Minority Banks: Regulators Need to Better Assess Effectiveness of Support Efforts
Published: 2006-10-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Minority banks can play an important role in serving the financial needs of historically underserved communities and growing populations of minorities. For this reason, the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established goals that the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) must work toward to preserve and promote such institutions (support efforts). To evaluate their efforts, as well as those of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, GAO (1) reviewed the profitability of minority banks, (2) identified the regulators' support and assessment efforts, and (3) obtained the views of minority banks on the regulators' efforts. GAO reviewed financial data from FDIC, interviewed regulators, and surveyed all minority banks.
section_title: What GAO Found
paragraphs: The profitability of most large minority banks (assets greater than $100 million) was nearly equal to that of their peers (similarly sized banks) in 2005 and earlier years. However, many small minority banks and African-American banks of all sizes were less profitable than their peers. GAO's analysis and other studies identified some possible explanations for these differences, including relatively higher loan loss reserves and operating expenses and competition from larger banks. Bank regulators have adopted differing approaches to supporting minority banks, but no agency has regularly and comprehensively assessed the effectiveness of its efforts. FDIC--which supervises over half of all minority banks--has the most comprehensive support efforts and leads interagency efforts. OTS focuses on providing technical assistance to minority banks. While not required to do so by Section 308 of FIRREA, OCC and the Federal Reserve have taken some steps to support minority banks and are planning others. Although FDIC has recently sought to assess the effectiveness of its support efforts through various methods, none of the regulators comprehensively surveys minority banks to obtain their views or has developed outcome-oriented performance measures. Consequently, the regulators are not well positioned to assess their support efforts. GAO's survey of minority banks identified potential limitations in the regulators' support efforts that would likely be of significance to agency managers and warrant follow-up analysis. Only about one-third of survey respondents rated their regulators' efforts for minority banks as very good or good, while 26 percent rated the efforts as fair, 13 percent as poor or very poor, and 25 percent responded "don't know." Banks regulated by FDIC were more positive about their agency's efforts than banks regulated by other agencies. However, only about half of the FDIC-regulated banks and about a quarter of the banks regulated by other agencies rated their agency's efforts as very good or good. Although regulators may emphasize the provision of technical assistance to minority banks, less than 30 percent of such institutions have used such agency services within the last 3 years and therefore may be missing opportunities to address problems that limit their operations or financial performance.

section_title: Letter
paragraphs: Minority banks are a small community within the banking industry,  accounting for about 2 percent of all financial institutions and total  industry assets. Despite their small numbers, minority banks can play an  important role in serving the financial needs of historically underserved  communities, such as African-Americans, and growing populations of  minorities, such as Hispanic-Americans and Asian-Americans. For this  reason, Section 308 of the Financial Institutions Reform, Recovery, and  Enforcement Act of 1989 (FIRREA) established goals that federal  regulators must work toward to preserve and promote such institutions.  For example, the Federal Deposit Insurance Corporation (FDIC) and the  Office of Thrift Supervision (OTS), in consultation with the Department of  the Treasury (Treasury), are required to provide minority banks with  technical assistance and training and educational programs and to work  toward preserving the character of minority banks in cases involving  mergers or acquisitions of these institutions (we refer to these activities as  efforts to support minority banks in our report).
In 1993, we reported on efforts by Treasury, FDIC, and OTS to support  minority banks in accordance with Section 308 of FIRREA. At that time,  we found that these agencies had taken steps to respond to Section 308,  but minority banks we interviewed gave FDIC and OTS mixed reviews on  their efforts. In particular, minority banks were concerned that the  regulators did not provide adequate technical assistance. Further, minority  banks expressed concerns about related regulatory issues, including their  view that agency safety and soundness examiners did not fully understand  the unique challenges their institutions faced. We recommended that  FDIC and OTS periodically survey minority banks to assess the  effectiveness of their efforts to support such institutions.
You requested that we follow up on our 1993 report and review all of the  federal banking regulators’ efforts to support minority banks, including the  activities of the Office of the Comptroller of the Currency (OCC) and the  Board of Governors of the Federal Reserve System (Federal Reserve),  which are not subject to Section 308 of FIRREA. Accordingly, our  reporting objectives were to (1) review the profitability of minority banks  over time, (2) identify the federal banking regulators’ efforts to support  minority banks and determine whether the regulators were evaluating the  effectiveness of these efforts, and (3) obtain the views of minority banks  on the federal regulators’ minority banking support efforts and related  regulatory issues.
To address the first objective, we obtained and analyzed financial data for  minority banks from FDIC for 2005, 2000, and 1995. We also reviewed  background literature and conducted interviews with minority banks to  discuss the business environment in which these banks operate. For the  second objective, we interviewed officials from the Department of the  Treasury, FDIC, Federal Reserve, OCC, and OTS and reviewed regulators’  documentation addressing their efforts to support minority banks and  assess the effectiveness of these efforts. We also compared the regulators’  efforts to our standards for program assessment and performance  measures and those established in the Government Performance and  Results Act. To address the third objective, we conducted a Web-based  survey of all institutions identified by the banking regulators as minority  institutions. The survey, which was conducted from March through April  2006, asked about the banks’ awareness and use of the regulators’ minority  bank support efforts and also asked the banks to rate these efforts. We  received 149 survey responses out of a total population of 195 minority  banks, for a response rate of 76 percent. We also interviewed relevant  trade associations and a sample of 19 minority banks throughout the  United States that we selected based on type of minority ownership and  primary regulator. Appendix I explains our scope and methodology in  greater detail. Appendix II describes each regulator’s definition of  minority-owned and women-owned banks for purposes of eligibility for  participation in the regulator’s particular minority banking support efforts.  Appendix III provides the number of minority banks that responded to  each survey question discussed in the report and thereby supplements the  use of percentages to summarize these results. All survey questions and  the frequencies of responses to each question are presented in a  supplemental product that can be found on our Web site at  www.gao.gov/cgi-bin/getrpt?GAO-07-7SP.
We conducted our work in Washington, D.C., and New York from  December 2005 to September 2006 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Many minority banks are located in urban areas and seek to serve  distressed communities and populations that have traditionally been  undeserved by financial institutions. For example, after the Civil War  banks were established to provide financial services to African-Americans.  More recently, Asian-American and Hispanic-American banks have been  established to serve the rapidly growing Asian and Hispanic communities  in the United States. In our review of regulators’ lists of minority banks,  we identified a total minority bank population of 195 for 2005 (table 1).
Table 2 shows that the distribution of minority banks by size is similar to  the distribution of all banks by size. More than 40 percent of all minority  banks had assets of less than $100 million.
Each federally insured depository institution, including each minority  bank, has a primary federal regulator: FDIC, OTS, OCC, or the Federal  Reserve. The primary regulator for each bank is determined by the  institution’s charter (table 3).
As shown in table 4, FDIC serves as the federal regulator for over half of  minority banks—109 out of 195 banks, or 56 percent—and the Federal  Reserve regulates the fewest.
The primary responsibilities of federal banking regulators include helping  to ensure the safe and sound practices and operations of the institutions  they oversee, the stability of financial markets, and compliance with laws  and regulations. To achieve these goals, among other activities, the  regulators conduct on-site examinations, issue regulations, conduct  investigations, and take enforcement actions. Regulators may also close  banks that are deemed to be insolvent and pose risks to the Deposit  Insurance Fund. FDIC is responsible for ensuring that deposits in failed  banks are protected up to established federal deposit insurance limits.
Banking regulators primarily focus on ensuring the safety and soundness  of banks, but laws and regulatory policies can identify additional goals and  objectives. Recognizing the importance of minority banks, under Section  308 of FIRREA, Congress outlined five broad goals that FDIC and OTS, in  consultation with Treasury, are to work toward to preserve and promote  minority banks. These goals are    preserving the present number of minority banks;    preserving their minority character in cases involving mergers or  acquisitions of minority banks;   providing technical assistance to prevent the insolvency of institutions  that are not currently insolvent;   promoting and encouraging the creation of new minority banks; and    providing for training, technical assistance, and educational programs.
