Minority Banks: Regulators' Assessments of the Effectiveness of Their Support Efforts Have Been Limited
Published: 2007-10-30T00:00:00

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). While not required to do so by FIRREA, the Board of Governors of the Federal Reserve System (Federal Reserve) and Office of the Comptroller of the Currency (OCC) have established some minority bank support efforts. This testimony, based on a 2006 General Accountability Office (GAO) report, discusses the profitability of minority banks, regulators' support and assessment efforts, and the views of minority banks on the regulators' efforts as identified through responses from a survey of 149 such institutions.
section_title: What GAO Found
paragraphs: GAO reported in 2006 that the profitability of most large minority banks (assets greater than $100 million) was nearly equal to that of their peers (similarly sized banks) in 2005 and earlier years, according to FDIC data. However, many small minority banks and African-American banks of all sizes were less profitable than their peers. GAO's analysis and other studies identified some possible explanations for these differences, including relatively higher loan loss reserves and operating expenses and competition from larger banks. Bank regulators had adopted differing approaches to supporting minority banks, but no agency had regularly and comprehensively assessed the effectiveness of its efforts. FDIC--which supervises over half of all minority banks--had the most comprehensive support efforts and leads interagency efforts. OTS focused on providing technical assistance to minority banks. While not required to do so by FIRREA, OCC and the Federal Reserve had taken some steps to support minority banks. Although FDIC had recently sought to assess the effectiveness of its support efforts through various methods, none of the regulators comprehensively surveyed minority banks or had developed performance measures. Consequently, the regulators were not well positioned to assess their support efforts. GAO's survey of minority banks identified potential limitations in the regulators' support efforts that would likely be of significance to agency managers and warrant follow-up analysis. Only about one-third of survey respondents rated their regulators' efforts for minority banks as very good or good, while 26 percent rated the efforts as fair, 13 percent as poor or very poor, and 25 percent responded "don't know". Banks regulated by FDIC were more positive about their agency's efforts than banks regulated by other agencies. However, only about half of the FDIC-regulated banks and about a quarter of the banks regulated by other agencies rated their agency's efforts as very good or good. Although regulators may have emphasized the provision of technical assistance to minority banks, less than 30 percent of such institutions have used such agency services within the last 3 years and therefore may be missing opportunities to address problems that limit their operations or financial performance.

section_title: Letter
paragraphs: I am pleased to be here to discuss the findings of a report that we issued  last year on the efforts of federal bank regulators to support minority  banks. As described in our report, minority banks are a small community  within the banking industry, accounting for 2 percent of all financial  institutions and total industry assets. Despite their small numbers,  minority banks can play an important role in serving the financial needs of  historically underserved communities, such as African-Americans, and  growing populations of minorities, such as Hispanic-Americans and Asian- Americans.
For this reason, Section 308 of the Financial Institutions Reform,  Recovery, and Enforcement Act of 1989 (FIRREA) established goals  toward which federal regulators must work to preserve and promote such  institutions. For example, the Federal Deposit Insurance Corporation  (FDIC) and the Office of Thrift Supervision (OTS), in consultation with the  Department of the Treasury (Treasury), are required to provide minority  banks with technical assistance and training and educational programs  and work toward preserving the character of minority banks in cases  involving mergers or acquisitions of these institutions (I will refer to such  activities as minority bank support efforts in my testimony today). While  the other bank regulators—the Board of Governors of the Federal Reserve  System (Federal Reserve) and the Office of the Comptroller of the  Currency (OCC)—are not subject to Section 308 of FIRREA, they also  have engaged in efforts to support minority banks over the years.
