Financial Services Institutions: Information for Assessing the Government's Potential Financial Exposure
Released: 1998-07-15T00:00:00

Letter

Background

The federal government provides, or assists in providing, a number of diverse financial services programs to help meet identified goals. For example, some of these programs provide credit or loan guarantees for housing, education, business, and the export of various products, as well as insurance for pension plans and deposits in financial institutions. Federal departments or agencies directly operate some of these financial programs. For example, the Department of Veterans Affairs provides direct and guaranteed loans to help veterans purchase homes. Similarly, the Small Business Administration provides credit to small businesses that may be unable to secure financing elsewhere. Other programs are operated by special entities created by the federal government, and they use appropriated and/or private funds. These entities, called financial services institutions for the purposes of this report, are predominately government corporations and government-sponsored enterprises.

There are no uniform and clear criteria to define a government corporation. However, the following characteristics are referred to by public administration experts as appropriate for government corporations.

They are predominantly of a business nature.

They produce revenue and are potentially self-sustaining.

They involve a large number of businesslike transactions with the public.

They require greater flexibility than the customary type of appropriations budget ordinarily permits.

These corporations can have assets wholly owned by the federal government or have both government and private equity. Government corporations typically have boards of directors or advisory boards that are to provide oversight over operations and help ensure that the corporations comply with their government charters. Collectively, federal agencies and government corporations operated financial programs that had a face value of $6.0 trillion outstanding in on- and off-balance sheet obligations and assets at the end of 1996, according to budget documents. This amount included $165 billion in direct loans, $805 billion in loan guarantees, and $5.0 trillion in insurance.

Government-sponsored enterprises provided an additional $1.7 trillion to this total for the same period. Government-sponsored enterprises are federally established, privately owned and operated corporations that were created to increase the flow of credit to specific economic sectors. Congress limited government-sponsored enterprises’ activities to specified economic sectors and gave them benefits, such as exemption from Securities and Exchange Commission (SEC) registration requirements and limited access to federal funds under specific conditions, to help them accomplish their public missions. They typically receive their financing from private investment sources.

Government-sponsored enterprises engage in financial services activities, such as issuing capital stock and short- and long-term debt instruments, guaranteeing mortgage-backed securities, purchasing loans and holding them in portfolio, funding designated activities, and collecting fees for guarantees and other services. Government-sponsored enterprises generally do not receive government appropriations. Although the enterprises’ charters state that their obligations must include a statement that they are not guaranteed by the United States, the enterprises’ federal ties cause their securities to receive preferential treatment in financial markets. For example, the enterprises generally can borrow at rates that are only slightly above Treasury borrowing rates.

Characteristics of Financial Services Institutions

We identified a total of 22 financial services institutions as being appropriate for this study; the type of financial services the institutions were authorized to engage in; and whether the institution was a government corporation, a government-sponsored enterprise, or another type of government entity (see table 1). Of the 22 financial services institutions, 11 were authorized to engage in lending activities, such as direct loans and loan guarantees; 9 were authorized to provide insurance protection, such as deposit or crop insurance; and 7 were authorized to perform secondary market activities, such as purchasing and assembling existing loans into pools for investors or for their portfolios. (As shown in table 1, a number of financial services institutions were authorized to engage in more than one category of financial services activity.)

Of the 22 financial services institutions we identified, 12 were government corporations. All but two of the government corporations—the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA)—were categorized by statute as being wholly owned corporations. FDIC was categorized as a mixed-ownership government corporation as was the National Credit Union Central Liquidity Facility, which is administered by NCUA. Six of the 22 financial services institutions were privately owned government-sponsored enterprises. Four institutions were included in the “other” category: a federally chartered private financial institution (National Consumer Cooperative Bank); an independent government-controlled corporation (Farm Credit System Insurance Corporation); a nonprofit, membership corporation (Securities Investor Protection Corporation); and a nonprofit, public corporation (Neighborhood Reinvestment Corporation). See appendix I for additional information on the purposes and funding sources of the financial services institutions covered in this report.

Oversight Mechanisms and Controls

To determine the extent of oversight that these financial services institutions were subject to, we obtained from the institutions information on their coverage by, or their voluntary adherence to, selected oversight mechanisms and controls. Specifically, the financial institutions reported whether there was a federal safety and soundness regulator, independent annual financial audits, Office of Inspector General (OIG) authority to perform reviews, and/or coverage by selected federal laws that address management and financial accountability and performance issues (see table 2). All of the institutions reported full or partial coverage by at least two of the five selected oversight mechanisms and controls. Government-sponsored enterprises all had a safety and soundness regulator, but the government corporations tended to be subject to other oversight mechanisms and controls.