Technical assistance is typically defined as one-on-one assistance that a  regulator may provide to a bank in response to a request. For example, a  regulator may advise a bank on compliance with a particular statute or  regulation. Regulators may also provide technical assistance to banks that  is related to deficiencies identified in safety and soundness or compliance  examinations. In contrast, educational programs are typically open to all  banks regulated by a particular agency or to all banks located within a  regulator’s regional office. For example, regulators may offer training for  banks to review compliance with laws and regulations.
section_title: Larger Minority Banks Showed Profitability Close to That of Their Peers and Historical Benchmarks, but Many Small and African-American Banks Have Been Less Profitable
paragraphs: Most minority banks with assets exceeding $100 million were nearly as  profitable—measured by ROA—as their peers in 2005 as well as in earlier  years, or had levels of profitability that have historically been considered  adequate, according to our analysis of FDIC data. However, small minority  and African-American banks of all sizes (which together account for about  half of all minority institutions) have been significantly less profitable than  their industry peers. Our analysis and other research has suggested some  possible reasons for lower profitability among some small minority banks  and African-American banks, such as higher reserves for potential loan  losses and higher operating expenses. The results of other studies we  reviewed were consistent with these findings, and minority banks that we  spoke with offered additional explanations, such as the effects of  increased competition from larger banks. However, overall officials from  banks across all minority groups were positive about the financial outlook  of their institutions. Many found their minority status to be an advantage  in serving their communities—for example, in communicating with  customers in their primary languages.
subsections: section_title: Small and African- American Banks’ Profitability Was Lower than That of Peers
paragraphs: As shown in figure 1, most minority banks with assets exceeding $100  million had ROAs in 2005 that were close to those of their peer groups,  while many smaller banks had ROAs that were significantly lower than  that of their peers. Minority banks with more than $100 million in assets  accounted for 58 percent of all minority banks, while those with less than  $100 million accounted for 42 percent. Each size category of minority  banks with more than $100 million in assets had a weighted average ROA  that was slightly lower than that of its peers, but in each case their ROAs  exceeded 1 percent. By historical banking industry standards, an ROA of  1 percent or more has generally been considered an adequate level of  profitability. We found that of these larger minority banks, Hispanic- American, Asian-American, Native American, and women-owned banks  were close to, and in some cases exceeded, the profitability of their peers  in 2005.
Overall, small minority banks (those with assets of less than $100 million)  had an average ROA of 0.4 percent, and their peers had an average ROA of  1 percent. Our analysis of FDIC data for 1995 and 2000 also indicated some  similar patterns, with minority banks with assets greater than $100 million  showing levels of profitability that were generally close to those of their  peers, or ROAs of about 1 percent, while minority banks with assets of less  than $100 million showed greater differences with their peers. Further, in  2000 the Chairman of FDIC discussed the agency’s finding that many small  minority banks lagged in profitability. According to FDIC’s analysis, nearly  70 percent of small minority banks reported an ROA in 1999 of under 1  percent, and nearly 40 percent reported an ROA of less than half the  industry average.
Among small minority banks, African-American, Asian-American, and  Hispanic-American banks had ROAs that were significantly lower than  those of their peers, while the ROAs of small Native American and women- owned banks were closer to those of their peers (fig. 2). For example, the  ROA for small Asian-American banks in 2005 was 0.10 percent and  Hispanic-American banks’ ROA was 0.65 percent, compared with their  peers’ ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000  showed similar results, with small African-American, Asian-American, and  Hispanic-American banks in particular having significantly lower ROAs  than their peers.
The profitability of African-American banks has generally been below that  of their peers in all size categories (fig. 3). African-American banks with  less than $100 million in assets—which constitute 61 percent of all  African-American banks—had an average ROA of 0.16 percent, while their  peers averaged 1.0 percent. Similarly, African-American banks with assets  of between $100 million and $300 million—which constituted 26 percent of  all African-American banks—had ROAs that were 75 percent lower than  those of their peers. While profitability improved among larger categories,  the profitability of African-American banks with assets of $300 million or  more was lower than that of their peers. Our analysis of FDIC data for  2000 and 1995 also found that African-American banks of all sizes had  lower ROAs than their peers. For example, in 2000 African-American  banks with assets of between $100 million and $300 million had an average  ROA that was about half of their peers’ average of 1.2 percent.
section_title: Higher Loan Loss Reserves, Operating Costs, and Increased Competition May Help Explain Lower Profitability of Certain Minority Banks
paragraphs: Our analysis of 2005 FDIC data suggests some possible reasons for the  differences in profitability between some minority banks and their peers.  For example, our analysis of 2005 FDIC data showed that African- American banks with assets of less than $300 million—which constitute 87  percent of all African-American banks—had significantly higher loan loss  reserves as a percentage of their total assets than the average for their  peers (fig. 4). Although having higher loan loss reserves may be  necessary for the safe and sound operation of any particular bank,  because loan loss reserves are counted as expenses, higher reserves lower  bank profits. Most Asian-American, Hispanic-American, Native American,  and women-owned banks had loan loss reserves that were closer to the  average for their peer group in 2005.
We also found some evidence that higher operating expenses may affect  the profitability of some minority banks. Operating expenses— expenditures for items such as administrative expenses and salaries—are  typically compared to an institution’s total earning assets, such as loans  and investments, to indicate the proportion of earning assets banks spend  on operating expenses. As figure 5 indicates, many minority banks with  less than $100 million in assets had higher operating expenses than their  peers in 2005. Specifically, the average ratio of minority banks’ operating  expenses to earning assets was 4.88 percent, compared with an average  3.86 percent for the peer group, or a difference of 21 percent.
Small African-American and Asian-American banks had higher operating  expenses than their peers (41 and 20 percent higher, respectively), while  operating expenses for small Hispanic-American banks were closer to  their peers (7 percent higher). Data on the operating expenses of small  women-owned banks were lower than their peers, while Native American  banks had higher operating expenses, although, as we have seen, both  Native American and women-owed banks were the most profitable of  small minority banks. Because larger African-American banks were  relatively less profitable than their peers, we also reviewed FDIC data on  their operating expenses in 2005. The FDIC data indicate that African- American banks with assets of between $100 million and $500 million had  operating expense ratios that exceeded those of their respective peer  groups by 20 percent or more. Other studies corroborated our findings  that some minority banks operate in more challenging markets and may  face higher operating costs.
Officials from several minority banks we contacted also described aspects  of their operating environments and business practices, including a focus  on customer service that could result in higher operating costs. In  particular, the officials cited the costs associated with providing banking  services in low-income urban areas or in communities with high immigrant  populations. Bank officials also told us that they focus on fostering strong  customer relationships, sometimes providing financial literacy services.  Consequently, these banks spend more time and resources on their  customers per transaction than other banks as part of their mission. Other  minority bank officials said that their customers made relatively small  deposits and preferred to do business in person at bank branch locations  rather than through potentially lower-cost alternatives, such as over the  phone or the Internet.
Along with these factors, minority bank officials we contacted cited other  factors that could limit their profitability. First, many minority banks  indicated competition from larger banks, credit unions, and nonbanks as  their institution’s greatest challenge. In particular, minority bank officials  said that larger banks, in response to Community Reinvestment Act (CRA)  incentives, were increasingly posing competitive challenges among the  banks’ traditional customer base. The bank officials said that larger  banks could offer loans and other financial products at more competitive  prices because these banks could raise funds at lower rates and had  advantageous operational efficiencies. Second, some African-American,  Asian-American, and Hispanic-American banks cited attracting and  retaining quality staff as a challenge to profitability. Officials from one  Hispanic-American bank said that the difficulty of attracting qualified new  staff restricted the bank’s growth. An Asian-American banker said that  many Asian-American banks tended to focus on the Asian-American  market, potentially limiting the pool of qualified applicants.