You and other members of the House Financial Services Committee,  including the Chairman, requested in 2005 that we review the efforts of all  of the regulators to support minority banks out of concerns about the  effectiveness of those efforts. We had previously reported in 1993 that  while FDIC and OTS had taken steps to comply with Section 308, minority  banks had mixed views on the effectiveness of the agencies’ efforts. In  particular, minority banks were concerned that the regulators did not  provide adequate technical assistance, and, more generally, that agency  safety and soundness examiners did not understand the unique challenges  that their institutions faced. We recommended in the 1993 report that  FDIC and OTS periodically survey minority banks to assess the  effectiveness of their support efforts. Given the passage of time between  1993 and 2005, you requested that we follow up on minority bank issues  and the efforts of all bank regulators to support such institutions.
In my testimony today, I will discuss the key findings of our 2006 report,  which included steps to (1) review the profitability of minority banks over  time; (2) identify the regulators’ minority bank support efforts and  determine whether the regulators were evaluating the effectiveness of  those efforts; and (3) obtain the views of minority banks on the support  efforts and related regulatory issues. Additionally, in the last section of  this testimony, I will provide a brief update on some of the steps the  regulators have taken in response to recommendations in our 2006 report.
To address the first objective, we obtained and analyzed financial data for  minority banks from FDIC for 1995, 2000, and 2005. We also reviewed  background literature and conducted interviews with minority banks to  discuss the business environment in which these banks operate. For the  second objective, we interviewed officials from Treasury, FDIC, the  Federal Reserve, OCC, and OTS and reviewed regulators’ documentation  addressing their efforts to support minority banks and assess the  effectiveness of these efforts. We also compared the regulators’ efforts to  our standards for program assessment and performance measures and  those established in the Government Performance and Results Act. To  address the third objective, we surveyed all institutions identified by the  banking regulators as minority institutions. The Web-based survey, which  was conducted from March through April 2006, asked about the banks’  awareness and use of the regulators’ minority bank support efforts and  also asked the banks to rate these efforts. We received 149 survey  responses out of a total population of 195 minority banks, for a response  rate of 76 percent. Finally, in preparation for this testimony, we contacted  the regulators in order to obtain information on any efforts they may have  undertaken in response to the recommendations in our 2006 report.
We conducted our work in Washington, D.C., and New York in accordance  with generally accepted government auditing standards.
subsections: section_title: In Brief
paragraphs: Our analysis of FDIC data showed that while the profitability of most  minority banks with assets greater than $100 million nearly equaled the  profitability of all similarly sized banks (peers), the profitability of smaller  minority banks and African-American banks of all sizes did not.  Profitability is commonly measured by return on assets (ROA), or the ratio  of profits to assets, and ROAs are typically compared across peer groups  to assess performance. Many small minority banks (those with less than  $100 million in assets) had ROAs that were substantially lower than those  of their peer groups in 2005 as well as in 1995 and 2000. Moreover, African- American banks of all sizes had ROAs that were significantly below those  of their peers in 2005 as well as in 1995 and 2000 (African-American banks  of all sizes and other small minority banks account for about half of all  minority banks). Our analysis of FDIC data identified some possible  explanations for the relatively low profitability of some small minority  banks and African-American banks, such as relatively higher reserves for  potential loan losses and administrative expenses and competition from  larger banks. Nevertheless, the majority of officials from banks across all  minority groups were positive about their banks’ financial outlook, and  many saw their minority status as an advantage in serving their  communities (for example, in providing services in the language  predominantly used by the minority community).
