nevertheless, certain

aspects of these structures may be useful to consider in future efforts to

modernize banking oversight in the United States, even though no

structure as a whole likely would be appropriate to adopt in the United

States.

In the five countries we studied, banking organizations typically were

subject to consolidated oversight, with an oversight entity being legally

responsible and accountable for the entire banking organization, including

its subsidiaries. If securities, insurance, or other nontraditional banking

activities were permissible in bank subsidiaries, functional regulation of

those subsidiaries was generally to be provided by the supervisory

authority with the requisite expertise. Bank supervisors generally relied on

those functional regulators for information but remained responsible for

ascertaining the safety and soundness of the consolidated banking

organization as a whole.

The number of national bank oversight entities in the countries we studied

was fewer than in the United States, ranging from one in the U.K. to three in

France. Furthermore, in all five countries no more than two national

agencies were ever significantly involved in any one major aspect of bank

oversight, such as chartering, regulation, supervision, or enforcement.

Commercial bank chartering, for example, was the direct responsibility of

only one entity in each country. In those countries where two entities were

involved in the same aspect of oversight, the division of oversight

responsibilities generally was based on whichever entity had the required

expertise.

The central banks in the countries we studied generally had significant

roles in supervisory and regulatory decisionmaking; that is, with the

exception of the Canadian central bank, their staffs were directly involved

in aspects of bank oversight, and all central banks had the ability to

formally or informally influence bank behavior. In large part, central bank

involvement was based on the premise that traditional central bank

responsibilities for monetary policy, payment systems, liquidity lending,

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and crisis intervention are closely interrelated with oversight of

commercial banks. While no two countries had identical oversight roles

for their central banks, each country had an oversight structure that

ensured that its central bank had access to information about, and certain

influence over, the banking industry.

In each of the five countries, the national government recognized that it

had the ultimate responsibility to maintain public confidence and stability

in the financial system. Thus, each of the bank oversight structures that we

reviewed also provided the Ministry of Finance, or its equivalent, with

some degree of influence over bank oversight and access to information.

Although each country included its finance ministry in some capacity in its

oversight structure, most also recognized the need to guard against undue

political influence by incorporating checks and balances unique to each

country.

While central banks and finance ministries generally had substantial roles

in bank oversight, deposit insurers, with the exception of the Canada

Deposit Insurance Corporation, did not. Their less substantial oversight

role may be attributable to the fact that national governments provided no

explicit guarantees of deposit insurance and that deposit insurers were

often industry-administered. Thus, in most of these countries, deposit

insurers were viewed primarily as a source of funds to help resolve bank

failures—either by covering insured deposits or by helping to finance

acquisitions of failed or failing institutions by healthy institutions.

Supervisory information was generally not shared with these deposit

insurers, and resolution decisions for failed or failing banks were

commonly made by the primary bank oversight entities.

Most of the foreign structures with multiple oversight entities

incorporated mechanisms and procedures that could ensure consistent

and efficient oversight. As a result, banking institutions that were

conducting the same lines of business were generally subject to a single

set of rules, standards, or guidelines. Coordination mechanisms included

having oversight committees or commissions with interlocking boards,

shared staff, or mandates to share information. Some countries relied on

the work of external auditors, at least in part, for purposes of efficiency.

Bank oversight in these countries generally did not include consumer

protection or social policy issues.

There are many practical problems associated with creating a new agency

or consolidating existing functions. Although such issues were beyond the

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Agency Comments

scope of this report, it remains important that transition and

implementation issues be thoroughly considered in deliberations about

any modernization of bank oversight.

Recommendations GAO’s work on the five foreign oversight systems showed that there are a

number of different ways to simplify bank oversight in the United States in

accordance with the four principles of consolidated oversight,

independence, consistency, and enhanced efficiency and reduced burden.

GAO recognizes that only Congress can make the ultimate policy judgments

in deciding whether, and how, to restructure the existing system. If

Congress does decide to modernize the U.S. system, GAO recommends that

Congress:

• Reduce the number of federal agencies with primary

responsibilities for bank oversight. GAO believes that a logical step

would be to consolidate OTS, OCC, and FDIC’s primary supervisory

responsibilities into a new, independent federal banking agency or

commission. Congress could provide for this new agency’s independence

in a variety of ways, including making it organizationally independent like

FDIC or FRS. This new independent agency, together with FRS, could be

assigned responsibility for consolidated, comprehensive supervision of

those banking organizations under its purview, with appropriate functional

supervision of individual components.

• Continue to include both FRS and Treasury in bank oversight. To

carry out its primary responsibilities effectively, FRS should have direct

access to supervisory information as well as influence over supervisory

decisionmaking and the banking industry. The foreign oversight structures

GAO viewed showed that this could be accomplished by having FRS be

either a direct or indirect participant in bank oversight. For example, FRS

could maintain its current direct oversight responsibilities for state

chartered member banks or be given new responsibility for some segment

of the banking industry, such as the largest banking organizations.

Alternatively, FRS could be represented on the board of directors of a new

consolidated banking agency or on FDIC’s board of directors. Under this

alternative, FRS’ staff could help support some of the examination or other

activities of a consolidated banking agency to better ensure that FRS

receives first hand information about, and access to, the banking industry.

To carry out its mission effectively, Treasury also needs access to

supervisory information about the condition of the banking industry as

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Agency Comments

well as the safety and soundness of banking institutions that could affect

the stability of the financial system. GAO’s reviews of foreign regulatory

structures provided several examples of how Treasury might obtain access

to such information, such as having Treasury represented on the board of

the new banking agency or commission and perhaps on the board of FDIC

as well.

• Continue to provide FDIC with the necessary authority to protect

the deposit insurance funds. Under any restructuring, GAO believes FDIC

should still have an explicit backup supervisory authority to enable it to

effectively discharge its responsibility for protecting the deposit insurance

funds. Such authority should require coordination with other responsible

regulators, but should also allow FDIC to go into any problem institution on

its own without the prior approval of any other regulatory agency. FDIC

also needs backup enforcement power, access to bank examinations, and

the capability to independently assess the quality of those examinations.

• Incorporate mechanisms to help ensure consistent oversight and

reduce regulatory burden. Reducing the number of federal bank

oversight agencies from the current four should help improve the

consistency of oversight and reduce regulatory burden. Should Congress

decide to continue having more than one primary federal bank regulator,

GAO believes that Congress should incorporate mechanisms into the

oversight system to enhance cooperation and coordination between the

regulators and reduce regulatory burden.

Although GAO does not recommend any particular action, such

mechanisms—which could be adopted even if Congress decides not to

restructure the existing system—could include

• expanding the current mandate of FFIEC to help ensure consistency in

rulemaking for similar activities in addition to consistency in

examinations;

• assigning specific rulemaking authority in statute to a single agency, as has

been done in the past when Congress gave FRS statutory authority to issue

rules for several consumer protection laws that are enforced by all of the

bank regulators;

• requiring enhanced cooperation between examiners and banks’ external

auditors; (While GAO strongly supports requirements for annual full-scope,

on-site examinations for large banks, GAO believes that examiners could

take better advantage of the work already being done by external auditors

to better plan and target their examinations.)

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• requiring enhanced off-site monitoring to better plan and target

examinations as well as to identify and raise supervisory concerns at an

earlier stage.

Agency Comments

and Our Evaluation

FRS, FDIC, OCC, and OTS provided written comments on a draft of this report,

which are described below and reprinted in appendixes IV through VII.

Treasury also reviewed a draft and provided oral technical comments,

which we incorporated where appropriate.

FRS agreed that it is useful to consider the experience of other countries in

making policy determinations. It also agreed that there are different ways

to accommodate the policy goal of modernizing the U.S. supervisory

structure. FRS reiterated its opinion that the purpose of bank supervision is

to enhance the capability of the banking system to contribute to long-term

national economic growth and stability. FRS agreed with our description of

the direct involvement of central bank staff in bank oversight in the

countries we studied and our recommendation that FRS continue to be

included in bank oversight. However, it felt that we should be more

specific in stating that FRS needs “active supervisory involvement in the

largest U.S. banking organizations and a cross-section of other banking

institutions” to carry out its key central banking functions. To clarify what

was meant by this statement, a senior FRS official advised us that FRS’

present regulatory authority gives it the access and influence it needs. But

if the regulatory structure were changed so that there is only one federal

regulator for each banking organization—holding company and all bank

subsidiaries—then FRS feels that it would have to be the regulator for the

largest banking organizations and a cross-section of others in order to

carry out its key central banking functions.

We agree that FRS needs to have direct access to supervisory information

as well as the ability to influence supervisory decisionmaking and the

banking industry if the oversight structure is changed. However, in our

studies of foreign oversight structures we found that direct central bank

involvement in bank oversight, and access to and influence over the

banking industry, could be accomplished in several ways. These could

include giving the central bank a formal role as bank supervisor,

participating on oversight boards with staff involvement in examination

and other areas of supervision, and serving in informal yet influential roles

that included participation in oversight by central bank staff.