Despite these challenges, officials from banks across minority groups were  optimistic about the financial outlook for their institutions. When asked in  our survey to rate their financial outlook compared to those of the past 3  to 5 years, 65 percent said it would be much or slightly better; 21 percent  thought it would be about the same, and 11 percent thought it would be  slightly or much worse, while 3 percent did not know. Officials from  minority banks said that their institutions had advantages in serving  minority communities. For example, officials from an Asian-American  bank said that the staff’s ability to communicate in customers’ primary  language provided a competitive advantage.
section_title: Regulators Adopted Differing Approaches to Supporting Minority Banks, but Assessment Efforts Were Limited
paragraphs: FDIC has established the most comprehensive efforts among the bank  regulators to support minority banks and also leads interagency efforts to  coordinate agencies’ activities. OTS also has developed several specific  initiatives to support minority banks. While not required to do so by  Section 308 of FIRREA, OCC and the Federal Reserve have taken some  steps to support minority banks, such as holding occasional conferences  for Native American banks, and are planning additional efforts. Treasury,  which FIRREA stipulates is to consult with FDIC and OTS on preserving  minority banks, no longer does so on a routine basis, but Treasury officials  told us that the agency does confer with the banking agencies on an as- needed basis. Although recently FDIC has proactively sought to assess the  effectiveness of its efforts to support minority banks, none of the  regulators routinely survey institutions they regulate to obtain  comprehensive performance information on their minority bank efforts,  nor have they established outcome-oriented performance measures to  gauge results in relation to pre-established targets. As a result, the  regulators are not well positioned to assess the results of their efforts to  support minority banks or identify potential areas for improvement.
subsections: section_title: FDIC Has the Most Comprehensive Minority Banking Support Efforts
paragraphs: Of the four banking regulators, FDIC—which supervises 109 of 195  minority banks—has developed the most extensive efforts to support such  institutions (fig. 6). FDIC also has taken the lead in coordinating  regulators’ efforts in support of minority banks, including leading a group  of all the banking regulators that meets semiannually to discuss individual  agency initiatives, training and outreach events, and each agency’s list of  minority banks. FDIC and OTS have established national and regional  coordinators to implement their policies to support minority banks and  provide routine technical and other outreach procedures for the  institutions that they regulate. OCC officials we contacted said that they  believed that minority banks could play an important role in providing  financial services to minorities and other groups, and Federal Reserve  officials told us that they adhered to the spirit of Section 308 of FIRREA.  While neither agency has developed support efforts designed specifically  for all the minority institutions that they regulate, both agencies provide  technical assistance and educational services to minority banks upon  request, as they do for all of their supervised banks, and have undertaken  efforts in support of some types of minority banks. Both agencies also told  us that they were planning additional efforts to support minority  institutions.
The following briefly describes the regulators’ minority bank support  programs, as listed in figure 6.
subsections: section_title: Policy Statements
paragraphs: FDIC, OTS, and OCC all have policy statements that outline the agencies’  efforts with respect to minority banks. The policy statements discuss how  the regulators identify minority banks, participate in minority bank events,  provide technical assistance, and work toward preserving the character of  minority banks during the resolution process. OCC officials told us that  they developed their policy statement in 2001 after an interagency meeting  of the federal banking regulators on minority bank issues. Both FDIC and  OTS issued policy statements in 2002.
section_title: Staffing Structure
paragraphs: FDIC has a national coordinator in Washington, D.C., and coordinators in  each regional office from its Division of Supervision and Consumer  Protection to implement the agency’s minority bank program. Among  other responsibilities, the national coordinator regularly contacts minority  bank trade associations about participation in events and other issues,  coordinates with other agencies, maintains FDIC’s list of all insured banks  that are considered to be minority under the agency’s definition, and  compiles quarterly reports for the FDIC chairman based on regional  coordinators’ reports on their minority bank activities. Similarly, OTS has  a national coordinator in its headquarters and supervisory and community  affairs staff in each region who maintain contact with the minority banks  that OTS regulates. The national coordinator participates in the  interagency coordination meetings with the other banking regulators and  works with the regional community affairs staff to compile the agency’s  annual report to Congress on minority bank issues. OCC and the Federal  Reserve do not have similar structures in place. However, OCC does have  an agency ombudsman who maintains contact with minority banks and a  senior adviser for external outreach and minority affairs who participates  in the interagency coordination meetings. Officials from the Federal  Reserve—which directly supervises the fewest number of minority  banks—told us that Federal Reserve staff at the district level maintain  frequent contact with minority banks under their purview and Federal  Reserve staff participate in interagency coordination meetings.
section_title: Web Pages
paragraphs: FDIC has a public Web page dedicated specifically to minority banking  issues that includes FDIC’s list of all minority banks, staff contacts, links  to trade associations and other relevant sites, and a link to provide  feedback on FDIC’s minority banking efforts. FDIC officials told us that  the feedback link has been on their Web page since 2002 but that the  agency rarely receives feedback from minority banks. FDIC is planning to  improve its Web page by adding a link to FDIC’s home page and additional  resources, including research highlighting issues relevant to minority  banks.
OCC also has a Web page that contains some information on minority  bank issues. The Web site containing this page, BankNet, is available to  registered national banks. OCC’s Web site is not as extensive as FDIC’s but  does contain a list of minority banks that OCC regulates, links to OCC’s  minority bank policy statement, and a comparative analysis tool to  compare the financial performance of minority banks with that of their  peers.
section_title: Minority Bank Events and Training
paragraphs: FDIC has taken the lead role in sponsoring, hosting, and coordinating with  the other regulators events in support of minority banks. These events  have included    A national conference in 2001, which was attended by about 70 minority  banks supervised by different banking regulators and in which all four  banking regulators participated. Participants discussed challenges, shared  best practices, and evaluated possible actions regulators could take to  preserve minority banks.
In August 2006, FDIC sponsored a national conference for minority banks  in which representatives from OTS, OCC, and the Federal Reserve  participated.
Regional forums and conferences, which were organized after 2002 to  follow up on the national conference and implement initiatives set forth in  FDIC’s 2002 policy statement. FDIC officials told us that these events are  held annually by each of their regional offices. The content of these events  has varied among regions, but has included issues relating to safety and  soundness and compliance examinations, community affairs, deposit  insurance, and FDIC’s minority banking program. Representatives from  other banking agencies have participated in these events.
The Minority Bankers Roundtable (MBR) series, which FDIC officials told  us was designed to provide insight into the regulatory relationship  between minority banks and FDIC and explore opportunities for  partnerships between FDIC and these banks. In 2005, FDIC held six  roundtables around the country for minority banks supervised by all of the  regulators.
Other regulators have also held events in support of minority banks. For  example:  In May 2006, the Director, Deputy Director, and the Northeast Regional  Director of OTS held a meeting in New York in which all of the OTS- regulated minority banks in the region participated. The issues discussed  included ways to strengthen community development and investment  activities and partnerships with community-based organizations, and other  issues of concern.
In 2002, OCC held a forum with the North American Native Bankers  Associations and a Native American bank and have created publications  on banking in Native American communities. In February 2006, OCC held  an event for several chief executive officers from African-American  national banks to meet with OCC’s Executive Committee and the  Comptroller of the Currency to discuss the challenges these banks faced.
Federal Reserve banks have hosted workshops and other events for Native  American banks, as well as produced publications on Native American  banking.