The bank regulators have adopted differing approaches to supporting  minority banks, and, at the time of our review, no agency had assessed the  effectiveness of its efforts through regular and comprehensive surveys of  minority banks or outcome-oriented performance measures. FDIC— which supervises more than half of all minority banks—had the most  comprehensive program to support minority banks and led an interagency  group that coordinates such efforts. Among other things, FDIC has  designated officials in the agency’s headquarters and regional offices to be  responsible for minority bank efforts, held periodic conferences for  minority banks, and established formal policies for annual outreach to the  banks it regulates to make them aware of available technical assistance.  OTS also designated staff to be responsible for the agency’s efforts to  support minority banks, developed outreach procedures, and focused its  efforts on providing technical assistance. OCC and the Federal Reserve,  while not required to do so by Section 308 of FIRREA, undertook some  efforts to support minority banks, such as holding occasional conferences  for Native American banks, and were planning additional efforts. FDIC  proactively sought to assess the effectiveness of its support efforts; for  example, it surveyed minority banks. However, these surveys did not  address key activities, such as the provision of technical assistance, and  the agency had not established outcome-oriented performance measures  for its support efforts. Furthermore, none of the other regulators  comprehensively surveyed minority banks on the effectiveness of their  support efforts or established outcome-oriented performance measures.  Consequently, the regulators were not well positioned to assess the results  of their support efforts or identify areas for improvement.
Our survey of minority banks identified potential limitations in the  regulators’ support efforts that likely would be of significance to agency  managers and warrant follow-up analysis. About one-third of survey  respondents rated their regulators’ efforts for minority banks as very good  or good, while 26 percent rated the efforts as fair, 13 percent as poor or  very poor, and 25 percent responded “do not know.” FDIC-regulated banks  were more positive about their agency’s efforts than banks that other  agencies regulated. However, only about half of the FDIC-regulated banks  and about a quarter of the banks regulated by other agencies rated their  agency’s efforts as very good or good. Although regulators may emphasize  the provision of technical assistance to minority banks, less than 30  percent of such institutions said they had used such agency services  within the last 3 years. Therefore, the banks may have been missing  opportunities to address problems that limited their operations or  financial performance. As we found in our 1993 report, some minority  bank officials also said that examiners did not always understand the  challenges that the banks may face in providing services in their  communities or operating environments. Although the bank officials said  they did not expect special treatment in the examination process, they  suggested that examiners needed to undergo more training to improve  their understanding of minority banks and the customer base they serve.
To allow the regulators to better understand the effectiveness of their  support efforts, our October 2006 report recommended that the regulators  review such efforts and, in so doing, consider employing the following  methods: (1) regularly surveying the minority banks under their  supervision on all efforts and regulatory areas affecting these institutions;  or (2) establishing outcome-oriented performance measures to evaluate  the extent to which their efforts are achieving their objectives. Subsequent  to the report’s issuance, the regulators have reported taking steps to better  assess or enhance their minority bank support efforts. For example, all of  the regulators have developed surveys or are in the process of consulting  with minority banks to obtain feedback on their support efforts. I also note  that some regulators plan to provide additional training to their examiners  on minority bank issues. These initiatives are positive developments, but it  is too soon to evaluate their effectiveness. We encourage agency officials  to ensure that they collect and analyze relevant data and take steps to  enhance their minority bank support efforts as may be warranted.
section_title: Background
paragraphs: Many minority banks are located in urban areas and seek to serve  distressed communities and populations that financial institutions  traditionally have underserved. For example, after the Civil War, banks  were established to provide financial services to African-Americans. More  recently, Asian-American and Hispanic-American banks have been  established to serve the rapidly growing Asian and Hispanic communities  in the United States. In our review of regulators’ lists of minority banks,  we identified a total minority bank population of 195 for 2005 (see table 1).
Table 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. As shown in table 3, FDIC serves as  the primary federal regulator for more than half of minority banks—109 of  the 195 banks, or 56 percent—and the Federal Reserve regulates the  fewest.
The federal regulators primarily focus on ensuring the safety and  soundness of banks and do so through on-site examinations and other  means. Regulators may also close banks that are deemed insolvent and  posing a risk to the Deposit Insurance Fund. FDIC is responsible for  ensuring that the deposits in failed banks are protected up to established  deposit insurance limits.