All six of the government-sponsored enterprises had federal safety and soundness regulators. Five of these six institutions reported not being covered by OIG authority, and all six reported not being subject to or voluntarily adhering to the Government Performance and Results Act of 1993 (GPRA) and the Chief Financial Officers (CFO) Act of 1990. As agreed with your office, we did not independently determine the applicability of the federal statutes to the institutions.

In contrast to the government-sponsored enterprises, most of the government corporations reported coverage by OIG audits and full or partial adherence to GPRA and the CFO Act, which were intended to promote accountability and control. Only one of the government corporations, the Federal Crop Insurance Corporation, reported having a safety and soundness regulator.

Of the four other financial services institutions, two (the National Consumer Cooperative Bank and the Securities Investor Protection Corporation) reported having federal safety and soundness regulators. The remaining two institutions (the Farm Credit System Insurance Corporation and Neighborhood Reinvestment Corporation) reported coverage by at least three of the four other oversight mechanisms and controls.

All of the financial services institutions had independent audits of their annual financial statements by either certified public accounting firms, Offices of Inspectors General, or GAO. See appendixes II and III for additional information on the 22 financial services institutions’ coverage by, or voluntary adherence to, various oversight mechanisms and controls, including their adherence to selected federal statutes.

Regulatory Independence, Authority, and Fees

For the nine institutions with federal safety and soundness regulators, we obtained information on the regulators’ independence, regulatory authorities, and fees. There were six safety and soundness regulators for the nine institutions (two of the regulators had responsibility for two or more of the financial services institutions), and their independence and regulatory authorities varied. With respect to regulatory authorities, the government-sponsored enterprises’ regulators (Department of the Treasury, Farm Credit Administration for the Farm Credit System and the Federal Agricultural Mortgage Corporation, Federal Housing Finance Board, and Office of Federal Housing Enterprise Oversight) tended to have more authority than the government corporation regulator (Risk Management Agency) and the other entities’ regulators (Farm Credit Administration for the National Consumer Cooperative Bank and SEC). All of the government-sponsored enterprises’ regulators and one of the other entity regulators were able to levy fees on the regulated financial services institution, but the other two regulators relied wholly or partially on appropriated funds to pay for their oversight expenses.

Two of the six safety and soundness regulators (Federal Housing Finance Board and Risk Management Agency) had responsibilities for corporate and management governance activities that could potentially impair their independence. In prior reports, we identified independence and objectivity as key criteria for effective regulatory oversight. Specifically, we reported that regulators should have an arm’s-length relationship with the regulated institution to ensure objectivity in assessing and controlling an institution’s risk-taking activities. As we noted in our 1997 report, the Federal Housing Finance Board cannot be considered to be an arm’s-length regulator, because it is involved in the corporate governance or management of the Federal Home Loan Banks. For example, the Federal Housing Finance Board is responsible for appointing six directors to each Federal Home Loan Bank’s board and preparing the Federal Home Loan Bank System’s annual financial statements. Likewise, the Risk Management Agency lacked an arm’s-length relationship with the Federal Crop Insurance Corporation. The Federal Agricultural Improvement and Reform Act of 1996 established the functions of the Office of Risk Management (now the Risk Management Agency) as supervising the Federal Crop Insurance Corporation and administering and overseeing all aspects of the programs authorized by the Federal Crop Insurance Act. Thus, the Risk Management Agency is responsible for the day-to-day operations of the Federal Crop Insurance Corporation.

As a group, the government-sponsored enterprises’ regulators tended to have more authority than the other regulators (see table 3). The greatest variation in the powers of these regulators related to enforcement powers and the authority to establish rules and regulations governing the regulated institutions’ operations. For example, only the Farm Credit Administration and Office of Federal Housing Enterprise Oversight had the specific authority to take formal enforcement actions, such as issuing cease and desist orders or assessing civil money penalties. See appendix IV for additional detail regarding the enforcement authorities of the six regulators.

Four of the six regulators had the authority to levy assessments or fees on the financial services institution to recoup the costs associated with performing safety and soundness oversight of the institution (see table 4). The other two regulators (Risk Management Agency and SEC) relied wholly or partially on appropriated funds to pay for their oversight costs and activities.