Outside of the customary training and educational programs that  regulators make available to all banks, FDIC is the only regulator to  convene training sessions only for minority banks (including minority  banks not regulated by FDIC) that the banks may attend free of charge.  FDIC officials told us that the agency’s regional offices have held several  such training sessions on an as-needed basis or when suggested at  minority bank events. For example, FDIC’s Dallas regional office has  conducted 1-day seminars in 2004 and 2005 specifically for minority banks  that included presentations on compliance, the Bank Secrecy Act and anti- money-laundering issues, and economic and banking conditions.
section_title: Technical Assistance and Other Outreach Procedures
paragraphs: All of the federal banking regulators told us that they provided their  minority banks with technical assistance if requested, but only FDIC and  OTS have specific procedures for offering this assistance. More  specifically, FDIC and OTS officials told us that they proactively seek to  make minority banks aware of such assistance through established  outreach procedures outside of their customary examination and  supervision processes. FDIC also has a policy that requires its regional  coordinators to ensure that examination case managers contact minority  banks 90 to 120 days after an examination to offer technical assistance in  any problem areas that were identified during the examination. This policy  is unique to minority banks. As part of their quarterly reports to  headquarters, FDIC regional coordinators report on how many offers of  technical assistance they have made to minority banks and how many  banks requested the assistance. More generally, FDIC staff contact the  minority banks they supervise at least once a year to offer to have a  member of regional management meet with banks’ board of directors and  to familiarize the institutions with FDIC’s initiatives.
OTS officials told us that technical assistance is the focus of their minority  banks efforts. According to the agency’s policy statement, OTS monitors  the financial condition of minority banks to identify those that might  benefit from a program of increased support and technical assistance. OTS  regional staff contact minority banks they supervise annually to make  them aware of their minority bank efforts and to offer to meet with the  banks’ boards of directors to discuss issues of interest and types of  assistance OTS can provide.
Additionally, FDIC and OTS officials told us that they have taken proactive  steps to assist individuals or groups that have filed applications for deposit  insurance or to acquire a national thrift charter. FDIC officials said that  they had developed a package of assistance to help smaller institutions,  including many minority banks, overcome challenges associated with the  FDIC insurance application process. OTS officials said that they had  provided substantial assistance to a minority group that filed to acquire a  national thrift charter and had extended established application deadlines  to assist the group. FDIC officials said that the agency interprets FIRREA’s  general goal to “promote and preserve” minority banks as a charge to  support those minority banks already in existence or those that have filed  deposit insurance applications rather than as a charge to actively seek out  minority groups or individuals to form new banks. FDIC officials  explained that the agency was an insurer, not a chartering authority, and  that it would probably be inappropriate to encourage potential applicants  to choose one banking charter over another. OTS officials told us that the  agency currently does not promote the thrift charter to any groups but is  considering the extent to which it might do so in the future.
OCC and the Federal Reserve provide technical assistance to all of their  banks, but they currently have not established outreach procedures for all  their minority banks outside of the customary examination and  supervision processes. However, OCC officials told us that the agency  would be designing an outreach plan for all of OCC’s minority banks this  fiscal year. Federal Reserve officials told us that Federal Reserve districts  conduct informal outreach to their minority banks and consult with other  districts on minority bank issues as needed. The officials said that four  reserve banks had begun a pilot outreach program specifically tailored to  minority banks that would include technical assistance, training, advisory  visits, and ongoing analysis. Staff are in the process of conducting  interviews with minority banks to obtain input on their draft program.
OCC and Federal Reserve officials told us that, like FDIC and OTS, their  agencies also provided assistance to minority groups during the  application process and that they put forth extra effort in certain cases.  For example, Federal Reserve officials told us that they had recently  assisted 15 sovereign tribal nations in establishing a Native American  bank. And like FDIC and OTS, neither OCC nor the Federal Reserve seeks  out individuals to form either minority or nonminority banks. OCC agency  officials said it would not be appropriate for their agency to do so, and  Federal Reserve officials told us that it was not within their jurisdiction to  do so, as they did not have authority to charter banks. The Federal  Reserve, however, has conducted activities such as providing information  to Native American, Muslim, and Asian-American communities on entering  the banking business.
section_title: Policies to Preserve the Minority Character of Troubled Banks
paragraphs: FDIC has developed policies for failing banks that are consistent with  FIRREA’s requirement that the agency work to preserve the minority  character of minority banks in cases of mergers and acquisitions. For  example, FDIC maintains a list of qualified minority banks or minority  investors that may be invited to bid on the assets of troubled minority  banks that are expected to fail. Officials from several minority banks we  contacted said that FDIC had invited them to bid on failing minority banks.  However, as we pointed out in our 1993 report, FDIC is required to accept  the bids on failing banks that pose the lowest expected cost to the Deposit  Insurance Fund. As a result, all bidders, including minorities, are subject  to competition. FDIC provided us with a list of minority banks that had  failed from 1990 to 2005. Of the 20 minority banks that failed during this  period, 12 were acquired by nonminority banks and 5 by minority banks,  while 3 were resolved through deposit payoffs. According to FDIC, the  most recent failures of minority banks were two institutions in 2002,  neither of which retained its minority status.
OTS and OCC’s policy statements on minority banks describe how the  agencies are to work with FDIC to identify qualified minority banks or  minority investors to acquire minority banks that are failing. Federal  Reserve officials told us that they do not have a similar written policy,  given the small number of minority banks the agency supervises. However,  agency officials said that they work with FDIC to identify qualified  minority banks or investors to acquire failing minority banks.
Officials from the four banking agencies said that they also tried to assist  troubled minority banks to help improve their financial condition before a  bank deteriorated to the point at which a resolution through FDIC was  necessary. For example, officials from OCC, Federal Reserve, and OTS  said that they provided technical assistance to such institutions or tried to  identify other minority banks or investors that might be willing to acquire  or merge with them.
section_title: Treasury No Longer Regularly Consults with Regulators on Minority Bank Issues but Does Consult on an As-Needed Basis
paragraphs: Section 308 of FIRREA required the Secretary of the Treasury to consult  with FDIC and OTS to determine the best methods for meeting FIRREA’s  goals in support of minority banks. In 1993, we reported that Treasury  initially convened interagency meetings to facilitate communication  among the federal banking regulators on minority banking issues.  Treasury convened four such meetings between 1990 and 1993 at which  regulators exchanged ideas, discussed policies regarding minority banks,  and worked to coordinate their efforts. However, during our work for this  report, Treasury officials said that the department no longer convened or  participated regularly in interagency discussions on minority banking  issues, although it still consulted with the federal banking regulators as  issues arose. Treasury officials explained that while the nature of the  FIRREA consulting requirement could be open to some interpretation,  given that Treasury had discontinued formal consultations in 1993, the  general view within the department is that ongoing consultations were not  required. Further, Treasury officials said the department’s authority to  assist the banking regulators in preserving the minority character of failing  minority banks was limited by federal legislation that prohibits the  Secretary of the Treasury from intervening in matters or proceedings that  are before the Director of OTS or the Comptroller of the Currency, unless  otherwise specifically provided by law. According to these officials,  Section 308 of FIRREA does not override this prohibition, which is also  consistent with Treasury’s policy not to intervene in case-specific matters  before the banking agencies.
section_title: Regulators Do Not Assess Efforts through Comprehensive Surveys or Outcome-Oriented Performance Measures
paragraphs: While FDIC has recently been proactive in assessing its support efforts for  minority banks, none of the regulators have routinely and  comprehensively surveyed their minority banks on all issues affecting the  institutions, nor have the regulators established outcome-oriented  performance measures. Evaluating the effectiveness of federal programs is  vitally important in order to manage programs successfully and improve  program results. To this end, in 1993 Congress enacted the Government  Performance and Results Act, which instituted a governmentwide  requirement that agencies report on their results in achieving their agency  and program goals. Agencies can evaluate the effectiveness of their  efforts by establishing performance measures or through program  evaluation. Performance measures are established in order to assess  whether a program has achieved its objectives and are expressed as  measurable, quantifiable indicators. Outcome-oriented performance  measures assess a program activity by comparing it to its intended  purpose or targets. Program evaluations are systematic studies that are  conducted periodically to assess how well a program is working. In our  1993 report, we recommended that FDIC and OTS periodically survey  minority banks that they regulate to help assess their support efforts.  Surveys are an instrument by which agencies may assess their efforts and  obtain feedback from the recipients of their efforts on areas for  improvement.