While the regulators’ primary focus is bank safety and soundness, laws and  regulations can identify additional goals and objectives. Recognizing the  importance of minority banks, Section 308 of FIRREA outlined five broad  goals toward which FDIC and OTS, in consultation with Treasury, are to  work to preserve and promote minority banks. These goals are:    preserving the present number of minority banks;    preserving their minority character in cases involving mergers or  acquisitions of minority banks;   providing technical assistance to prevent insolvency of institutions that  are not currently insolvent;    promoting and encouraging the creation of new minority banks; and    providing for training, technical assistance, and education programs.
Technical assistance is typically defined as one-to-one assistance that a  regulator may provide to a bank in response to a request. For example, a  regulator may advise a bank on compliance with a particular statute or  regulation. Regulators also may provide technical assistance to banks that  is related to deficiencies identified in safety and soundness examinations.  In contrast, education programs typically are open to all banks regulated  by a particular agency or all banks located within a regulator’s regional  office. For example, regulators may offer training for banks to review  compliance with laws and regulations.
section_title: Large Minority Banks Showed Profitability Close to That of Their Peers, but Many Small and African-American Banks Have Been Less Profitable
paragraphs: As shown in figure 1, our 2006 report found that, according to FDIC data,  most minority banks with assets exceeding $100 million had ROAs in 2005  that were close to those of their peer groups, while many smaller banks  had ROAs that were significantly lower than those of their peers. Minority  banks with more than $100 million in assets accounted for 58 percent of all  minority banks, while those with less than $100 million accounted for 42  percent. Each size category of minority banks with more than $100 million  in assets had a weighted average ROA that was slightly lower than that of  its peers, but in each case their ROAs exceeded 1 percent. By historical  banking industry standards, an ROA of 1 percent or more generally has  been considered to indicate an adequate level of profitability. We found  that profitability of the larger minority, Hispanic-American, Asian- American, Native American, and women-owned banks were close to, and  in some cases exceeded, the profitability of their peers in 2005.
In contrast, small minority banks (those with assets of less than $100  million) had an average ROA of 0.4 percent, and their peers had an average  ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000 also  indicated some similar patterns, with minority banks with assets greater  than $100 million showing levels of profitability that generally were close  to those of their peers, or ROAs of about 1 percent, and minority banks  with assets of less than $100 million showing greater differences with their  peers.
The profitability of African-American banks generally has been below that  of their peers in all size categories (see fig. 2). For example, African- American banks with less than $100 million in assets—which constitute 61  percent of all African-American banks—had an average ROA of 0.16  percent, while their peers averaged 1.0 percent. Our analysis of FDIC data  for 2000 and 1995 also found that African-American banks of all sizes had  lower ROAs than their peers.
Our analysis of 2005 FDIC data also 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 (see fig. 3). Although having higher loan loss reserves may be  necessary for the safe and sound operation of any particular bank, they  lower bank profits because loan loss reserves are counted as expenses.
We also found some evidence that higher operating expenses might affect  the profitability of some minority banks. Operating expenses— expenditures for items such as administrative expenses and salaries— typically are compared to an institution’s total earning assets, such as  loans and investments, to indicate the proportion of earning assets that  banks spend on operating expenses. As figure 4 indicates, many minority  banks with less than $100 million in assets had higher operating expenses  than their peers in 2005. Academic studies we reviewed generally reached  similar conclusions.
Officials from several minority banks we contacted also described aspects  of their operating environment, business practices, and customer service  that could result in higher operating costs. In particular, the officials cited  the costs associated with providing banking services in low-income urban  areas or in communities with high immigrant populations. Bank officials  also told us that they focus on fostering strong customer relationships,  sometimes providing financial literacy services. Consequently, as part of  their mission these banks spend more time and resources on their  customers per transaction than other banks. Other minority bank officials  said that their customers made relatively small deposits and preferred to  do business in person at bank branch locations rather than through  potentially lower-cost alternatives, such as over the phone or the Internet.