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FRS also noted that 88 percent of U.S. banks are part of banking

organizations that are actively supervised by no more than two oversight

agencies. The portion of activities supervised by the third or fourth agency

in holding companies where more than two agencies are involved in

oversight is generally small. We acknowledge that most U.S. banks are

supervised by no more than two federal banking supervisory agencies.

Nevertheless, as the table provided by FRS shows (see app. IV), more than

50 percent of bank assets are held in companies that are supervised by

three or four of these agencies. Furthermore, it is the larger, more

complex banking institutions—whose failure could pose the greatest

danger to the financial system—that are likely to be subject to oversight by

more than two agencies, with the potential attendant oversight problems

described in our report. In addition, the percentage of assets supervised by

additional agencies—which may be relatively small—does not indicate

their importance or potential risk to the banking organization.

FDIC provided four fundamental principles for an effective bank regulatory

structure, which are generally consistent with the principles and

recommendations that we advocate. These principles include providing

FDIC with an explicit backup supervisory authority, backup enforcement

power, and the capability to assess the quality of bank and thrift

examinations. We also support providing FDIC with such backup authority.

FDIC also noted that the broader regulatory responsibilities related to the

role of the deposit insurer require current and sufficient information on

the ongoing health and operations of financial institutions. In FDIC’s

judgment, periodic on-site examination remains one of the essential tools

by which such information may be obtained.

FDIC commented on the mechanisms we described that Congress might

consider to enhance regulators’ cooperation and coordination and reduce

regulatory burden, noting that the current processes for coordinating

regulation allow for the consideration of the unique regulatory

perspectives of each agency. We agree that the present practice of

cooperation, coordination, and communication among the agencies in

rulemaking allows the unique viewpoints of each of the oversight agencies

to be considered. The assignment of rulemaking authority to a single

agency would not preclude incorporating other viewpoints, as evidenced

by the current rulemaking process with regard to some consumer

protection regulations, where a single agency has been assigned such

authority. We believe assigning rulemaking authority for safety and

soundness regulations could be one way to attain a more efficient

regulatory process.

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OCC described our report as comprehensive and conveying more about the

foreign regulatory structures than has been available to the public, albeit

not exhaustive. OCC agreed with us that the foreign structures are not

readily adaptable to the United States and described some of its

observations about the differences among the five countries’ regulatory

structures. Consequently, OCC suggested that Congress consider our

suggestions very carefully in making any changes to the oversight

structure in the United States. We agree that Congress should be cautious

in any consideration it gives to changing the regulatory structure.

OTS generally concurred with our principal recommendations and restated

its position that consolidation will make the bank oversight system more

efficient and effective. It added that reducing the number of federal

oversight agencies should be done in a way that preserves a strong and

stable regulatory environment and protects agency employees. We agree

that the consolidation of any oversight agencies should be done in a way

that preserves a strong and stable regulatory environment that is effective,

efficient, and responsive to the needs and risks of the supervised

institutions.

FRS, FDIC, and OTS also noted several regulatory actions and other initiatives

underway that are designed to improve coordination—including joint or

coordinated examinations—and reduce regulatory and supervisory

redundancy and overlap. We believe such efforts are important to the

consistency and efficiency of the regulatory structure and have

incorporated this information into our report where appropriate.

The comment letters from FRS, FDIC, and OTS attest to the unique

perspectives of each of the oversight agencies, which we believe provide

valuable insights to Congress. As we describe in our report, there is a

range of ways to address our recommendations and to capture these

perspectives in any congressional consideration of changing the current

U.S. bank oversight structure. Therefore, we have incorporated the

agencies’ insights in the report where appropriate. In addition, we have

included descriptions of the interagency efforts discussed in the agencies’

responses to improve coordination and cooperation and reduce regulatory

burden.

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Appendix I 

History of U.S. Bank and Thrift Oversight

The U.S. bank oversight structure was subject to significant change from

its early years through 1933. After 1933, the four-agency structure of bank

oversight was to change little. Instead, changes in the bank and thrift

industries were addressed principally through additions to and revisions of

banking law.

Historical

Development of U.S.

Bank and Thrift

Oversight

The role of the U.S. federal government in the banking industry and the

structure of federal oversight of banking institutions has been significantly

shaped by congressional efforts to promote public confidence in the

nation’s financial system—often following financial crises. The federal

government has sought over time to address difficulties related to paper

currency, the financing of government operations, the money supply,

inflation, and unsafe and unsound practices of banking institutions that

can lead to financial system disruptions. The federal agencies that oversee

banking institutions today were created piecemeal, largely in response to

these difficulties.

Pre-1863: Beginning of the

U.S. Banking Industry

During the late 1700s, the first commercial banks were chartered by

special acts of some state legislatures.1

 At that time, limited and varied

governmental oversight was provided by the states.2

 Sporadic state efforts

to prescribe rules for state banks were often ineffective. Bankers in some

jurisdictions refused to provide any information about the conditions of

their banks, contending that running a bank was a private affair. The

federal government first became involved in bank oversight in 1791, when

Congress created the Bank of the United States. The U.S. government was

the major stockholder, owning one-fifth of the bank’s $10 million in

capital. The bank earned most of its income by operating as a commercial

bank, but it also assumed some of the functions of a central bank. For

example, it was to provide a first-rate convertible currency, serve as a

lender to the Department of the Treasury, and act as a fiscal agent for the

1

The first bank chartered in the United States was the Bank of Pennsylvania, formed in 1781 under a

resolution by the Continental Congress. It was replaced in 1784 by the Bank of North America, which

was chartered by both the federal government and the state government of Pennsylvania. In 1784, two

other states chartered banks. These were the only commercial banks in existence until 1790. However,

by 1811, there were 88 state-chartered banks in the country.

2

It was a common procedure at the time for state legislatures to grant all corporate charters.

Eventually, states passed laws permitting incorporation of other companies without a special

legislative act, although charters were still required for banks. As the requests for bank charters

increased, state legislatures became flooded with requests for charters and a movement toward “free”

banking began. “Free” banking meant that anyone could start a bank if they complied with certain

procedural steps prescribed in statute. By the 1850s, about one-half of the states had free banking laws

that provided for readily available charters but also required bond-secured note issues and other

constraints.

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History of U.S. Bank and Thrift Oversight

federal government. The federal government’s oversight of the bank was

limited. The bank was required to furnish statements of condition to the

Secretary of the Treasury, but the Secretary did not make the reports

public, nor did he make them available to Congress unless a Member

asked for specific information.

The Bank of the United States was not rechartered in 1811. However,

problems financing the War of 1812 and a deterioration of paper currency

in the United States led to renewed support for a federal bank.

Consequently, Congress chartered a second Bank of the United States in

1816. The U.S. government was again a major stockholder in this bank,

owning one-fifth of the bank’s $35 million in capital. The bank was

required to furnish statements of condition to the Secretary of the

Treasury, and Congress reserved the right to inspect the bank’s records.

This bank played a greater role in central banking than had the first Bank

of the United States. It acted as a lender-of-last-resort to commercial

banks, while also acting as a commercial bank itself, and took actions to

offset swings in economic activity. Its notes circulated without a discount,

and it had branches in many areas of the country. State bankers and

agrarian interests opposed the bank because they believed it unduly

restricted the money supply. For this reason, among others, the bank’s

charter was not renewed in 1836.

During the first half of the 19th century, particularly after the public

recognized that the second Bank of the United States would not be

rechartered, state banks increased in number. At the same time, bank note

problems and bank failures increased. In response to the increasing bank

note problems and failures, states gradually began to assume more

oversight responsibilities. Some states required statements of financial

condition reports, either on a regular or as-requested basis. Most states

requiring reports were stockholders in the banks and therefore entitled to

statements of condition. Some states also issued regulations limiting the

total face value of notes that a bank could issue to some multiple of the

bank’s capital. Other states’ regulations required minimum denominations

for notes. Some states that were bank stockholders also began to examine

banks. Another development that contributed to more vigilant bank

oversight was the development in the mid-1800s of state self-insurance

systems to protect depositors.3

 Stricter state government oversight helped

to limit the liability of participants in the insurance system.

3

The first of these insurance systems was established by the New York legislature in 1829, with five

other states following. These insurance systems generally required each bank in the insurance system

to contribute annually into an insurance fund up to a certain maximum percentage of its capital.

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History of U.S. Bank and Thrift Oversight

By 1860, more than 1,500 state-chartered banks operated in the United

States. These banks had, on average, 6 denominations of notes; more than

9,000 different kinds of paper bills were therefore in circulation. Some of

these bills were traded at face value, some were traded at discounts, and

some might have been worthless because they were counterfeit or had

been issued by banks that had failed. Judging the authenticity of notes and

determining their discount rates became complicated and expensive for

businesses and households. It was decided that a uniform national

currency was needed to solve these problems.

1863-1929: Creation of the

Office of the Comptroller

of the Currency and the

Federal Reserve System

The National Currency Act of 1863 and the National Bank Act of 1864,

which recodified and strengthened the 1863 act, provided for a national

currency and a national banking system. These acts authorized national

charters for commercial banks and allowed these banks to issue notes in

standardized denominations that were collateralized by Treasury bonds.4

To discourage state-chartered banks from issuing competing notes, the

acts required notes issued by state-chartered banks to be taxed. This

effectively discouraged state banks from issuing notes and ultimately left

only national bank notes in circulation.