As part of its assessment methods, FDIC has recently conducted  roundtables and surveyed minority banks on aspects of its minority bank  efforts, as follows:  In 2004, in response to an FDIC Corporate Performance Objective to  enhance minority bank outreach efforts, FDIC completed a review of its  minority bank outreach program that included a survey of 20 minority  banks from different regulators. Seven banks responded. On the basis of  the 2004 review, FDIC established the MBR program to gain insights into  issues affecting minority banks and obtain feedback on its efforts.
In 2005, FDIC requested feedback on its minority bank efforts from  institutions that attended the agency’s six MBRs (which approximately  one-third of minority banks attended). The agency also sent a survey letter  to all minority banks to seek their feedback on several proposals to better  serve such institutions, but only 24 minority banks responded. The  proposals included holding another national minority bank conference,  instituting a partnership program with universities, and developing a  minority bank museum exhibition. FDIC officials said that they used the  information gathered from the MBRs and the survey to develop  recommendations for improving programs and developing new initiatives.
According to FDIC officials, these recommendations, which have been  approved and are expected to be implemented by the end of 2006, include    enhancing the agency’s minority bank Web page by (1) adding a link to  FDIC’s home page, (2) including a calendar of minority bank events,  and (3) adding more resource links, such as links to research  highlighting issues relevant to minority banks;    hosting another national conference for minority banks—the  conference was held in August 2006;    continuing the MBR series and hosting six more roundtables in 2006;  instituting the University Partnership Program, through which FDIC  and minority bank staff would advise and lecture at universities that  have an emphasis on minority student enrollment. The goals of the  program include enhancing recruiting efforts for minority banks and  FDIC and increasing students’ knowledge base of banking in general  and minority banks in particular.
While recently FDIC has taken steps to assess the effectiveness of its  minority bank support efforts, we identified some limitations in the  agency’s approach. For example, in its surveys of minority banks, the  agency did not solicit feedback on key aspects of its support efforts, such  as the provision of technical assistance. Moreover, FDIC has not  established outcome-oriented performance measures to gauge the  effectiveness of its various support efforts. As discussed previously, in its  quarterly reports FDIC has provided output measures that track the  number of technical assistance offers it makes to minority banks and the  number of banks making use of the assistance. FDIC also requires regional  case managers to follow up with minority banks 90 to 120 days after  examinations to offer technical assistance to address deficiencies that  have been identified in examinations. However, FDIC does not report  agencywide on the extent to which minority banks are able to resolve any  deficiencies found during the examination process.
FDIC officials told us while the agency has not conducted surveys  regarding technical assistance or developed related performance  measures, technical issues may be resolved during the course of the  examination process. Further, FDIC officials said that throughout the  examination process and through other agency contacts, minority banks  may informally provide feedback on the effectiveness of any assistance  provided. However, without surveys or agencywide outcome-oriented  performance measures, FDIC management may lack comprehensive and  reliable information necessary to help ensure that agency staff provide  effective technical assistance to minority banks to help them resolve  problems identified in examinations or through other means. Further, the  public and stakeholders, such as Congress, may not be informed as to the  effectiveness of the agency’s technical assistance, as well as other efforts  in support of minority banks.
In 1994-1995, OTS interviewed the 40 minority banks that it regulated to  obtain their views on the agency’s support efforts. The interviews covered  topics such as the banks’ overall impressions of the agency’s efforts,  technical assistance, and application issues and asked for suggestions for  improving OTS’s efforts to support minority banks. However, OTS has not  conducted a similar effort since that time. OTS officials told us that in 2003  and 2004 the agency conducted surveys of all OTS-regulated institutions  and that a 2006 survey is in process. Because of restrictions imposed by  the Office of Management and Budget on the amount of information that  can be collected from institutions, OTS officials told us that they surveyed  all of their banks at the same time. The surveys solicited feedback on  OTS’s examination process and provided opportunities for banks to make  suggestions for improving OTS’s operations. While OTS officials stated  that the results from these surveys could be sorted by minority status, and  has plans to do so and use the information for program enhancement, such  analysis has not been conducted.
As required under Section 3 of FIRREA, OTS provides annual reports to  Congress that, among other things, track technical assistance offers made  to minority banks. But OTS has also not established quantifiable outcome- oriented measures to gauge the quality and effectiveness of technical  assistance.
OCC and Federal Reserve officials told us that they had not surveyed the  minority banks that they regulated to assess the effectiveness of their  support efforts, and neither agency has established performance measures  related to minority banking efforts. OCC officials explained that the  agency did not survey minority banks because it did not treat these banks  any differently from other banks. However, as described earlier, OCC has a  written policy statement for minority banks, information on a Web page  for such institutions, and has held events on Native American banking.  OCC officials also told us that they recently convened a forum for African- American bankers and were in the process of developing an outreach  program specifically for its minority banks.
By not periodically surveying and obtaining comprehensive feedback from  a substantial number of minority banks or through developing outcome- oriented performance measures for various support efforts (such as  technical assistance), the regulators are not well positioned to assess their  support efforts or identify areas for improvement. Further, the regulators  cannot take corrective action as necessary to provide better support  efforts to minority banks.
section_title: Survey of Minority Banks Identified Potential Limitations in Regulators’ Support Efforts and Other Regulatory Issues
paragraphs: Minority bank survey respondents identified potential limitations in the  regulators’ efforts to support them and related regulatory issues, such as  examiners’ understanding of issues affecting minority banks, which would  likely be of significance to agency managers and warrant follow-up  analysis. Minority banks regulated by FDIC were generally more positive  about the agency’s efforts than other banks were about their regulators’  efforts. Still, only about half of FDIC-regulated banks gave their regulator  very good or good marks, whereas about a quarter of banks regulated by  other agencies gave the same ratings. Although some regulators  emphasized technical assistance as a key component of their efforts to  support minority banks, relatively few institutions used such assistance.  Further, in our interviews and open-ended survey responses, banks  reported some specific concerns about regulatory issues related to their  minority status. In particular, survey respondents were concerned that (1)  examiners, as was also noted in our 1993 report, did not always  understand their operating environment or the challenges that minority  banks faced in their communities and might need more training on the  topic, and (2) a provision of CRA designed to facilitate relationships  between minority banks and other banks has not produced the desired  results.
subsections: section_title: About a Third of Survey Respondents Viewed Regulators’ Minority Bank Support Efforts as Very Good or Good, and Technical Assistance Usage Appeared Low
paragraphs: When minority bankers were asked to rate regulators’ overall efforts to  support minority banks, responses varied. Some 36 percent of survey  respondents described the efforts as very good or good, 26 percent  described them as fair, and 13 percent described the efforts as poor or  very poor (fig. 7). A relatively large percentage—25 percent—responded  “don’t know” to this question. Banks’ responses varied by regulator, with  45 percent of banks regulated by FDIC giving very good or good  responses, compared with about a quarter of banks regulated by other  agencies. However, more than half of FDIC-regulated banks and about  three-quarters of the other minority banks responded that their regulator’s  efforts were fair, poor, or very poor or responded with a “don’t know.” In  particular, banks regulated by OTS gave the highest percentage of poor or  very poor marks, while banks regulated by the Federal Reserve most often  provided fair marks.
Nearly half of minority banks reported that they attended FDIC  roundtables and conferences designed for minority banks, and about half  of the 65 respondents that attended these events found them to be  extremely or very useful (fig. 8). Almost a third found them to be  moderately useful, and 17 percent found them to be slightly or not at all  useful. One participant commented, “The information provided was useful,  as was the opportunity to meet the regulators.” Many banks also  commented that the events provided a good opportunity to network and  share ideas with other minority banks.
We noted that minority banks frequently reported participating in training  and education events and that they found these events extremely or very  useful, even though most of these programs were not designed specifically  for minority banks. About 58 percent reported participating in their  regulator’s training and education activities—a higher percentage than had  participated in FDIC roundtables and conferences. Of this group, 76  percent found training and education to be extremely or very useful, 15  found it to be moderately useful, 6 percent found it to be slightly useful,  and 3 percent did not know.