Minority bank officials also cited other factors that may have limited their  profitability. In particular, in response to Community Reinvestment Act  (CRA) incentives, the officials said that larger banks and other financial  institutions were increasing competition for minority banks’ traditional  customer base. The officials said that larger banks could offer loans and  other financial services at more competitive prices because they could  raise funds at lower rates and take advantage of operational efficiencies.  In addition, officials from some African-American and Hispanic banks  cited attracting and retaining quality staff as a challenge to their  profitability.
Despite these challenges, officials from banks across minority groups were  optimistic about the financial outlook for their institutions. When asked in  our survey to rate their financial outlook compared to those of the past 3  to 5 years, 65 percent said it would be much or slightly better; 21 percent  thought it would be about the same, and 11 percent thought it would be  slightly or much worse, while 3 percent did not know. Officials from  minority banks said that their institutions had advantages in serving  minority communities. For example, officials from an Asian-American  bank said that the staff’s ability to communicate in the customers’ primary  language provided a competitive advantage.
section_title: Regulators Adopted Differing Approaches to Supporting Minority Banks, but Assessment Efforts Were Limited
paragraphs: Our report found that FDIC—which supervises 109 of 195 minority  banks—had developed the most extensive efforts to support minority  banks among the banking regulators (see fig. 5). FDIC had also taken the  lead in coordinating regulators’ efforts in support of minority banks,  including leading a group of all the banking regulators that meets  semiannually to discuss individual agency initiatives, training and outreach  events, and each agency’s list of minority banks. OTS had developed a  variety of support programs, including developing a minority bank policy  statement and staffing support structure. OCC had also taken steps to  support minority banks, such as developing a policy statement. OCC and  the Federal Reserve had also hosted events for some minority banks.
The following highlights some key support activities discussed in our  October 2006 report.
Policy Statements. FDIC, OTS, and OCC all have policy statements that  outline the agencies’ efforts for minority banks. They discuss how the  regulators identify minority banks, participate in minority bank events,  provide technical assistance, and work toward preserving the character of  minority banks during the resolution process. OCC officials told us that  they developed their policy statement in 2001 after an interagency meeting  of the federal banking regulators on minority bank issues. Both FDIC and  OTS issued policy statements in 2002.
Staffing Structure. FDIC has a national coordinator in Washington, D.C.  and coordinators in each regional office from its Division of Supervision  and Consumer Protection to implement the agency’s minority bank  program. Among other responsibilities, the national coordinator regularly  contacts minority bank trade associations about participation in events  and other issues, coordinates with other agencies, and compiles quarterly  reports for the FDIC chairman based on regional coordinators’ reports on  their minority bank activities. Similarly, OTS has a national coordinator in  its headquarters and supervisory and community affairs staff in each  region who maintain contact with the minority banks that OTS regulates.  While OCC and the Federal Reserve did not have similar staffing  structures, officials from these agencies had contacted minority banks  among their responsibilities.
Minority Bank Events and Training. FDIC has taken the lead role in  sponsoring, hosting, and coordinating events in support of minority banks.  For example, in August 2006 FDIC sponsored a national conference for  minority banks in which representatives from OTS, OCC, and the Federal  Reserve participated. FDIC also has sponsored the Minority Bankers  Roundtable (MBR) series, which agency officials told us was designed to  provide insight into the regulatory relationship between minority banks  and FDIC and explore opportunities for partnerships between FDIC and  these banks. In 2005, FDIC held six roundtables around the country for  minority banks supervised by all of the regulators. To varying degrees,  OTS, OCC, and the Federal Reserve also have held events to support  minority banks, such as Native American Institutions.
Technical Assistance. All of the federal banking regulators told us that  they provided their minority banks with technical assistance if requested,  but only FDIC and OTS have specific procedures for offering this  assistance. More specifically, FDIC and OTS officials told us that they  proactively seek to make minority banks aware of such assistance through  established outreach procedures outside of their customary examination  and supervision processes. FDIC also has a policy that requires its regional  coordinators to ensure that examination case managers contact minority  banks from 90 to 120 days after an examination to offer technical  assistance in any problem areas that were identified during the  examination. This policy is unique to minority banks. OCC and the Federal  Reserve provide technical assistance to all of their banks, but had not  established outreach procedures for all their minority banks outside of the  customary examination and supervision processes. However, OCC  officials told us that they were in the process of developing an outreach  plan for all minority banks regulated by the agency. Federal Reserve  officials told us that Federal Reserve districts conduct informal outreach  to their minority banks and consult with other districts on minority bank  issues as needed.