The National Bank Act also created OCC and gave it responsibility for

chartering, regulating, supervising, and examining all national banks. This

was the beginning of federal government oversight of commercial

banks—with the exception of the very limited oversight by the Department

of the Treasury of the first and second Banks of the United States. Since

the National Bank Act was essentially a currency measure, the aim of bank

supervision was, through examinations, to make sure that banks would be

able to redeem their notes when presented. Over time, the scope and

quality of national bank oversight broadened and improved.

Between 1864 and the early 1900s, financial panics and bank runs

continued to occur, even though supervision increased. The banking

system was not always successful in meeting the demand for currency.

Banks supported only a fraction of their demand deposits with cash

reserves, and the banking system as a whole had no outside source of

liquid reserves. Disruptions in the monetary system and lending activities

caused by financial panics eventually curtailed commercial activity.

Industry observers expressed the belief that such downturns were likely to

4

National bank notes were gradually replaced with Federal Reserve notes following the creation of

FRS in 1913. By 1935, the last national bank notes were withdrawn from circulation.

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History of U.S. Bank and Thrift Oversight

continue until the public gained enough confidence to return funds to the

banking system and banks were again willing to expand their lending.

To help correct for these financial panics and curtailments in commercial

activity, Congress established FRS in 1913. Among other things, the primary

function of FRS was to provide an outside source of reserves for the

banking system.5

 Banks that were members of FRS could borrow from FRS

reserves to obtain funds needed to meet a temporary cash drain or a rapid

increase in the demand for credit. This helped correct for the fixed supply

of currency and thereby decreased financial panics. All national banks

were required to become members of FRS, and state banks were given the

option to join.

The organization of FRS represented a compromise among diverse and, at

times, conflicting forces. The urban business community favored a highly

centralized organization, independent of the federal government and

dedicated to stabilizing the purchasing power of the dollar. Rural

agricultural interests favored a decentralized, government-owned system

oriented toward providing credit on liberal terms. The compromise

achieved decentralization through the establishment of 12 regional or

district banks. These banks were owned by the member commercial

banks, which also elected the majority of the directors. A degree of

centralization was achieved by the creation of a Board of Governors in

Washington, D.C., whose members were appointed by the President and

confirmed by the Senate and shared the responsibility for determining and

executing FRS policies with the regional banks. The Board was also given a

significant degree of independence by providing its members with 14-year

terms and FRS with independent sources of operating revenue.6

The Federal Reserve Act gave both OCC and FRS authority to regulate and

supervise all national and state-chartered member banks. The act provided

that OCC was to examine each member bank at least twice a year. But it

also authorized the Federal Reserve Board to examine member banks at

its discretion, and another provision gave further authority to the 12

Federal Reserve Banks to make special examinations of member banks.

5

The Federal Reserve Act also gave FRS the authority to hold a portion of its member banks’ deposits

in reserve and to make open-market purchases and sales of government securities.

6

FRS generates income from a variety of sources, including interest on U.S. government securities it

has acquired through open-market operations; interest on loans to depository institutions; and fees

received for services provided to depository institutions, such as check clearing, funds transfers, and

automated clearinghouse operations. FRS revenues in excess of expenses are turned over to the U.S.

Treasury. For additional information see Federal Reserve System: Current and Future Challenges

Require Systemwide Attention (GAO/GGD-96-128, June 17, 1996).

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History of U.S. Bank and Thrift Oversight

Thus, OCC, the board, and the Federal Reserve Banks could each look into

the affairs of member banks. In addition, state authorities maintained their

supervisory authority of state-chartered banks within their jurisdictions

and examined those banks at their discretion. The federal and state

banking chartering and corresponding supervisory authorities are often

referred to as the dual banking system.

After the enactment of the Federal Reserve Act, conflicts arose between

FRS and OCC over the Federal Reserve’s right to the examination reports of

national banks. Conflicts also arose about the Federal Reserve’s

participation in examinations and OCC supervision of state member banks.

State member banks objected to the expense of OCC examinations and

were also unwilling to subject themselves to OCC’s more rigorous

examination procedures. FRS officials argued that OCC examination was

deterring state-chartered banks from joining FRS, and, in June 1917, the

Federal Reserve Act was amended to exempt state banks from OCC

examination. Since that time, OCC has supervised and examined national

banks and provided their examination reports to FRS, and FRS has

supervised state member banks. At the time, state-chartered nonmember

banks were supervised only by the states.

During the 1920s, no major shifts in responsibility relative to bank

supervision occurred. Although many small, particularly rural, banks failed

or merged with other banks, high business profits during that time spurred

many banks to increase their commercial lending and securities activities.

Additionally, many large banks began expanding their branch networks to

the extent allowable by law.

1930s: Financial Crisis and

Reform

During the 1930s, the most dramatic financial decline in U.S. history

occurred. In the 3 years after the stock market crash of 1929, many banks

failed. In 1933, President Roosevelt ordered all banks closed from March 6

to March 13, and banks opened again only after state and federal

regulators had examined their condition and issued a license to reopen.

Many banks never reopened. By the end of 1933, over 4,000 banks were

closed or absorbed by other banks. This left about 14,500 banks—less than

half the number of banks that had existed in 1921, when the number of

banks had peaked at about 30,000.

After this financial crisis, many reform measures were proposed to help

the banking system avoid another such calamity. The banking acts of 1933

and 1935 required many reforms. One of the most important was the

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History of U.S. Bank and Thrift Oversight

creation of federal deposit insurance and the administrator of the

insurance, FDIC.

7

 All FRS member banks, which included all national banks,

were required to be insured, and nonmember banks were given the option

to be insured, on approval of FDIC. By the end of 1935, a few months after

the permanent plan of federal deposit insurance was introduced, more

than 90 percent of all U.S. commercial banks were insured. Once the

insurance system was established and began to prove itself, bank panics

and the loss of public confidence became much less of a threat to the

banking system.

These banking acts gave FDIC the authority to examine all insured banks.

The acts also required that insured banks ultimately become members of

FRS, and membership implied that FRS would have oversight responsibility.

But legislative pressures of nonmember banks led to the removal of the

membership requirement in 1939. To avoid regulatory duplication, OCC,

FRS, and FDIC agreed to a formal division of responsibility for the bank

examination function that still exists today: OCC would be responsible for

national banks, FRS for state-member banks, and FDIC for state-nonmember

banks.

The stock market crash of 1929 was also the impetus for the 1932 creation

of a Federal Home Loan Bank System (FHLBS) as a regulatory and support

structure for the savings and loan associations. FHLBB was empowered to

charter and regulate federal savings and loan associations. Previously, all

savings and loan associations were chartered by the states. Savings and

loan associations were initially organized in the mid-1800s by groups who

wanted to buy their own homes but did not have enough savings to finance

the purchase. At that time, neither commercial banks nor life insurance

companies lent money for residential mortgages. The members of the

groups pooled their savings and lent them back to a few members to

finance their home purchases. As loans were repaid, funds could be lent to

other members of the group.

The purposes of FHLBS were in some ways parallel to those of FRS. The

primary objectives of FHLBS were to (1) provide secondary liquidity to

mortgage lending institutions that had temporary cash flow problems,

7

The banking acts of 1933 and 1935 also (1) prohibited banks from paying interest on demand deposits;

(2) provided for limitations on the interest banks could pay on time deposits; (3) prohibited investment

banks from receiving deposits; (4) restricted banks to a limited range of investment banking activities,

including a prohibition on bank underwriting of corporate securities; (5) required federal banking

agencies to consider capital adequacy, earnings prospects, managerial character, and community

needs before chartering a bank; (6) gave the Federal Reserve Board the authority to change the reserve

requirements for member banks; and (7) allowed national banks to form branch offices to the same

extent as state banks.

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History of U.S. Bank and Thrift Oversight

(2) transfer loanable funds from areas where there was excess saving and

little demand for loans to areas where the demand for loans was higher

than the funds available, and (3) attempt to stabilize the residential

construction and financing industries. Federal deposit insurance for

savings and loan associations was created in 1934 when the Federal

Savings and Loan Insurance Corporation (FSLIC) was established under

FHLBB. Although FHLBB purposes were similar to those of FRS relative to

money supply and similar to those of FDIC relative to deposit insurance,

FHLBB structure included both functions; the bank regulatory structure had

FDIC as a separate independent insurer.

The Late 1980s: The Thrift

Crisis and Changes in

Thrift Oversight and

Deposit Insurance

From 1980 through 1990, 1,020 thrifts failed at a cost of about $100 billion

to the federal deposit insurance funds.8

 Despite a doubling of premiums

and a special $10.8 billion recapitalization program, sharply mounting

thrift losses in the 1980s bankrupted FSLIC. Observers have recognized

many factors as contributing causes of the thrift failures, including

increasing competition from nondepository institutions, such as

money-market funds and mortgage banks, as well as periods of inflation,

recession, and fluctuating interest rates. The high interest rates and

increased competition for deposits created a mismatch between the

interest revenues from the fixed-rate mortgages that constituted the bulk

of the thrift industry’s assets and the cost of borrowing funds in the

marketplace. Increased powers granted to thrifts in a period during which

FHLBB supervision was scaled back has also been cited as a contributing

cause of problems in the industry.