While FDIC and OTS emphasized technical services as key components of  their efforts to support minority banks, less than 30 percent of the  institutions they regulate reported using such assistance within the last 3  years in our survey (fig. 9). Minority banks regulated by OCC and the  Federal Reserve reported similarly low usage of the agencies’ technical  assistance services. However, of the few banks that used technical  assistance—41—the majority rated the assistance provided as extremely  or very useful. Further, although small minority banks and African- American banks of all sizes have consistently faced financial challenges  and may benefit from certain types of assistance, these banks also  reported low rates of usage of the agencies’ technical assistance. In  addition, both regulators and minority banks explained that minority  banks often have difficulty attracting and retaining qualified staff, and  given this fact, technical assistance could be particularly important in  providing these banks with guidance tailored to their staff’s specific needs.  While our survey did not address the reasons that relatively few minority  banks appear to use the agencies’ technical assistance and banking  regulators cannot compel banks under their supervision to make use of  offered technical assistance, the potential exists that many such  institutions may be missing opportunities to learn how to correct  problems that limit their operational and financial performance.
section_title: Survey Respondents Expressed Concerns about the Examination Process and a Provision of CRA Designed to Assist Minority Banks
paragraphs: Over 80 percent of the minority banks we surveyed responded that their  regulators did a very good or good job of administering examinations, and  almost 90 percent felt that they had very good or good relationships with  their regulator. However, as in our 1993 report, some minority bank  officials said in both survey responses and interviews that examiners did  not always understand the challenges the banks faced in providing  services in their particular communities. Twenty-one percent of survey  responses mentioned this issue when asked for suggestions about how  regulators could improve their efforts to support minority banks, and  several minority banks we spoke with in interviews elaborated on this  topic.
The bank officials said that examiners tended to treat minority banks like  any other bank when they conducted examinations and thought such  comparisons were not appropriate. For example, some bank officials  whose institutions serve immigrant communities said that their customers  tended to do business in cash and carried a significant amount of cash  because banking services were not widely available or trusted in the  customers’ home countries. Bank officials said that examiners sometimes  commented negatively on the practice of customers doing business in cash  or placed the bank under increased scrutiny with respect to the Bank  Secrecy Act’s requirements for cash transactions. While the bank officials  said that they did not expect preferential treatment in the examination  process, several suggested that examiners undergo additional training so  that they could better understand minority banks and the communities  that these institutions served. FDIC has conducted such training for its  examiners. In 2004, FDIC invited the president of a minority bank to speak  to about 500 FDIC examiners on the uniqueness of minority banks and the  examination process. FDIC officials later reported that the examiners  found the discussion helpful. According to a Federal Reserve official, the  organization is developing guidance to better educate examination staff  about the various types of minority institutions and minority communities.  Also, according to an OCC official, OCC has an initiative under  consideration to provide training for its examiners on minority bank  issues.
Many survey respondents also said that a provision in the Community  Reinvestment Act (CRA) that was designed to assist their institutions was  not effectively achieving this goal. CRA requires bank regulators to  encourage institutions to help meet credit needs in all areas of the  communities they served. The act includes a provision allowing regulators  conducting a CRA examination to give consideration to banks that assist  minority banks through capital investment, loan participations, and other  ventures that help meet the credit needs of local communities. Despite this  provision, only about 18 percent of survey respondents said that CRA  had—to a very great or great extent—encouraged other institutions to  invest in or form partnerships with their institutions, while more than half  said that CRA encouraged such activities to some, little, or no extent (fig.  10). Some minority bank officials said that current interagency guidance  on the provision granting consideration for investments in minority banks  should be clarified to assure banks that they will receive CRA  consideration for such investments. Some minority banks believe that  CRA does not provide incentives for nonminority banks to make  investments in minority banks that operate in other parts of the country. A  minority bank official said that the CRA provision does not clearly state  that a bank making an investment in a minority bank that is outside of its  CRA assessment area will receive consideration for such investments in its  CRA compliance examinations. However, officials from each of the four  regulators said that they had interpreted the provision in CRA as allowing  consideration for such out-of-area investments in minority banks. OCC  recently published guidance clarifying this issue, and FDIC officials said  that the agencies would clarify the guidance provided to all CRA  examiners across agencies on such investments.
This report does not contain all results from the survey. The survey and a  more complete tabulation of the results can be viewed at GAO-07-7SP.
section_title: Conclusions
paragraphs: Federal banking regulators have adopted differing approaches to support  minority banks but generally have not assessed their efforts using regular  and comprehensive surveys of minority banks or outcome-oriented  performance measures. FDIC, which along with OTS is required by  FIRREA to help preserve and promote minority banks, has established the  most comprehensive support efforts and has taken the lead on interagency  initiatives. In this regard, FDIC appears to be serving a coordination and  facilitation role for the banking agencies’ efforts. OTS has also taken  several steps to support minority banks, while OCC and the Federal  Reserve, which are not subject to Section 308 of FIRREA, have, on their  own initiative, taken some steps to support such institutions. Further,  officials from OCC and the Federal Reserve, which collectively supervise  about one-third of minority banks, stated that they recognize the  importance of minority banks and are planning additional efforts to  support them. While these efforts may help ensure that more minority  banks receive support, it is important that when managing both existing  and new programs, regulators assess their effectiveness. While FDIC has  recently sought to evaluate its efforts through conducting surveys, these  surveys have not addressed all key activities (including the provision of  technical assistance), and the agency has not established outcome- oriented performance measures. None of the other agencies regularly or  comprehensively surveys minority banks regarding its support efforts or  has developed outcome-oriented performance measures. Consequently,  the regulators are not well positioned to identify issues of concern to  minority banks or to take corrective actions to improve their support  efforts.
Our work identified potential limitations in the regulators’ support efforts  and related activities that would likely be of significance to agency  managers and potentially warrant follow-up analysis and the initiation of  corrective actions as necessary. For example, only about half of minority  banks regulated by FDIC and only about a quarter regulated by the other  agencies view their regulator’s support efforts as very good or good. We  also found that some issues identified in our 1993 report may still be  potential limitations to the regulators’ efforts. First, although regulators  emphasize the provision of technical assistance services to minority  banks, less than 30 percent of such banks have recently used such  services. Small banks and African-American banks, which have struggled  financially over the years and potentially stand to benefit most from  additional technical assistance, are no more likely than other minority  banks to use such assistance. While there may be a variety of reasons that  minority banks do not take advantage of the regulators’ technical  assistance services and regulators cannot compel banks to use this  assistance, without soliciting further feedback from these banks, the  regulators cannot identify these reasons, determine whether more banks  would benefit from such assistance, or obtain suggestions for  improvement. Second, both our 1993 report and our current analysis found  that some minority banks believe that regulators have not ensured that  examiners fully understand the challenges that such institutions often face  in, for example, providing financial services in areas with high  concentrations of poverty or to immigrant communities. Again, without  further analysis and soliciting feedback from banks, regulators cannot  identify possible areas where they can provide additional assistance or  take corrective action. By establishing outcome-oriented performance  measures to determine the extent to which they are achieving program  goals, regulators could then measure the progress of their efforts and any  results. Using existing interagency forums for coordination to assess  minority bank support efforts and related regulatory activities could help  ensure that all minority banks have access to the same opportunities while  minimizing burdens on the regulators themselves.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Chairman of the FDIC, the Director of OTS, the  Comptroller of the Currency, and the Chairman of the Federal Reserve  regularly review the effectiveness of their minority bank support efforts  and related regulatory activities and, as appropriate, assess the need to  make changes necessary to better serve such institutions. In conducting  such reviews, the regulators should consider    conducting periodic surveys of such institutions to determine how they  view regulators’ minority support efforts and related activities, and/or   developing outcome-oriented performance measures to assess the  progress of their efforts in relation to program goals.