Policies to Preserve the Minority Character of Troubled Banks.  FDIC has developed policies for failing banks that are consistent with  FIRREA’s requirement that the agency work to preserve the minority  character of minority banks in cases of mergers and acquisitions. For  example, FDIC maintains a list of qualified minority banks or minority  investors that may be asked to bid on the assets of troubled minority  banks that are expected to fail. However, FDIC is required to accept the  bids on failing banks that pose the lowest expected cost to the Deposit  Insurance Fund. As a result, all bidders, including minority bidders, are  subject to competition. OTS and OCC have developed written policies that  describe how the agencies will work with FDIC to identify qualified  minority banks or investors to acquire minority banks that are failing.  While the Federal Reserve does not have a similar written policy, agency  officials say that they also work with FDIC to identify qualified minority  banks or investors. All four agencies also said that they try to assist  troubled minority banks improve their financial condition before it  deteriorates to the point that a resolution through FDIC becomes  necessary. For example, agencies may provide technical assistance in such  situations or try to identify other minority banks willing to acquire or  merge with the troubled institutions.
subsections: section_title: At the Time of our Report, Regulators Did Not Assess Their Support Efforts through Surveys or Performance Measures
paragraphs: While FDIC was proactive in assessing its support efforts for minority  banks, none of the regulators routinely and comprehensively surveyed  their minority banks on all issues affecting the institutions, nor have the  regulators established outcome-oriented performance measures.  Evaluating the effectiveness of federal programs is vitally important to  manage programs successfully and improve program results. To this end,  in 1993 Congress enacted the Government Performance and Results Act,  which instituted a governmentwide requirement that agencies report on  their results in achieving their agency and program goals.
As part of its assessment methods, FDIC conducted roundtables and  surveyed minority banks on aspects of its minority bank efforts. For  example, in 2005, FDIC requested feedback on its efforts from institutions  that attended the agency’s six MBRs (which approximately one-third of  minority banks attended). The agency also sent a survey letter to all  minority banks to seek their feedback on several proposals to better serve  such institutions, but only 24 minority banks responded. The proposals  included holding another national minority bank conference, instituting a  partnership program with universities, and developing a minority bank  museum exhibition. FDIC officials said that they used the information  gathered from the MBRs and the survey to develop recommendations for  improving programs and developing new initiatives.
While FDIC had taken steps to assess the effectiveness of its minority  bank support efforts, we identified some limitations in its approach. For  example, in FDIC’s surveys of minority banks, the agency did not solicit  feedback on key aspects of its support efforts, such as the provision of  technical assistance. Moreover, FDIC has not established outcome- oriented performance measures to gauge the effectiveness of its various  support efforts. None of the other regulators had surveyed minority banks  recently on support efforts or developed performance measures.
By not taking such steps, we concluded that the regulators were not well  positioned to assess their support efforts or identify areas for  improvement. Further, the regulators could not take corrective action as  necessary to provide better support efforts to minority banks.
section_title: Survey of Minority Banks Identified Potential Limitations in Regulators’ Support Efforts and Other Regulatory Issues
paragraphs: Minority bank officials we surveyed identified potential limitations in the  regulators’ efforts to support them and related regulatory issues, such as  examiners’ understanding of issues affecting minority banks, which would  likely be of significance to agency managers and warrant follow-up  analysis. Some 36 percent of survey respondents described their  regulators’ efforts as very good or good, 26 percent described them as fair,  and 13 percent described the efforts as poor or very poor (see fig. 6). A  relatively large percentage—25 percent—responded “do not know” to this  question.