Indicators of Potential Exposure

Congress created the government corporations, government-sponsored enterprises, and other financial services institutions discussed in this report to provide direct and indirect benefits to society, such as increased home ownership and insurance against certain losses. Meeting these societal goals often means that the institutions’ programs and activities create potential exposure to losses that a private sector financial services institution would not assume. In some credit programs, the federal government bears the risk for less creditworthy borrowers, often giving credit for longer periods or at a lower cost to the borrower than would the private market. Many federal insurance programs cover complex, case-specific, or catastrophic risks that the private sector has historically been unwilling or unable to cover. For example, in some insurance programs, the federal government provides coverage against depositor losses up to a specified amount from failures of insured institutions or insures most defined-benefit pension plans sponsored by private employers in accordance with certain prescribed coverage and payment limits and restrictions.

To obtain a general indication of the potential exposure these financial services institutions pose to the federal government, we asked the institutions to provide information on (1) assets and liabilities from their audited 1996 financial statements; (2) commitments and contingencies reported in the notes to the 1996 financial statements; (3) explicit government backing of the institution’s liabilities, commitments, and contingencies; and (4) other financial information, such as borrowing authority (see table 5 and app. V). It is important to note that the figures reported as commitments and contingencies, and any federal backing thereof, generally represent the broadest possible measure of the potential exposure these financial services institutions could pose to the federal government not the loss considered probable or reasonably possible.

The issue of explicit versus perceived federal government responsibility must also be considered. Of the 12 government corporations, 9 reported that their liabilities, commitments, and contingencies were in whole or in part explicitly guaranteed or backed by the federal government. The federally guaranteed portion of the government corporations’ liabilities, commitments, and contingencies ranged from 100 percent (five corporations), specific portions (three corporations), to a specific maximum amount (one corporation). Of the institutions categorized as other, only the Farm Credit System Insurance Corporation reported a federal guarantee for a portion of its liabilities, commitments, and contingencies. None of the government-sponsored enterprises, which are privately owned, reported an explicit federal government liability for their obligations. However, although an institution’s charter may state that its obligations are not guaranteed by the United States government, the institution’s federal ties may cause creditors to believe that the federal government would not allow the institution to default on its obligations. As we noted in past work, government-sponsored enterprises can generally borrow at rates that are only slightly above Treasury borrowing rates, largely due to the market’s perception of an implicit federal guarantee. And, the government has intervened in the past to strengthen the position of some troubled government-sponsored enterprises absent any formal obligation to do so. Whether the federal government would intervene if such an institution were to become financially troubled would depend on a variety of complicated and specific circumstances.

Twenty-one of the financial services institutions reported commitments and contingencies with a face amount ranging from $5 million to $2.7 trillion in their 1996 financial statements (see table 5). The commitments and contingent liability amounts shown reflect the maximum theoretical exposure to the federal government. The actual loss, even under fairly extreme economic conditions, is likely to be significantly lower and could even be zero. For example, FDIC reported $2.7 trillion in total commitments and contingencies. This number primarily represents the total amount of FDIC-insured deposits and would be the accounting loss that would occur if all depository institutions failed and the assets acquired as a result of the resolution process provided no recoveries. As of December 31, 1996, the assets of all FDIC-insured institutions totaled $5.6 trillion, and the combined equity capital of these institutions was $461 billion. Moreover, the deposit insurance fund held $35.7 billion that would be available to cover losses to the insurance fund. Of the $2.7 trillion of maximum loss exposure, FDIC estimated $180 million as the amount of losses “for which the risk was less than certain but still considered reasonably possible,” and an additional $79 million as the amount of loss deemed probable.

Another illustration of the need to use caution in interpreting and using the total commitments and contingencies data presented in table 5 is the Overseas Private Investment Corporation. Of the $37.6 billion in total commitments and contingencies reported by the Overseas Private Investment Corporation, $31.4 billion represented the total face value of the three types of political risk investment insurance it provides (inconvertibility of currency, expropriation, and political violence). Investors may obtain all three coverages, but claim payments may not exceed the single highest coverage amount. In addition, claim payments are limited or reduced for other factors, such as stop-loss agreements and recoveries from other sources. Taking these and other factors into consideration, the Overseas Private Investment Corporation estimated that its “current exposure to claims” or reasonably possible loss for its political risk insurance program was $6.4 billion, and an additional $103 million as the amount of loss deemed probable.