As part of these regular program assessments, the regulators may wish to  focus on such areas as minority banks’ overall views on support efforts,  the usage and effectiveness of technical assistance services (particularly  technical assistance provided to small minority banks and African- American banks), and the level of training provided to agency examiners  regarding minority banks and their operating environments. Regulators  may also wish to utilize existing interagency coordination processes in  implementing this recommendation to help ensure consistent efforts and  minimize burdens on agency staff.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FDIC, OTS, OCC, and the Federal  Reserve for comment, and they provided written comments that are  reprinted in appendixes IV–VII. In their responses, the agencies further  elaborated on their efforts to support minority banks and described  planned initiatives. Further, FDIC, OTS, and OCC agreed to implement our  recommendation, while the Federal Reserve commented that it would  consider implementing the recommendation. The agencies also provided  technical comments, which we have incorporated as appropriate. We also  requested comments from the Department of the Treasury on the section  of the draft report relevant to their activities under Section 308 of FIRREA.  Treasury provided us with technical comments, which we have  incorporated as appropriate.
We will provide copies to Chairman of the FDIC, the Director of OTS, the  Comptroller of the Currency, the Chairman of the Federal Reserve, and the  Secretary of the Department of the Treasury, and other interested  congressional committees. We will also make copies available to others  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7215 or scottg@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report at  listed in appendix VIII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) review the profitability of  minority banks over time, (2) identify the federal banking regulators’  efforts to support minority banks and determine whether the regulators  were evaluating the effectiveness of these efforts, and (3) obtain the views  of minority banks on the federal regulators’ minority banking support  efforts and related regulatory issues.
To review the profitability of minority banks, in addition to undertaking a  literature review, we analyzed financial data provided by the Federal  Deposit Insurance Corporation (FDIC) for year end 2005, 2000, and 1995.  Each bank is required to file consolidated Reports of Condition and  Income (Call Report) data, and each thrift institution is required to file  Thrift Financial Reports (Thrift Report) quarterly. We obtained Call and  Thrift Report data from FDIC listing each minority bank’s financial  characteristics (such as return on assets, net income, and loan loss  provisions), along with summary statistics for peer groups. Peer groups  were formed by FDIC based on standard asset sizes used in FDIC reports  (less than $100 million, $100 million-$300 million, $300 million-$500  million, $500 million-$1 billion, $1billion-$10 billion, greater than $10  billion). The peer groups include minority and nonminority institutions.
Using these data, we classified the minority banks by asset size and  minority status. To classify the banks by minority status, we used the  regulators’ designations and confirmed these classifications with a bank’s  survey response (if the banks responded to our survey). FDIC provided  summary statistics for peer groups based on asset size. The peer groups  included all banks of a given asset size, including minority banks. We did  not attempt to remove minority banks from the peer group to simplify the  analysis because minority banks are so few, it is unlikely that their  inclusion in the peer group would change composite statistics for any peer  group. We analyzed the profitability characteristics of each group and  compared the summary statistics to the comparable statistics generated by  FDIC for relevant peer groups.
Because information on minority banks was not available for both 2000  and 1995 from all federal banking regulators, for these periods we  analyzed data only for those minority banks that were still operating as  minority banks in 2005. On the basis of the regulators’ lists, we were aware  that not all of the banks were operating in 2005 were operating in previous  years. In 2000, 181 of these banks were operating, and 152 were operating  in 1995. Minority banks that failed or merged with other institutions  between 1995 and 2005 are not included in the analysis for those years. In  addition, we did not obtain data on the minority status of banks operating  in 1995 and 2000 and were unable to confirm that all 2005 minority banks  were operating as minority banks in 1995 and 2000, although the change of  ownership rate for minority banks is low.
We chose to use Call and Thrift Report data because it was designed to  provide information on all federally insured banks’ financial condition and  has been collected and reported by FDIC in a standardized format. We  have tested the reliability of FDIC’s Call and Thrift Report databases  during previous studies and found the data to be reliable. As with any self- reported financial information, however, the data are subject to change for  a variety of reasons. We corroborated our analysis of the Call and Thrift  Report data with other studies, which also found that minority banks lag in  profitability and have high operating expenses.
To address the second objective, we interviewed officials at the federal  banking agencies and the Department of the Treasury and reviewed  regulators’ documentation addressing their efforts to support minority  banks and assess the effectiveness of these efforts. We also reviewed  publicly available documentation maintained by the regulators, such as  policy statements, lists of minority banks, Web sites, and public  statements. We reviewed the regulators’ minority banking support efforts  across the different banking agencies and compared any program  assessment efforts with our standards for program assessment and  performance measures, and those established in the Government  Performance and Results Act. We also interviewed 19 minority banks  throughout the United States that we selected based on type of minority  ownership and primary regulator, and relevant trade associations, to  discuss the business environment in which they operate, regulators’  minority banking efforts, any assessment efforts undertaken by the  regulators, and their knowledge and experience with their regulators’  minority banking efforts.
To obtain the views of minority banks on the federal regulators’ minority  banking support efforts and related regulatory issues, we surveyed banks  that were designated as minority institutions. We created a list of the  population of minority banks by asking FDIC, Office of the Comptroller of  the Currency (OCC), Federal Reserve, and Office of Thrift Supervision  (OTS) for the names of all such institutions. The objective was to survey  all minority banks that were officially recognized by regulators as such. Of  the 204 institutions in our original population, 14 represented women- owned institutions. We identified the total minority bank population by  reviewing and compiling one list of these banks from FDIC and the  Federal Reserve’s lists as of September 30, 2005; OCC’s list from  December 31, 2005; the most recent list from the Department of the  Treasury (December 2004); and OTS’s list as of January 2006.
All institutions we originally identified as minority banks were asked to  complete a Web-based questionnaire in March of 2006. We determined that  of the original 204 minority banks we identified, 9 were actually ineligible,  either because the ownership was no longer minority or had insignificant  minority interest, and some had merged with other banks. Our final survey  population therefore consisted of 195 institutions. When the survey closed  in late April, 149 of the 195 banks ultimately determined to be eligible  minority banks had provided usable responses, for a response rate of 76  percent.
While developing our Web-based questionnaire, we asked all four banking  regulators and minority banking associations to review a draft of the  instrument and to offer comments. We also conducted four pretests of the  draft questionnaire, each one using the software environment that actual  respondents would experience. During the pretest, we observed  respondents filling out the questionnaire and asked follow-up questions to  clarify the respondents’ understanding of the questions. On the basis of  these results, we made modifications as appropriate before finalizing the  questionnaire. The questionnaire also underwent a peer review by an  independent survey specialist in our organization. The survey, which was  implemented as an automated questionnaire on a secure Web site, was  accessible only to specifically contacted bank officials and could be  completed using a typical Web browser. However, the questionnaire,  which contained 51 questions, was also reproduced as an electronic word- processing document that could be administered via e-mail, mail, or fax,  for those respondents who preferred those modes or who could not access  the Internet.
We began the survey in late February of 2006 by precontacting banks by  telephone to verify their status and to obtain the names, titles, and e-mail  addresses of the president or chief executive officer of the institution, who  were designated as respondents, or were responsible for delegating the  survey to another official. Prenotification e-mails were sent in early March  to verify that the e-mails were valid. The survey was opened and  respondents were given user names and passwords to their institution’s  questionnaires on March 14.
In late March and early April 2006, we sent two reminder e-mails to banks  that had not yet responded, and began to call nonrespondents after that.  We also made appeals encouraging responses through the National  Bankers Association’s (NBA) e-mailings and events. We also made a paper  copy of the questionnaire that respondents could receive and return via  mail or fax. In a final set of telephone follow-ups, we gave reluctant  respondents the opportunity to answer a reduced set of key questions to  encourage participation. A final reminder e-mail was sent in late April, and  the survey was closed on April 28.