The Financial Institution Reform, Recovery, and Enforcement Act of 1989

(FIRREA)9

 was enacted primarily in response to the immediate problems

surrounding FSLIC’s bankruptcy and troubles in the thrift industry. Among

other actions mandated by FIRREA, a new regulator was created for the

thrift industry—OTS, a bureau of the Department of the Treasury. A new

insurance fund, the Savings Association Insurance Fund (SAIF), was also

established to replace the bankrupt FSLIC. SAIF was to be administered by

FDIC.

8

For more specific information on the costs of resolving the thrift crisis, see Financial Audit:

Resolution Trust Corporation’s 1995 and 1994 Financial Statements (July 2, 1996, GAO/AIMD-96-123).

9

FIRREA, P.L. 101-73, became effective on Aug. 9, 1989.

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History of U.S. Bank and Thrift Oversight

Major Banking

Legislation

Congress has passed many laws over the last 70 years that affect the

banking industry. These laws address many issues, including the types of

activities banking institutions and their holding companies may engage in,

how these institutions may expand their operations, how consumers are to

be protected and served, and how agency oversight is to be exercised.

Some of these laws are described below.

Separation of Commercial

and Investment Banking

A significant development in financial regulation during the 1930s was the

separation of the commercial and investment banking industries. After the

stock market crash of 1929, Congress examined the mixing of the

commercial and investment banking industries that occurred during the

1920s. Congressional hearings revealed alleged conflicts of interest and

fraud in some banking institutions’ securities activities. Changes legislated

in the resulting Banking Act of 1933 forced the separation of the banking

and securities businesses. These changes, found in sections 16, 20, 21, and

32 of the Banking Act of 1933, are known as the Glass-Steagall Act.10

Bank Holding Companies The Bank Holding Company Act of 1956, as amended, restricts bank

holding companies’ activities to the management and control of banks

consistent with the public interest. Among other things, the act requires

that bank holding companies register with the Board of Governors of FRS

and gives FRS regulatory and supervisory authority over those

corporations. The act provides that bank holding companies may not own

or control nonbanking companies or engage in nonbanking activities

unless the Board determines that the activities are closely related to

banking and expected to produce net benefits to the public if performed

by a bank holding company. As mentioned earlier, existing nonbank

subsidiaries of bank holding companies include businesses engaged in

consumer finance, trust services, leasing, mortgage, electronic data

processing, securities underwriting and brokerage, management

consulting services, and futures trading.

10Section 16 of the Glass-Steagall Act limits the securities activities of national banks essentially to

brokerage services. Section 20 prohibits member banks from affiliating with organizations engaged

principally in securities activities, although with FRS approval a bank holding company may engage in

limited securities activities through a subsidiary—called a section 20 subsidiary. Section 21 makes it a

crime for any person engaged in the securities business to engage at the same time in the business of

receiving deposits, except that it permits state-chartered banks or trust companies, if authorized by

state law, to engage in the securities business to the extent permitted national banks in section 16.

Section 32 prohibits interlocking directorates between member banks and persons engaged primarily

in the securities business, with waiver discretion granted to the Federal Reserve Board.

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History of U.S. Bank and Thrift Oversight

Interstate Branching and

Banking

Until Congress enacted the Interstate Banking and Branching Efficiency

Act of 1994 (Interstate Banking Act), the degree of inter- and intrastate

branching and banking allowable was largely determined by state laws.11

Under the McFadden Act of 1927 and the Banking Act of 1933, state laws

determined how banks, including national banks, could branch within

each state. The McFadden Act also prohibited interstate branching for all

banks except state-chartered, nonmember banks. State laws governed the

ability of these banks to branch interstate, but few states took advantage

of this provision to permit interstate branching. However, as of June 1,

1997, the Interstate Banking Act will allow interstate branching through

consolidation of existing banks or branches. The act gives states the ability

to “opt-out,” or choose not to allow branching, before June 1, 1997. They

can also “opt-in,” or authorize branching earlier. De novo

branching—branching other than by merger with an existing bank—must

be specifically authorized by individual states.

Until 1995, section 3(d) of the Bank Holding Company Act of 1956,

commonly known as the Douglas Amendment, prohibited bank holding

companies from acquiring a bank in another state unless the state the bank

holding company wanted to enter specifically permitted such entry.

However, as of September 29, 1995, the Interstate Banking Act allows

nationwide interstate banking through the bank holding company, so long

as certain safety and soundness and community reinvestment conditions

are met and specified concentration levels are not exceeded.

Antitrust The primary purpose of antitrust laws is to prevent anticompetitive

behavior and preserve and promote competition. The Sherman Act and the

Clayton Act are the linchpins of federal antitrust enforcement. In general,

they—and several state antitrust statutes that mirror their

provisions—prohibit mergers that would result in or tend to create a

monopoly or may substantially lessen competition. The Department of

Justice is charged by these acts to enforce the antitrust statutes in all

industries, including banking.

Until the Bank Merger Act of 1960 was enacted, it was not clear whether

federal bank regulators had the authority to deny bank mergers that were

anticompetitive. The Bank Merger Act clarified this uncertainty by

mandating that bank regulators with responsibility over the surviving bank

consider the competitive effects of bank mergers. Congress further

11Branches are bank offices and are regulated as integral parts of the bank. As a result, they do not

have separate capital requirements, and transfers of assets and liabilities among branches and between

branches and the headquarters bank are not restricted.

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History of U.S. Bank and Thrift Oversight

strengthened bank merger enforcement efforts by amending both the Bank

Merger Act and the Bank Holding Company Act in 1966 and by passing the

Change in Bank Control Act in 1978. These amendments and the Change in

Bank Control Act introduced the principles of the Sherman and Clayton

antitrust acts into the banking laws. As a result, federal bank regulators

and the Department of Justice generally enforce similar antitrust statutes

when addressing the competitive concerns arising from bank mergers.

Consumer Protection Since the late 1960s, over 20 laws have been passed to provide various

consumer protections. These laws were created to deal with all aspects of

consumer banking services and transactions and can generally be grouped

into three categories: civil rights laws, disclosure laws, and safeguards

against specific abuses. The banking civil rights laws are aimed at

eliminating the consideration of factors unrelated to creditworthiness

when banks make judgments about whether to extend credit. These civil

rights laws are directed at both intentional acts of discrimination and

practices that have the effect of discrimination. With respect to banking

activities, the term “civil rights laws” generally includes the Equal Credit

Opportunity Act of 1974, the Fair Housing Act of 1968, and the Home

Mortgage Disclosure Act of 1975. Additionally, the Community

Reinvestment Act of 1977, although not a civil rights law, is intended to

encourage depository institutions to help meet the credit needs of their

communities, including low- and moderate-income neighborhoods.

The second category of consumer protection laws—disclosure laws—is

generally intended to provide consumers with adequate information to

make better financial choices. These laws include, among others, the

Truth in Lending Act of 1968, the Real Estate Settlement Procedures Act of

1974, and the Truth in Savings Act of 1991.

Finally, the third category of consumer protection laws can generally be

labeled as laws designed to provide specific safeguards against specific

abuses, such as the inappropriate use of or access to credit information.

These laws include, among others, the Fair Credit Reporting Act of 1970

and the Right to Financial Privacy Act of 1978.

Industry Deregulation Legislation enacted in the late 1970s and early 1980s was aimed at creating

a more open competitive banking environment and a more equal treatment

of different types of financial institutions. For example, the Depository

Institutions Deregulation and Monetary Control Act of 1980 provided for,

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History of U.S. Bank and Thrift Oversight

among other things, the phase-out of interest rate ceilings on time and

savings deposits. It also broadened the investment and lending powers of

savings and loan associations and savings banks. The Garn-St Germain

Depository Institutions Act of 1982, among other things, effectively

eliminated the deposit interest rate ceilings, permitted savings and loan

associations to hold assets—up to certain specified percentages—in

certain types of commercial and consumer loans, and eliminated

statutorily imposed loan-to-value ratios for savings and loan associations.

Banking Problems Much of the legislation in the late 1980s and 1990s has focused on dealing

with troubled institutions and strengthening the regulatory framework.

This legislation included FIRREA, mentioned earlier, which provided

$50 billion in funding for resolving failing thrifts and established more

stringent capital and regulatory standards. The Federal Deposit Insurance

Corporation Improvement Act of 1991 (FDICIA) is another law that was

enacted to deal with banking problems of the 1980s. FDICIA instituted

changes intended to improve the supervision of banks; enhance safety and

soundness; reduce the cost of resolving failing or failed banks; and provide

additional resources to the Bank Insurance Fund, among other things.