Banks’ responses varied by regulator, with 45 percent of banks regulated  by FDIC giving very good or good responses, compared with about 25  percent of banks regulated by other agencies. However, more than half of  FDIC-regulated banks and about three-quarters of the other minority  banks responded that their regulator’s efforts were fair, poor, or very poor  or responded with a “do not know.” In particular, banks regulated by OTS  gave the highest percentage of poor or very poor marks, while banks  regulated by the Federal Reserve most often provided fair marks.
Nearly half of minority banks reported that they attended FDIC  roundtables and conferences designed for minority banks, and about half  of the 65 respondents that attended these events found them to be  extremely or very useful (see fig. 7). Almost a third found them to be  moderately useful, and 17 percent found them to be slightly or not at all  useful. One participant commented that the information was useful, as was  the opportunity to meet the regulators. Many banks also commented that  the events provided a good opportunity to network and share ideas with  other minority banks.
While FDIC and OTS emphasized technical services as key components of  their efforts to support minority banks, less than 30 percent of the  institutions they regulate reported using such assistance within the last 3  years (see fig. 8). Minority banks regulated by OCC and the Federal  Reserve reported similarly low usage of technical assistance services.  However, of the few banks that used technical assistance—41—the  majority rated the assistance provided as extremely or very useful.  Further, although small minority banks and African-American banks of all  sizes have consistently faced financial challenges and might benefit from  certain types of assistance, the banks also reported low rates of usage of  the agencies’ technical assistance. While our survey did not address the  reasons that relatively few minority banks appear to use the technical  assistance and banking regulators cannot compel banks under their  supervision to make use of offered technical assistance, the potential  exists that many such institutions may be missing opportunities to learn  how to correct problems that limit their operational and financial  performance.
subsections: section_title: Survey Respondents Expressed Concerns about the Examination Process and a Provision of CRA Designed to Assist Minority Banks
paragraphs: More than 80 percent of the minority banks we surveyed responded that  their regulators did a very good or good job of administering  examinations, and almost 90 percent felt that they had very good or good  relationships with their regulator. However, as in our 1993 report, some  minority bank officials said in both survey responses and interviews that  examiners did not always understand the challenges the banks faced in  providing services in their particular communities. Twenty-one percent of  survey respondents mentioned this issue when asked for suggestions  about how regulators could improve their efforts to support minority  banks, and several minority banks that we interviewed elaborated on this  topic.
The bank officials said that examiners tended to treat minority banks like  any other bank when they conducted examinations and thought such  comparisons were not appropriate. For example, some bank officials  whose institutions serve immigrant communities said that their customers  tended to do business in cash and carried a significant amount of cash  because banking services were not widely available or trusted in the  customers’ home countries. Bank officials said that examiners sometimes  commented negatively on the practice of customers doing business in cash  or placed the bank under increased scrutiny relative to the Bank Secrecy  Act’s requirements for cash transactions. While the bank officials said  that they did not expect preferential treatment in the examination process,  several suggested that examiners undergo additional training so that they  could better understand minority banks and the communities that these  institutions served. FDIC has conducted such training for its examiners. In  2004, FDIC invited the president of a minority bank to speak to about 500  FDIC examiners on the uniqueness of minority banks and the examination  process. FDIC officials later reported that the examiners found the  discussion helpful.