Not all surveyed members of the population returned questionnaires or  answered every question. Two institutions explicitly refused to participate,  and we were not able to obtain answers from the other 44 nonrespondents  by the close of this review. This resulted in a response rate of 76 percent,  calculated as the number of usable questionnaires returned divided by the  final eligible population. The response rate to any one particular question  varied, however, as some survey participants declined to provide answers  to individual questions, and those 4 institutions agreeing to respond only  to the final telephone follow-up attempt were asked only a limited number  of key questions.
Results from this type of survey are subject to several types of errors:  failure to include all eligible members in the listing of the population,  measurement errors when administering the questions, nonresponse error  from failing to collect information on some or all questions from part of  the surveyed population, and data-processing error.
To limit the error from failing to list members of the population, we  compared the regulators’ lists of minority banks and discussed any  discrepancies with each regulator. In accordance with our request, we  included any bank considered by at least one regulator to be eligible to  participate in its efforts. In some cases we surveyed minority banks that  were not considered by their primary regulator to be minority institutions  but were considered to have minority status or be eligible for participation  in another regulator’s efforts. We compared the survey results for  questions reported on in the text of the report with and without such  banks to ascertain whether or not the results would have been  significantly different without including such banks. We found no  significant differences in the results when the banks not considered  minority banks by their regulator were included from when such banks  were excluded. Generally, removing the responses from such banks would  have changed the results of key questions by 1 or 2 percentage points. In a  few cases, the inclusion of banks not viewed by their regulators as  minority institutions changed the survey results by 4 or 5 percentage  points in a manner more favorable to the regulator. However, the inclusion  of such banks did not have a material effect on the overall results.
To limit measurement error, we obtained comments from experts and  tested the questionnaire with bank officials and attempted to improve the  questionnaire before finalizing it.
Although we chose to send our survey to all members of the population  and not a sample, and thus the survey results are not technically subject to  sampling error, because only 76 percent of the population provided usable  responses, bias from nonresponse may result. If the responses of those  who did not respond would have differed from the responses of those who  did on some survey questions, the estimates made solely from those who  did respond would be biased from excluding parts of the population with  different characteristics or views. To limit this kind of error, we made  multiple attempts to gain the participation of as many banks as possible.  To assess the likelihood of significant bias, we compared characteristics  such as asset size, regulator, and minority type—which may be related to  the substance of answers to our survey questions—of nonrespondents to  respondents. We did not detect a significant difference between those who  chose to respond and those who did not based on these characteristics. To  further assess the potential extent of nonresponse bias, we compared the  response rates of the subgroups of those characteristics in our population,  and determined that response rate did not differ markedly between  categories of these subgroups, suggesting that banks of certain types were  not materially more likely to participate or not participate than others.  Finally, we analyzed the patterns in response between those who  answered in the earlier part of the fieldwork period and those who  responded only after repeated follow-up attempts. It is possible that the  latter group resembles nonrespondents. No significant difference in the  answers between the groups was detected, which may suggest that actual  nonrespondents would not have answered in a substantially different way  from those who did. While the possibility exists that the true results for the  entire population might be different from those we estimated in our  report, we feel that on the basis of our analysis, nonresponse bias is  unlikely.
To limit data-processing error, a second data analyst independently  verified analysis programming. In addition, the coding process of  converting narrative answers into quantitative, categorical data was  independently assessed to be reliable, and diagnostic checks were  performed on the survey data to the extent possible. For example, one of  our checks identified inconsistencies for four questionnaires that  indicated a primary supervisor which did not match regulator records,  allowing us to make a correction to responses. We did not otherwise verify  the substance of respondents’ answers to our questions.
We conducted our work in Washington, D.C., and New York from  December 2005 to September 2006 in accordance with generally accepted  government auditing standards.
section_title: Appendix II: Minority Bank Eligibility Criteria
paragraphs: Banking regulators use different criteria for determining the types of  institutions that can participate in their respective minority bank efforts,  and all regulators maintain lists of minority banks based on these different  criteria (fig. 11). Some regulators base their definition on Section 308 of  the Financial Institutions Reform, Recovery, and Enforcement Act of 1989  (FIRREA), and others base their definition on the criteria in a 1969  executive order that established the Department of the Treasury’s Minority  Bank Deposit Program (MBDP). The MBDP is a voluntary program that  encourages federal agencies, state and local governments, and the private  sector to use MBDP participants as depositaries and financial agents.  Participants are certified by Treasury’s Bureau of Financial Management  Service and included on an annual program roster.
FDIC is subject to the “minority depository institution” definition set forth  in Section 308 of FIRREA but has interpreted ownership by “socially and  economically disadvantaged individuals” as requiring ownership by  minorities as defined in Section 308. FDIC does not include women-owned  banks in its minority bank definition. For stock institutions, FDIC  determines minority ownership of stock institutions based on the  proportion of the outstanding voting stock owned by minorities. In  addition, FDIC has made its program available to public or privately held  stock institutions and mutuals whose boards of directors and communities  served are predominantly minority, without regard to the minority status  of the institution’s ownership or its account holders.
OTS is also subject to the “minority depository institution” definition set  forth in Section 308 of FIRREA. Like FDIC, OTS has interpreted ownership  by “socially and economically disadvantaged individuals” as requiring  ownership by minorities as defined in Section 308. OTS also determines  minority ownership of stock institutions based on the proportion of the  outstanding voting stock owned by minorities. OTS has also expanded the  availability of its program to some constituencies that are not eligible for  FDIC’s program. For example, mutual institutions that have women CEOs  and have a majority of women on their boards of directors are eligible to  participate in OTS’s minority bank efforts. In addition, public stock  institutions and mutuals (but not private stock institutions) whose boards  of directors, communities served, and account holders are predominantly  minority, may participate in OTS’s efforts regardless of the minority status  of the institution’s ownership.
Treasury’s criteria—on which OCC and the Federal Reserve base their  criteria—differ from those of Section 308 of FIRREA, FDIC, and OTS in  several ways. In the first instance, the MBDP program is available to both  minority- and women-owned banks, stock savings and loans, and mutual  savings and loans. In order to be included on Treasury’s MBDP roster as a  minority-owned bank or stock savings and loans, more than 50 percent of  an institution’s outstanding stock must be either owned or controlled for  voting purposes by individuals of minority groups. A mutual savings and  loan may qualify as minority-owned if a majority of the institution’s board  of directors are members of minority groups. To qualify as a women- owned bank or stock savings and loans, more than 50 percent of the  institution’s outstanding stock must be owned by women and a significant  percentage of senior management positions must be held by women. A  women-owned mutual savings and loan is eligible for the MBDP if a  majority of its board of directors are women and a significant percentage  of senior management positions are held by women.
The OCC’s definition is consistent with that established by Treasury’s  MBDP criteria. OCC is not covered by Section 308 of FIRREA.
The Federal Reserve also bases its definition on Treasury’s MBDP criteria.  However, the Division of Supervision of the Federal Reserve also compiles  an internal list of minority banks that is based on Section 308 FIRREA  criteria.
We identified several discrepancies in the regulators’ lists of minority  banks. These banks were all listed as minority banks by one regulator but  not by another. When we spoke to officials from each of the agencies, they  told us that these discrepancies were due to differences in criteria for  minority banks. For example, five of these discrepancies were the result of  FDIC’s exclusion of women-owned banks—women-owned banks cannot  participate in FDIC’s programs, but they can participate in the MBDP  program. Another discrepancy resulted from a bank’s primary regulator  excluding a certain ethnicity (not named in FIRREA), while another  regulator included it.
section_title: Appendix III: Selected Survey Results
paragraphs: This appendix provides the number of minority banks that responded to  each survey question discussed in the report body by response category.
section_title: Appendix IV: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix V: Comments from the Office of Thrift Supervision
section_title: Appendix VI: Comments from the Comptroller of the Currency
section_title: Appendix VII: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Wesley M. Phillips, Assistant  Director; Allison Abrams; Anna Bonelli; Stefanie Bzdusek; Emily  Chalmers; Catherine Hurley; Marc Molino; Carl Ramirez; and Omyra  Ramsingh made significant contributions to this report.