Readiness in Achieving Year 2000 Compliance

We surveyed both the financial services institutions and the relevant regulators on Year 2000 compliance efforts. The 22 financial services institutions provided information regarding their status in achieving Year 2000 compliance using the 5 readiness phases and the corresponding recommended schedule for completing each phase that we described in our recent Year 2000 Assessment Guide (see table 6). There were no significant differences among the types of financial services institutions and their reported readiness. A number of the institutions reported that they had their Year 2000 readiness assessed by external auditors or other independent outside entities.

The awareness phase includes such activities as defining the Year 2000 problem, gaining executive level support and sponsorship, establishing a team, and developing an overall strategy. The recommended completion date for the awareness phase was December 1996. All 22 institutions reported completing this phase.

The assessment phase includes assessing the Year 2000 impact on the institution, identifying core business areas and processes, analyzing systems supporting the core business areas, and setting priorities for their conversion or replacement. The recommended completion date for the assessment phase was August 1997. Sixteen of the 22 institutions reported they had completed this phase. The remaining six institutions reported that this phase was in progress.

The majority of the institutions were in the process of completing the renovation, validation, and implementation phases. The renovation phase includes such activities as converting, replacing, or eliminating selected platforms, applications, databases, and utilities. The recommended completion date for the renovation phase is August 1998. The validation phase includes testing, verifying, and validating converted or replaced platforms, applications, databases, and utilities and testing them in an operational environment. The implementation phase includes implementing the converted or replaced platforms, applications, databases, utilities, and interfaces. According to our recommended schedule, both the validation and implementation phase activities are to be performed on or by December 1999.

We asked each of the six regulators what actions they had taken to ensure that their regulated financial services institutions would be in compliance with the Year 2000 computer conversion (see table 7). The reported data indicated that the regulators had extensive efforts under way to monitor the Year 2000 conversion efforts of regulated institutions. These efforts range from issuing guidance to requiring external auditor reviews or performing examinations on the institution’s Year 2000 compliance status.

Scope and Methodology

To determine which financial services institutions are independent corporations, sponsored in whole or in part by the federal government, or corporations within the executive branch, we defined financial services institutions as entities whose enabling legislation authorized them to provide direct loans or credit, guarantee loans or mortgage-backed securities; insurance (deposits, pension funds, crops, etc.); or secondary market activities related to loans (mortgages, student loans, etc). We then used prior GAO reports, the President’s 1998 Budget Appendix, reference documents, and studies/articles identified during our literature/Internet search to develop a list of institutions. This list was then shared with the Congressional Research Service, Congressional Budget Office, Department of the Treasury, and Office of Management and Budget and refined to reflect their comments.

To identify the extent to which these institutions were subject to selected oversight mechanisms and controls, we used prior GAO reports, the President’s Budget, and the institution’s enabling legislation to determine if the institution had a federal safety and soundness regulator. We did not determine for this report if the regulators were effectively using these authorities to supervise the financial services institutions. However, we have addressed the oversight activities of some regulators in other reports.

To determine if other internal and external oversight mechanisms and controls existed that might serve to alert Congress to potential problems, promote market discipline, or lead to correction of a problem, we completed a data collection instrument (DCI) for each institution that focused on control mechanisms that could be used regardless of the presence or absence of a safety and soundness regulator. Specifically, we focused on (1) adherence to selected federal statutes (Government Corporation Control Act of 1945, Government Performance and Results Act of 1993, Chief Financial Officers Act of 1990, Federal Managers’ Financial Integrity Act of 1982, and Federal Credit Reform Act of 1990); (2) independent OIG personnel; (3) externally audited financial statements; and (4) independent credit rating reports. We sent the completed DCI to the financial services institutions for validation and to obtain missing data items.

To provide information on the independence and authorities of any safety and soundness regulators for these financial services institutions, we used legal statutes, published regulations, and prior GAO reports to complete a DCI for each identified regulator. The DCI focused on the regulator’s standard-setting authorities; enforcement powers; and ability to levy direct fees or assessments (examination fees, user fees, general assessments, and other mechanisms). In addition, the regulator DCI obtained information on the total costs incurred by the regulator for its examination and oversight activities and the funding sources used to offset any costs that were not charged to the institution. The DCIs were sent to the regulators for validation and to obtain missing data items.

To address the objective of potential exposure, we first determined whether or not the federal government had an explicit liability for the activities of the financial services institution on our listing. We made this determination on the basis of an analysis of the institution’s enabling legislation and prior GAO reports. We obtained information on the extent of potential exposure for each financial services institution using the most recent available audited financial statements and/or the President’s Budget. Specifically, we obtained information on the institutions’ total assets and liabilities and their commitments and contingencies. These data were recorded in a DCI that was subsequently sent to each institution for validation and to obtain missing data items.