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Appendix II 

External Audits of Banking Institutions

This appendix supplements the chapter 2 discussion of U.S. examiners’

cooperation with external auditors and the use of external auditors’ work.

In the United States, examiners’ cooperation with external auditors and

use of the work and expertise of external auditors has generally been

more limited than in the countries we studied, and any cooperation or

reliance that takes place has varied significantly across agencies as well as

among individual examiners and auditors. Improving cooperation between

external auditors and examiners can be a challenge, primarily because of

the different roles auditors and examiners play. Yet, some of the

regulatory agencies have recently initiated programs to improve

cooperation and identify possible areas where examiners could use the

work of external auditors. Such programs have the potential to improve

examinations, enhance the efficiency of examinations, and reduce

regulatory burden on banking institutions.

Requirements for

External Audits

As we mentioned in chapter 2, banks and thrifts in the United States are

either required or strongly encouraged to have annual external audits of

their financial statements. Large banks—with total assets in excess of

$500 million—are required to have annual independent audits of their

financial condition. Smaller banks are generally required to have such

external audits for the first 3 years after obtaining FDIC insurance. Others

are strongly encouraged to have such annual external audits. OTS also

requires large thrifts to have annual external financial audits, encourages

all thrifts to have such annual audits, and has the explicit authority to

require financial audits of any thrifts it has determined present safety and

soundness concerns. Some state banking regulators also require such

external audits for institutions chartered in their states. Additionally, the

Federal Reserve requires bank holding companies with total consolidated

assets of $150 million or more to have annual, independent financial

audits; and OTS requires annual audits of holding companies whose

subsidiary savings associations have aggregate assets of $500 million or

more.1 SEC also has a financial audit requirement for all public companies,

including bank holding companies that are SEC-registrants and all banking

institutions that are subject to SEC reporting requirements. In practice,

regulators told us that most banking institutions have annual independent

financial audits.

1

OTS selected the $500 million asset threshold to achieve comparability with the approach used by

FDIC for banks. Setting a lower-asset threshold, as the Federal Reserve has, in effect requires certain

insured subsidiary institutions to obtain an audit that otherwise would not have been required by

FDIC.

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Appendix II 

External Audits of Banking Institutions

The scope of banking institutions’ external audit requirements varies by

the size of the institution and the type of activities it engages in. Small

institutions are encouraged to have an external audit that is designed to

test and evaluate the high-risk areas of an institution’s business. Such

external audits are to be performed by an independent auditor who may or

may not be a certified public accountant (CPA).2

For large banking institutions, the requirements for the scope of audits are

more specific. Large institutions—those with total assets in excess of

$500 million—are required, among other things, to annually engage an

independent public accountant to

• audit and report on the institution’s annual financial statements in

accordance with generally accepted auditing standards;

• examine, attest to, and report separately on the assertions of management

concerning the institution’s internal control structure and the procedures

for financial reporting; and

• determine compliance by the institution with designated laws and

regulations.3

Unlike other countries we studied, external auditors in the United States

are not required to immediately report problems they identify to the

banking agencies. However, external auditors do have the responsibility to

withdraw from an audit engagement if identified problems are not

resolved or if bank management refuses to accept their audit report.

Auditors must also notify the banking agencies if they withdraw from an

engagement, which serves as a flag to the supervisors to look into the

reasons for the withdrawal. Additionally, a recent amendment to the

Securities Exchange Act requires independent public accountants to

report to SEC certain illegal acts they detect if the audited firm does not

take appropriate remedial action and inform SEC of the auditors’ report.

2

Independence has traditionally been defined as the ability to act with integrity and objectivity.

Banking regulators may test the independence of the CPA through reviews of loan listings, contracts,

stockholder listings, or other measures.

3

The regulations implementing FDICIA require external auditors to follow a detailed set of procedures

to test compliance with safety and soundness regulations related to specific areas (i.e., loans to

insiders and dividend restrictions).

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External Audits of Banking Institutions

U.S. Examiners’ Past

Cooperation With and

Use of External

Auditors Has Been

Limited

U.S. examiners’ cooperation with external auditors and use of the work of

external auditors has generally been more limited than in most of the

countries we studied. Banking supervisors in the United States are

required by examination guidelines to use audit reports—and sometimes

audit workpapers—to help plan examinations and identify potential safety

and soundness problems. The banking regulators generally require that

any institution that has an external audit, regardless of the scope of the

audit, provide them with copies of any audit reports or management

letters. Institutions are required to submit their audit reports, including

management letters and certain other correspondence, to the examiners

within 15 days of receipt of the report. When these audit reports are

provided, examination guidelines require staff at each agency to review

them to determine whether there are any issues that need to be followed

up on immediately or during the next examination.4

 Generally, audit

reports are to be used to assist in the financial analysis of institutions, to

identify areas of supervisory concern or accounting complexity, and to

detect trends and information not otherwise revealed through regulators’

off-site monitoring.

Examiners also are to review auditor’s reports, management letters, and

other information, including correspondence and memorandums between

the bank and its auditor for areas of particular concern when planning

examinations. As a result of these preexamination reviews, regulatory

officials said examiners may decide to place greater emphasis during the

examination on specific areas—such as reviewing more thoroughly certain

aspects of an institution’s internal control system or ensuring problems

identified by the auditors have been addressed. Some regulatory officials

also said examiners may be able to use external auditors’ work to

eliminate certain examination procedures from their examinations—such

as verifications or confirmations of the existence and valuation of

institution assets like loans, derivative transactions, and accounts

receivable. External auditors perform these verifications or confirmations

routinely as a part of their financial statement audits; but such

verifications have rarely been done by examiners because they are costly

and time consuming.

Beyond these examination procedures, regulatory officials said they

generally do not use the work of external auditors to reduce the scope of

their examinations, although the extent to which officials at each agency

4

Specifically, examiners look for (1) information pertaining to the scope of the audit; (2) the type of

opinion issued by the CPA on the financial statement audit; (3) findings, recommendations, and

conclusions stated in the report, paying particular attention to any unusual transactions or noted

weaknesses or issues in the report or footnotes; and (4) compliance with required reporting standards.

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External Audits of Banking Institutions

said they would consider altering the scope of their examinations varied.

Officials at FDIC, for example, told us that examiners do not have the

authority to rely exclusively on the work of external auditors. However,

officials at OTS, which has had a longstanding history of working with

external auditors, said there are a broad range of areas where auditors’

work can be used to adjust the scope of their examinations.

In July 1992, the federal bank and thrift oversight agencies issued a joint

policy statement that promotes coordination and cooperation between

examiners and external auditors. In the statement, federal bank and thrift

regulators encourage auditors to attend examination exit conferences or

other meetings between examiners and bank management at which

examination findings relevant to the scope of the audit are discussed. The

statement also says that auditors may request meetings with the federal

bank and thrift regulators. Furthermore, this statement provided

guidelines concerning information that institutions should give to their

external auditors, such as condition and examination reports,

correspondence received from the regulators, any supervisory

“memorandum of understanding” or other written agreement, or any other

enforcement action.

Greater Cooperation

and Reliance Could

Improve

Examinations,

Enhance Efficiency,

and Reduce

Regulatory Burden

Improving cooperation between external auditors and examiners and

identifying areas where examiners could use the work of external auditors

has the potential to improve examinations, enhance the efficiency of

examinations, and reduce regulatory burden on banking institutions,

according to many of the regulatory officials we interviewed. For example,

external auditors’ work may help examiners identify those high-risk areas

in a banking institution in which examiners should focus their review and

may consequently improve the quality of examinations. Increasing use of

external auditors’ work may also help examiners determine areas in which

sufficient work was performed by the external auditor, thereby allowing

the examiners to limit their work in the area. Examiners could then focus

their efforts on other areas or other institutions, thereby improving the

efficiency of examinations. Banking institutions could also benefit from

such cooperation if it resulted in a more narrow scope of examination or if

information requests by auditors or examiners were reduced by

coordinating requests and sharing information.

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External Audits of Banking Institutions

Numerous Barriers to

Cooperation and

Reliance Exist

Regulatory officials said that the extent of coordination with external

auditors varies significantly, has been sporadic, and past efforts to achieve

improved coordination have often achieved lackluster results, even after

the issuance of the 1992 guidelines. In most cases, the degree of

cooperation seemed to depend on the attitude of the banking clients

toward auditor/examiner coordination and on the willingness of

examiners and auditors to work together. For example, some auditors are

not interested in attending examination exit conferences, according to

regulatory officials, while auditors said that examiners do not always

inform them of such conferences. Regulatory officials also said that they

get few requests by auditors to meet with examiners or to review examiner

workpapers, reflecting a statement by one audit industry executive that

examiner workpapers would be of little use to auditors because of the

differing missions of auditors and examiners.

Improving cooperation between external auditors and examiners can be a

challenge, primarily because of these differing missions. External auditors

are generally engaged by a banking institution to attest to the fairness of

the presentation of the institutions’ financial statements and, in the case of

large institutions, to managements’ assertions about the institutions’

financial reporting controls and compliance with laws and regulations.