Many survey respondents also said that a CRA provision that was designed  to assist their institutions was not effectively achieving this goal. The  provision allows bank regulators conducting CRA examinations to give  consideration to banks that assist minority banks through capital  investment, loan participation, and other ventures that help meet the  credit needs of local communities. Despite this provision, only 18 percent  of survey respondents said that CRA had—to a very great or great extent— encouraged other institutions to invest in or form partnerships with their  institutions, while more than half said that CRA encouraged such activities  to some, little, or no extent (see fig. 9). Some minority bankers attributed  their view that the CRA provision has not been effective, in part, to a lack  of clarity in interagency guidance on the act’s implementation. They said  that the interagency guidance should be clarified to assure banks that they  will receive CRA consideration in making investments in minority banks.
section_title: Regulators Recently Have Taken Steps to Assess and Enhance Their Minority Bank Support Efforts, but It Is Too Soon to Assess Their Effectiveness
paragraphs: Our 2006 report recommended that the bank regulators regularly review  the effectiveness of their minority bank support efforts and related  regulatory activities and, as appropriate, make changes necessary to better  serve such institutions. In conducting such reviews, we recommended that  the regulators consider conducting periodic surveys of minority banks or  developing outcome-oriented performance measures for their support  efforts. In conducting such reviews, we also suggested that the regulators  focus on the overall views of minority banks about support efforts, the  usage and effectiveness of technical assistance (particularly assistance  provided to small minority and African-American banks), and the level of  training provided to agency examiners on minority banks and their  operating environments.
Over the past year, bank regulatory officials we contacted identified  several steps that they have initiated to assess the effectiveness of their  minority bank support efforts or to enhance such support efforts. They  include the following actions:    A Federal Reserve official told us that the agency has established a  working group that is developing a pilot training program for minority  banks and new banks. The official said that three training modules have  been drafted for different phases of a bank’s life, including starting a bank,  operating a bank during its first 5 years of existence, and bank expansion.  The official said that the program will be piloted throughout the U.S.  beginning in early November 2007. Throughout the course of developing,  drafting, and piloting the program, Federal Reserve officials said they  have, and will continue to, consult with minority bankers to obtain  feedback on the effort.
An OCC official said that the agency recently sent a survey to minority  banks on its education, outreach, and technical assistance efforts that  should be completed by the end of October. OCC also plans to follow up  this survey with a series of focus groups. In addition, the official said OCC  just completed an internal survey of certain officials involved in  supervising minority institutions, and plans to review the results of the two  surveys and focus groups to improve its minority bank support efforts.
FDIC officials told us that the agency has developed a survey to obtain  feedback on the agency’s minority bank support efforts. They estimate  that the survey will be sent out to all minority institutions (not just those  minority banks FDIC supervises) in mid-December 2007.
An OTS official told us that the agency will send out a survey to the  minority banks the agency supervises on its efforts in the next couple  weeks and that it has also conducted a series of roundtables with minority  banks in the past year.
The federal banking agencies have also taken some steps to address other  issues raised in our report. For example, Federal Reserve and FDIC  officials told us that that the agencies will provide additional training on  minority bank issues to their examiners. In addition, in July 2007 the  federal banking agencies published a CRA Interagency Notice that  requested comments on nine new “Questions and Answers” about  community reinvestment. One question covers how majority banks may  engage in and receive positive CRA consideration for activities conducted  with minority institutions. An OCC official said that the comments on the  proposed “Q and As” are under review.
While the regulators’ recent efforts to assess and enhance their minority  bank support efforts and other activities are encouraging, it is too soon to  assess their effectiveness. For example, the Federal Reserve’s pilot  training program for minority and new banks is not scheduled to begin  until later this year. Further, the other regulators’ efforts to survey  minority banks on support efforts generally also are at an early stage. We  encourage agency officials to ensure that they collect and analyze relevant  data and take steps to enhance their minority bank support efforts as  warranted.
Mr. Chairman, this concludes my prepared statement. I would be happy to  address any questions that you or subcommittee members may have.
section_title: GAO Contacts
paragraphs: For further information about this testimony, please contact George A.  Scott on (202) 512-7215 or at scottg@gao.gov.
section_title: Staff Acknowledgments
paragraphs: Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Individuals making  key contributions include Wesley M. Phillips, Assistant Director; Allison  Abrams; Kevin Averyt; and Barbara Roesmann.
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