To provide information on the state of readiness of these institutions to achieve Year 2000 compliance and the regulators’ efforts in this area, we used both the institution and regulator DCIs. The institution DCI was keyed to the five broad phases of readiness that we developed and used in previous Year 2000 compliance assessments. The regulator DCI focused on efforts taken by the regulator to ensure the institution’s readiness, including issuance of guidance, examination of progress, coverage by external or internal auditors, and submission of reports. For this particular objective, we relied almost entirely on the institutions and regulators to provide the needed data. The information on FDIC’s Year 2000 readiness was based on our prior work on this subject, which was validated by FDIC.

We did our work between November 1997 and April 1998 in accordance with generally accepted government auditing standards.

Agency Comments and Our Evaluation

We requested comments on a draft of this report from the Secretary of the Department of the Treasury and the Director of the Office of Management and Budget (OMB) or their designees. On May 5, 1998, we met with the Department of the Treasury’s Director of the Office of Government-Sponsored Enterprise Policy, who said that Treasury would not be providing written comments on the draft. However, he provided technical comments, which we incorporated where appropriate.

We received written comments from OMB, which are reprinted in appendix VI. OMB had two primary concerns with the scope of this report. Its first concern was with the exclusion of numerous government entities that engage in financial services activities that result in potential liabilities. OMB stated that the report did not address government agencies and departments, such as the Small Business Administration, that directly engage in credit and insurance activities similar to those undertaken by the financial services institutions covered in the report. We agree that the U.S. Treasury has a potential liability from financial services institutions within the federal government regardless of whether the credit or insurance program is conducted under a corporate entity or directly by an executive branch department. However, we feel that it is useful for this report to focus on financial services institutions that are independent corporations, sponsored in whole or in part by the federal government, or corporations within the executive branch because the oversight, issues, and concerns can be affected by an institution’s status as a corporation. We revised and added information early in this report to recognize that some of the financial institutions are in fact parts of executive branch departments and agencies or constitute entire agencies themselves.

Second, OMB expressed concern that in presenting data on potential liability we did not ultimately identify which were the most appropriate indicators of the potential liabilities of these financial services institutions. We agree. Due to the wide range of financial activities undertaken by the institutions and the unique nature of the associated potential liabilities, identifying a set of indicators that would be most appropriate for measuring the government’s exposure for all 22 of the institutions would require analyses beyond the agreed-upon scope of this report. For example, the unique purposes of each institution and various economic and other circumstances that might affect its condition would have to be considered. However, we believe that the information contained in this report can be useful for Congress and the executive branch in identifying specific institutions for more focused and in-depth analysis. OMB also provided technical comments, which we incorporated where appropriate.

As agreed with your office, unless you announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of the report to the Ranking Minority Member of your Subcommittee; the Chairmen and Ranking Minority Members of the Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, House Banking Committee; the financial services institutions and federal regulators covered in this report; the Department of the Treasury, and the Office of Management and Budget. We will also make copies available to others on request.

This report was prepared under the direction of M. Kay Harris, Assistant Director, Financial Institutions and Markets Issues. Other major contributors are listed in appendix VII. Please contact me or Ms. Harris on (202) 512-8678 if you have any questions on this report.

Financial Services Institutions Purposes and Funding Sources

Receives annual appropriations from Congress and operates under a revolving fund from which repayments are used to fund other projects.

Stabilize, support, and protect farm income and prices; assist in maintaining balanced and adequate suppliers of agricultural commodities and their products; and facilitate the orderly distribution of commodities. It also carries out assigned foreign assistance activities, such as guaranteeing the credit sale of U.S. agricultural products abroad.

Corporation has capital stock of $100 million held by the U.S. Treasury and has authority to borrow up to $30 billion collectively from the U.S. Treasury, private lending agencies, and other sources. The corporation receives annual appropriations for its past losses. In addition, the corporation receives appropriations for the subsidy portion of its export credit activities as required by the Federal Credit Reform Act.

Provide financial assistance through equity investments, deposits, grants, loans, and technical assistance to new and existing community development financial institutions, such as community development banks, credit unions, loan funds, venture capital funds, and micro-loan funds. Its aim is to expand the availability of credit, investment capital, financial, and other services in distressed urban, rural, and Native American communities.

Funding is provided through congressional appropriations. Funds could be generated from returns on equity investments in community development financial institutions.