Banking institutions’ examiners, however, conduct periodic on-site

examinations to address broader regulatory and supervisory issues, such

as the safety and soundness of institutions operations and activities as

well as compliance with all banking laws and regulations, not just insiders

lending and dividend requirements. Although external auditors have

responsibility for assessing an institution as a going concern, they are

primarily concerned with the accuracy of the information provided to the

institution’s shareholders about their investments at a particular point in

time. Examiners, however, have a responsibility to protect depositors,

taxpayers, and the financial system, and are consequently concerned

about the future viability of the institution.

In performing their functions, external auditors and examiners may review

much of the same information. However, both audit and exam officials

told us they are expected to apply different standards in preparing their

separate reports. Officials said that different methodologies, assumptions,

and the passage of time between audits and regulatory examinations can

lead to different results and different assessments of the financial health of

a banking institution. For example, an auditor may issue an unqualified

opinion on an institution after determining that its transactions and

balances are reported in accordance with generally accepted accounting

Page 99 GAO/GGD-97-23 Bank Oversight Structure
Appendix II 

External Audits of Banking Institutions

principles (GAAP). This does not necessarily mean, however, that the

transactions reflect sound business judgment, that the associated risks

were managed in a safe or sound manner, or that the asset balances could

be recovered upon disposition or liquidation. These are all issues that

examiners must consider in safety and soundness examinations. Different

results between external audits and examinations might also occur if the

audits and examinations are based on different periods. All banks must

operate on a calendar year basis (i.e., having fiscal years ending

December 31). Audits are performed in close proximity to the end of an

institution’s fiscal year, whereas examinations are scheduled year-round

and based on the financial condition as of the end of a specific month or

quarter.5

 Examiners told us that the differences in “as-of” dates makes it

difficult for them to use the work of external auditors, because the

auditors’ work may not be in close proximity to the period they examined

and the institutions’ activities and conditions may have changed

significantly since the audit.

Such different assessments between examiners and auditors have often

led them to be skeptical about the purpose of each others’ work and the

assumptions and methodologies used. Regulatory and accounting industry

officials both told us that this skepticism often resulted from a lack of

understanding and education about each others’ work. Officials also said

this lack of understanding, along with problems in the banking industry

and regulators’ professional liability lawsuits against accounting firms,

have contributed to the failure of past efforts to improve cooperation

between auditors and examiners. They said these various circumstances

remain a significant barrier today.

Recent Initiatives May

Identify Specific

Areas of Overlap and

Help Improve

Cooperation Between

Examiners and

External Auditors

As we discussed in chapter 2, some of the regulatory agencies have

recently initiated programs to improve cooperation between external

auditors and examiners and potentially to identify areas where examiners

could better use the work of external auditors. Although, as we discussed

above, past efforts to promote cooperation between examiners and

external auditors were often unsuccessful, both regulatory officials and

officials from the accounting industry said they were more optimistic

about recent initiatives to promote cooperation. Regulatory officials said

current initiatives are more likely to be successful because the condition

of the industry is better than it was when past efforts were made. Also,

they said the current focus on reducing regulatory burden will help new

5

Thrifts are not required to have calendar year-ends for their fiscal years; therefore, auditors and

examiners can more easily coordinate their respective assessments to a period in closer proximity to

one another.

Page 100 GAO/GGD-97-23 Bank Oversight Structure
Appendix II 

External Audits of Banking Institutions

efforts. Furthermore, since the enactment of FDICIA, regulators have had

additional information and leverage—including the auditors’ attestations

and authority to review external auditors workpapers—that could help

these efforts be more successful.

Page 101 GAO/GGD-97-23 Bank Oversight Structure
Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

Three plans to reform the federal system of oversight of depository

institutions that have been proposed in the past 3 years include a proposal

put forward by the U.S. Department of Treasury (the administration’s

proposal),1

 a proposal of Representative James A. Leach (the Leach

proposal),2

 and an informal proposal of a former member of the Federal

Reserve Board (the LaWare proposal).3

 Each proposal sought to reduce

the number of agencies with rulemaking and supervisory authority over

banking organizations and reduce possible overlap and duplication in

regulation and supervision. None would change the current system of

regulating credit unions.4

The Administration’s

Proposal

Of the three proposals, the administration’s would result in the most

comprehensive change. It would realign the federal banking agencies by

core policy functions—that is, the bank supervision and regulation

function, central bank function, and deposit insurance function. Generally,

this proposal would combine most regulatory and supervisory duties of

OCC, FRS, FDIC, and OTS into a new independent agency, the Federal Banking

Commission (FBC). Under this proposal, FDIC would continue to be

responsible for administering federal deposit insurance, and FRS would

retain central bank responsibilities for monetary policy, liquidity lending,

and the payments system. Although FDIC and FRS would lose most bank

supervisory rulemaking powers, each would be allowed access to all

information of FBC as well as limited secondary or backup enforcement

authority.5

 In addition, FRS would be authorized to examine a cross-section

of large and small banking organizations jointly with FBC. FDIC would

continue to oversee activities of state banks and thrifts that could pose

risks to the insurance funds and maintain responsibility for resolving

failures of banking organizations at the least cost to those funds.

The governing board of the commission would consist of

1

This proposal was outlined in the statement of the Honorable Lloyd Bentsen, Secretary of the

Treasury, before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate (Mar. 1,

1994).

2

H.R. 1227: The Bank Regulatory Consolidation and Reform Act of 1993 (Mar. 4, 1993).

3

This proposal was outlined in the statement of Alan Greenspan, Chairman, Board of Governors of the

Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs of the U.S.

Senate (Mar. 2, 1994).

4

The Leach proposal leaves the regulation of credit unions with the National Credit Union

Administration but calls for regulations comparable to those imposed on banks and thrifts.

5

The Federal Reserve would receive backup enforcement authority to correct safety and soundness

problems at the nation’s 20 largest banking organizations, and FDIC would also retain backup

enforcement authority over all insured institutions.

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Description of Three Recent Bank Oversight

Reform Proposals

• a chairperson appointed by the President and confirmed by the Senate,

serving a 4-year term (both as a member and as chairperson) expiring on

the last day of March following a Presidential election;

• The Secretary of the Treasury (or the Secretary’s designee);

• a member of the Federal Reserve Board, designated by the Federal

Reserve; and

• two members appointed by the President and confirmed by the Senate,

serving staggered 5-year terms.

Table III.1: Basic Structure in the

Proposed Plan of the Administration Agency Responsibilities

FBC Supervises, regulates, and examines all federally insured banks and

thrifts and their holding companies, U.S. banks’ foreign operations, and

foreign banks’ U.S. operations.

FRS Examines a cross-section of large and small banking organizations

jointly with FBC.

FDIC Oversees activities of troubled state banks and thrifts; has backup

enforcement authority over all insured institutions.

Source: GAO analysis.

The Leach Proposal The Leach proposal would consolidate OCC and OTS in an independent

Federal Bank Agency (FBA) and align responsibilities among the new and

the other existing agencies. This would reduce the multiplicity of

regulators to which a single banking organization could be subject, while

avoiding the concentration of regulatory power of a single federal agency.

The role of FFIEC would be strengthened whereby it would see to the

uniformity of examination, regulation, and supervision among the three

agencies.

According to an analysis performed by the Congressional Research

Service, the Leach proposal would put FRS in charge of more than

40 percent of banking organization assets, with the rest divided between

the FBA and the reorganized FDIC.

6

 Thus, each of the three agencies would

be important regulators.

The proposed realignment of responsibilities is shown in table III.2.

6

CRS Report for Congress: Bank Regulatory Agency Consolidation Proposals: A Structural Analysis

(Mar. 18, 1994).

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

Table III.2: Alignment of

Responsibilities for Federal Agencies

Overseeing Banks and Thrifts Under

the Leach Proposal

Agency Responsibilities

FBA Federally chartered banks and savings institutions, unless otherwise

regulated.

Bank holding companies and affiliates whose lead bank is federally

chartered, except for those with assets over $25 billion.a

Savings and loan holding companies and affiliates whose principal

depository institution subsidiary is a federal savings association,

regardless of asset size.

FDIC State banks and their holding companies except for those with assets

over $25 billion and state-chartered savings institutions and their holding

companies, regardless of asset size.

FRS Bank holding companies with assets over $25 billion.a

aInternational banking regulation is split among the three agencies; see text of H.R. 1277 for

details.

Source: Congressional Research Service, March 1994.

The FBA would be led by an Administrator assisted by two deputy

administrators, one of whom would be specific for savings institutions.

The Administrator would be appointed for a 5-year term. All three

administrators would be appointed by the President with the advice and

consent of the Senate.

The LaWare Proposal The LaWare proposal was outlined in testimony to the Congress but never

presented as a formal legislative proposal, according to Federal Reserve

Board officials. It called for a division of responsibilities defined by

charter class, and, as in the other plans, a merging of OCC and OTS

responsibilities. As outlined in table III.3, the two primary agencies under

the proposal are an independent Federal Banking Commission

(FBC)—whose structure the LaWare proposal did not address—and FRS. FRS

would supervise all independent state banks and all depository institutions

in any holding company whose lead institution was a state-chartered bank.

FBC would supervise all independent national banks and thrifts and all

depository institutions in any banking organization whose lead institution

is a national bank or thrift. As with domestic bank holding companies, all

U.S. banks, branches and agencies of foreign banks would be supervised

and regulated according to the charter class of the largest depository

institution. FDIC would not examine financially healthy institutions, but

would be authorized to join in examination of problem banking

institutions. Based on estimates of assets of commercial banks and thrifts

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

performed by the Congressional Research Service, the LaWare proposal

would have nominally put FBC in charge of somewhat more commercial

bank assets than FRS.

Table III.3: Alignment of

Responsibilities for Oversight of

Banks and Thrifts Under the LaWare

Proposal

Agency Supervisory Responsibilitiesa

FBC All independent national banks and thrifts and all depository institutions

in any banking organization whose lead depository institution is a

national bank or thrift.

FRS All independent state banks and all depository institutions in any banking

organization whose lead depository institution is a state-chartered bank.

aThe supervisor would examine, take enforcement actions, establish operational rules, and act on

applications for all the depository institutions under its jurisdiction, regardless of the banks’

charter class.

Source: GAO analysis.

The LaWare proposal included two options for the regulation of bank

holding companies. The first option would retain FRS jurisdiction over all

holding companies and their nonbank affiliates.7

 The second option would

divide the jurisdiction of virtually all holding companies between FRS and

FBC on the basis of charter class of the lead bank. However, for systemic

risk reasons, jurisdiction over those holding companies and nonbank

affiliates of banking organizations that meet certain criteria—such as size

and payments and foreign activity—would be retained by FRS, even if the

lead bank of the organization had a national charter.8

A variant of the second option that the proposal discussed was to retain

FRS authority over permissible activities of all holding companies, with all

other authority being exercised by the regulator of the lead bank, except

for the 25 or 30 large organizations with lead national banks.9

The Congressional Research Service estimated regulatory power in terms

of assets of institutions supervised under each of these options. Under the

second holding company option, the balance of regulatory power could

7

The first option would result in two regulators for about 1,650 banking organizations, because the lead

bank has a national charter, of which 92 percent would be subject to very light FRS supervision

because the latter entities have no nonbank activities.

8

Under this approach, only about 25 to 30 organizations with lead national banks would have two

supervisors, depending on the criteria established. All other organizations would have only one

supervisor/regulator for the entire organization.

9

According to the proposal, this variant of the second option would retain some of the benefits of the

first option.

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

well go to FRS, although less so than under the first option, according to

the estimates.

Under both of the holding company options, FRS would retain supervision

and regulation of (1) all foreign banks that operate a bank, branch, agency,

or commercial lending affiliate in the United States and (2) all U.S.

nonbanking operations of these foreign banks. As with domestic bank

holding companies, all U.S. banks, branches and agencies of foreign banks

would be supervised and regulated according to the charter of the largest

depository operations.

The Number of

Federal Agencies

Proposed Differed

Although each of the proposals would have reduced the number of federal

agencies authorized to perform various oversight functions, the extent of

the proposed reductions differed. The variances in the number of

proposed agencies reflect differences of view regarding, among other

things, the number of federal agencies best suited to meet society’s goals

for a financial system.

Table III.4: Comparison of the Number

of Federal Bank Agencies in the Three

Reform Proposals

Number of agencies with

examination and

enforcement authority

Number of agencies with

rulemaking authority

Current system 4 4

Three reform proposals

Administration’s proposal 3 1

Leach proposal 3 3

LaWare proposal 2 2

Source: GAO analysis.

Federal Reserve Board officials have opposed the creation of a single

federal bank agency as adverse to three principles that the Federal

Reserve Board believes to be basic to any bank regulatory structure:

• To avoid the risks associated with the undue concentration of regulatory

power, there should be at least two federal regulators, one of which

should have macroeconomic responsibilities, because a single regulator

without such responsibilities would have a tendency to inhibit prudent

risk-taking by banks, thus limiting economic growth.

• The dual banking system—in which banks can be chartered by either the

states or the federal government—should be preserved because choice of

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

both charter and federal regulator facilitates the diversity of approach that

has made the U.S. banking system the most innovative in the world.

• As the nation’s central bank, FRS should continue to have direct, hands-on

involvement in supervision and regulation of a broad cross-section of

banking organizations in order to carry out its core central bank

responsibilities to insure the stability of the financial system, manage the

payment system, act as a lender of last resort, and formulate and

implement a sound monetary policy.

The Secretary of the Treasury, however, has said that

• regulatory power is not restrained by creating additional agencies to

perform duplicate functions; rather, an agency acts responsibly because it

is subject to congressional oversight, the courts, the press, and market

pressures—particularly from the nonbank financial services sector and

foreign bank regulators.

• nothing in the administration’s proposal would prevent an institution from

seeking a state, rather than a Federal, charter. Moreover, the Secretary of

the Treasury has said, arguments that preservation of the dual banking

system requires a choice between two or more federal regulators are really

arguments for retaining the ability for institutions to arbitrage federal

supervision. With regard to innovation, the Secretary of the Treasury said

competition among bank agencies is not needed to promote financial

product innovation, which is initiated in the marketplace—particularly by

nonbank financial service providers, foreign banks, and state banking

industries—and not by bank regulatory agencies.

• under the administration’s proposal, FRS would have ample bank

supervisory powers to perform its central bank functions, full authority to

manage the payments system and operate the discount window, and

abundant bank supervisory powers to guard against systemic risk.

The Proposals Differed in

Checks and Balances

The proposals differed in their provision of checks and balances to ensure

that banks are treated fairly. FRS officials recognized risks associated with

“undue concentration of regulatory power,” such as an increased

likelihood of sudden changes in policy that would add uncertainties and

instability to the banking system or actions that might inhibit prudent

risk-taking by banks, thus limiting economic growth. Both the LaWare and

the Leach proposals provide for multiple federal oversight agencies to

avoid concentration of regulatory power. Because the administration’s

proposal would put banking regulation in the hands of one agency, the

administration’s proposal would create the greatest concentration of

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

regulatory power, compared with the other proposals. However, the

Secretary of the Treasury has said that congressional oversight, the courts,

the press, and market pressures serve to ensure that agencies act

responsibly. Other mechanisms that would help ensure responsible

actions by the proposed single regulator, according to the Secretary of the

Treasury, are the composition of the FBC Board—with five members,

including a representative of FRS—and a requirement that there be a

political mix on the FBC Board.10

The Proposals Differed in

the Means Used to Balance

Independence and

Accountability

The three proposals differed in mechanisms related to the goal of

balancing the need for independence in regulatory action with

accountability to the electorate. The administration’s proposal would

establish FBC as an independent agency whose board would include a

representative of the Treasury Department. According to the Secretary of

the Treasury, the 5-member board would be of a manageable size that

would allow individual board members to be held accountable for their

decisions. In the Leach proposal, the executive branch would continue to

have a major regulatory agency housed in one of its departments, but FBA

would have to coordinate with the independent FRS and FDIC. The LaWare

proposal—which, as mentioned earlier, was outlined in congressional

testimony but never presented as a formal legislative proposal—did not

discuss details about the independence of the new Federal Banking

Commission or the composition or manner of determination of its

leadership. However, FRS is independent in its policymaking, and the

members of the Board of Governors are appointed by the President and

confirmed by the Senate.

The Proposals Differed In

the Supervisory/

Rulemaking Role Given

to the Central Bank

The proposals also differed in the roles that they assigned to FRS. Two of

the three proposals—the Leach proposal and the LaWare proposal—gave

FRS a primary supervisory and rulemaking role for the institutions under

FRS jurisdiction. The administration’s proposal provided FRS with

representation on the FBC board and opportunities to participate in various

bank examinations and backup enforcement authority.

The Chairman of the Federal Reserve Board has said that FRS must

continue to have hands-on involvement in supervision and regulation to

effectively carry out its macroeconomic responsibilities. Removing FRS

10The three appointed members of the commission would include the chairperson (specifically

appointed and confirmed as such), and two other appointed members. According to testimony

presented by the Secretary of the Treasury on March 1, 1994, “One of these two members must be from

another political party.”

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Appendix III 

Description of Three Recent Bank Oversight

Reform Proposals

from supervision and regulation would greatly reduce its ability to

forestall financial crises and to manage a crisis once it occurs, according

to the Chairman. FRS has also said that a central bank brings a unique and

invaluable perspective to regulation and it is far better situated than a

narrowly focused regulatory agency to see how bank regulation and

supervision relate to the strength of the payment system, the stability of

financial markets, and the health of the economy.

The Secretary of the Treasury has said that the contention that sound

monetary policy rests on FRS’s continued direct supervision of banks is not

credible because FRS already relies on other federal banking agencies for

much of the information it obtains. The Secretary also said that potential

conflicts exist between monetary policy and supervisory functions of FRS.

According to the Secretary of the Treasury, the administration’s plan

would satisfy the needs articulated by FRS for a significant supervisory role

and, at the same time, dramatically reduce the duplication and eliminate

the inconsistency inherent in the current supervisory system.

The Proposals Differed in

the Supervisory Role of the

Deposit Insurer

Under two of the three proposals (the administration’s proposal and the

LaWare proposal) FDIC’s supervisory role would be substantially reduced.

Under the administration’s proposal, FDIC would be relieved of its role as a

primary supervisor. However, FDIC would be able to conduct its own

special examinations of insured institutions where necessary to protect

the deposit insurance fund and take “backup” enforcement action to stop

unsafe practices if FBC does not do so. It also would retain its

responsibility as deposit insurer for overseeing activities of state banks

and thrifts that could pose risks to the insurance funds and resolving bank

and thrift failures at the least cost to the insurance funds. Under the Leach

proposal, FDIC was one of three supervisory and regulatory agencies.

Under the LaWare proposal, FDIC would be removed from examining

financially healthy institutions but authorized to join in examination of

problem institutions.

Page 109 GAO/GGD-97-23 Bank Oversight Structure
Appendix IV 

Comments From the Board of Governors of

the Federal Reserve System

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 110 GAO/GGD-97-23 Bank Oversight Structure
Appendix IV 

Comments From the Board of Governors of

the Federal Reserve System

Page 111 GAO/GGD-97-23 Bank Oversight Structure
Appendix IV 

Comments From the Board of Governors of

the Federal Reserve System

See comment 1.

Page 112 GAO/GGD-97-23 Bank Oversight Structure
Appendix IV 

Comments From the Board of Governors of

the Federal Reserve System

Page 113 GAO/GGD-97-23 Bank Oversight Structure
Appendix IV 

Comments From the Board of Governors of

the Federal Reserve System

The following are GAO’s comments on the Board of Governors of the

Federal Reserve System’s letter dated August 21, 1996.

GAO Comments 1. FRS described steps that the oversight agencies have taken to promote

consistency and strengthen coordination among the agencies. We have

added additional information on recent agency efforts to make uniform

regulations and guidelines to our discussion of interagency coordination

activities on pages 49 and 51 of our report.

Page 114 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 115 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

See comment 1.

Page 116 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

See comment 2.

See comment 3.

Page 117 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

See comment 4.

Page 118 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

Page 119 GAO/GGD-97-23 Bank Oversight Structure
Appendix V 

Comments From the Federal Deposit

Insurance Corporation

The following are GAO’s comments on the Federal Deposit Insurance

Corporation’s letter dated September 4, 1996.

GAO Comments 1. We agree with FDIC’s comments that coordination occurs among the

oversight agencies outside of the scope of FFIEC, and we described such

coordination mechanisms on page 51 of our report. Nevertheless, as noted

in our discussion of the agencies’ coordination, there remains the

opportunity for some inconsistency among regulators in examinations as

well as in interpreting, implementing, and enforcing regulations, which

could potentially be reduced with an expanded role for FFIEC.

2. We previously described FDIC’s efforts to improve communications and

coordination between examiners and external auditors in appendix II. We

also discussed examiners use of audit reports on page 97. Finally, we

discussed FDIC’s current requirement that examiners review selected

workpapers on page 44 of our report.

3. We have incorporated the information provided by FDIC on planned

efforts by FDIC to further improve cooperation with external auditors into

our discussion of FDIC’s initiatives on page 44 of our report.

4. We have included a summary of the information on off-site monitoring

provided by FDIC on page 41 of our report.

Page 120 GAO/GGD-97-23 Bank Oversight Structure
Appendix VI 

Comments From the Office of the

Comptroller of the Currency

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 121 GAO/GGD-97-23 Bank Oversight Structure
Appendix VI 

Comments From the Office of the

Comptroller of the Currency

See comment 1.

Page 122 GAO/GGD-97-23 Bank Oversight Structure
Appendix VI 

Comments From the Office of the

Comptroller of the Currency

See comment 2.

Page 123 GAO/GGD-97-23 Bank Oversight Structure
Appendix VI 

Comments From the Office of the

Comptroller of the Currency

The following are GAO’s comments on the Office of the Comptroller of the

Currency’s letter dated September 17, 1996.

GAO Comments 1. We agree with OCC that supervisory methods contribute to the overall

effectiveness of oversight structures and that the approach to supervision

is significantly different in each of the countries we studied. Although

Canada, France, Japan, and the U.K. all conduct on-site examinations to

some degree, the scope of their examinations differs from that in the

United States. Generally, the examinations done in the United States are

more transaction oriented. However, in Germany, the U.K., and to a lesser

degree in Canada, the work of external auditors provides a significant

amount of supervisory information that is generally received through

examinations in the United States. Additional detail on supervisory

practices in the five countries we studied can be found in the individual

country reports.1

2. OCC observed that our report is limited to the oversight structure as it

affects “banks” in the United States, which we have defined on pages 20 to

21 to include commercial banks and thrifts. OCC also observed that we do

not treat similar institutions in other countries as banks. Such institutions

were included in our discussions of the oversight structures in Canada,

France, Germany, and Japan. We did not include the supervision of

building societies—institutions that lend predominantly for house

purchases—in our discussion of the oversight structure in the U.K. because

(1) we considered these institutions to be significantly different from

banks in their activities and (2) building societies held a relatively small

percentage of depository institution assets.

OCC also observed that other providers of financial services such as credit

unions should be included in any consideration of changes to the oversight

structure. We agree that credit unions are classified as depository

institutions. However, as we noted on pages 4 and 34 of our report,

because credit unions hold only a small percentage of all depository

institution assets—about 5.5 percent—and the services they provide are

somewhat unique, we did not include them in our definition of “banks” for

the purposes of this report.

1

See Bank Regulatory Structure: The Federal Republic of Germany (GAO/GGD-94-134BR, May 9, 1991);

Bank Regulatory Structure: The United Kingdom (GAO/GGD-95-38, Dec. 29, 1994); Bank Regulatory

Structure: France (GAO/GGD-95-152, Aug. 31, 1995); Bank Regulatory Structure: Canada

(GAO/GGD-95-223, Sept. 28, 1995); and Bank Regulatory Structure: Japan, which is currently a draft

report.

Page 124 GAO/GGD-97-23 Bank Oversight Structure
Appendix VII 

Comments From the Office of Thrift

Supervision

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 125 GAO/GGD-97-23 Bank Oversight Structure
Appendix VII 

Comments From the Office of Thrift

Supervision

See comment 1.

See comment 2.

Page 126 GAO/GGD-97-23 Bank Oversight Structure
Appendix VII 

Comments From the Office of Thrift

Supervision

The following are GAO’s comments on the Office of Thrift Supervision’s

letter dated August 26, 1996.

GAO Comments 1. OTS provided examples of efforts by oversight agencies to promote

consistency in federal examinations and federal banking agency

supervision. We have added information on the conduct of joint

examinations and additional coordination of examinations on page 49 of

our report.

2. OTS noted that the federal banking agencies have collaborated on many

initiatives to enhance consistency among the oversight agencies. We have

added information on such efforts on page 51 of our report.

Page 127 GAO/GGD-97-23 Bank Oversight Structure
Appendix VIII 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Maja Wessels, Evaluator-in-Charge

Tamara Cross, Evaluator

Kristi Peterson, Evaluator

Desiree Whipple, Reports Analyst

Hazel Bailey, Writer-Editor

Office of General

Counsel, Washington,

D.C.

Paul Thompson, Attorney

Page 128 GAO/GGD-97-23 Bank Oversight Structure
Appendix VIII 

Major Contributors to This Report

Page 129 GAO/GGD-97-23 Bank Oversight Structure
Appendix VIII 

Major Contributors to This Report

Page 130 GAO/GGD-97-23 Bank Oversight Structure
Related GAO Products

Bank Regulatory Structure: Canada (GAO/GGD-95-223, Sept. 28, 1995).

Bank Regulatory Structure: France (GAO/GGD-95-152, Aug. 31, 1995).

Bank Regulatory Structure: The United Kingdom (GAO/GGD-95-38, Dec. 29,

1994).

Bank Regulatory Structure: The Federal Republic of Germany

(GAO/GGD-94-134BR, May 9, 1994).

Financial Derivatives: Actions Needed to Protect the Financial System

(GAO/GGD-94-133, May 18, 1994).

Financial Regulation: Modernization of the Financial Services Regulatory

System (GAO/T-GGD-95-121, Mar. 15, 1995). 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 Regulation: Regulatory Impediments to Small Business Lending

Should Be Removed (GAO/GGD-93-121, Sept. 7, 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).

Thrift Examination Quality: OTS Examinations Do Not Fully Assess Thrift

Safety and Soundness (GAO/AFMD-93-11, Feb. 16, 1993).

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

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

Page 131 GAO/GGD-97-23 Bank Oversight Structure
Related GAO Products

Bank Supervision: OCC’s Supervision of the Bank of New England Was Not

Timely or Forceful (GAO/GGD-91-128, Sept. 16, 1991).

(233435) Page 132 GAO/GGD-97-23 Bank Oversight Structure
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