Aid in the financing and promotion of U.S. exports by providing export credit support through direct loan, loan guarantee, and insurance programs.

Has capital stock of $1 billion purchased by the U.S. Treasury; the bank receives annual appropriations and can issue up to $6 billion in debt obligations for purchase by the U.S. Treasury. (continued)

Improve the economic stability of U.S. agriculture through a sound system of crop insurance and provide the means for the research and experience helpful in devising and establishing such insurance. Offers catastrophic crop insurance to cover unavoidable losses due to factors, such as insect infestation, adverse weather conditions, fires, and earthquakes. It also offers additional coverage to supplement the minimal level of protection provided under the catastrophic program.

Crop insurance program is financed primarily through general fund appropriations and farmer-paid premiums. It is authorized to use funds from the issuance of capital stock, subscribed to by the United States for working capital purposes.

Promote stability of and public confidence in the nation’s banking system by providing deposit insurance to banks and thrifts and supervise and examine state-chartered banks that are not members of the Federal Reserve System.

Primarily funded from (1) interest earned on investments in U.S. Treasury obligations, (2) bank and thrift assessment premiums, and (3) income earned on and funds received from the management and disposition of assets acquired from failed banks and thrifts. FDIC also has authority to borrow up to $30 billion outstanding at any one time from the U.S. Treasury and limited amounts from the Federal Financing Bank.

Provide mortgage insurance to borrowers that the conventional market does not adequately service: first-time home buyers, minorities, lower income families, and residents of underserved areas. It underwrites single-family, multifamily, property improvement, and manufacturing home loans.

Receives appropriations and generates additional income from investments in U.S. government securities funded by insurance premiums. (continued)

Support the government’s housing objectives by establishing secondary market facilities for residential mortgages, guaranteeing mortgage-backed securities composed of Federal Housing Administration-insured or Veterans Affairs-guaranteed mortgage loans that are issued by private lenders .

Uses assessments of commitment, guarantee, and other fees of Government National Mortgage Association mortgage-backed securities issuers to cover costs and to fund a reserve against possible future payments under the guarantee.

Charter new federal credit unions, supervise established federal credit unions, make periodic examinations of the credit unions’ financial condition and operating practices, and provide administrative services. In addition, it administers (1) a fund that insures member share deposits in all federal credit unions and in qualifying state credit unions that request insurance, (2) a Central Liquidity Facility fund that provides seasonal and emergency loans to member federal and state credit unions, and (3) a revolving loan program that is intended to stimulate community development.

The deposit insurance fund is funded by premiums paid by member credit unions, a 1-percent deposit from insured credit unions, and income generated by their investment. The Central Liquidity Facility is funded primarily by stock subscriptions from credit unions and borrowings (up to $600 million) from the Federal Financing Bank. NCUA also has the authority to borrow up to $100 million from the U.S. Treasury for the deposit insurance fund.

Promote economic growth in developing countries by encouraging U.S. private investment in those countries. It encourages U.S. investors by financing businesses through loans and loan guarantees, supporting private investment funds that provide equity for U.S. companies investing in overseas projects, insuring investments against a broad range of political risks, and engaging in outreach activities.

Income is derived primarily from (1) interest earnings on invested assets, (2) premiums, (3) recoveries, and (4) fees. In addition, it has the authority to borrow up to $100 million from the U.S. Treasury. It also receives annual appropriations for the subsidy portion of its credit activities. (continued)

Protect the retirement income of participants and beneficiaries covered by private sector defined-benefit pension plans if single-employer plans terminate or if multiemployer plans are unable to pay benefits.

Receives funds from premiums collected from ongoing pension plans, investment income, terminated plan assets, and recoveries from sponsors of terminated plans. In addition, it has the authority to borrow up to $100 million from the U.S. Treasury.

Provide a supplemental source of financing for telecommunications borrowers under the Rural Utilities Service’s telecommunications loan program. The Rural Telephone Bank assists rural electric and telecommunications organizations in obtaining financing to provide services in rural areas. The Bank lends to rural telecommunications organizations.

Equity capital consisting of class A stock purchased by the United States and classes B and C stock purchased by bank borrowers, organizations eligible to become borrowers, and organizations controlled by borrowers. In addition, income is generated from interest charged on its loans. The Rural Telephone Bank also receives annual appropriations for the subsidy portion of its credit activities.

Provide privately financed credit to agricultural and rural communities. Its services include long-term real estate loans, short- and intermediate-term loans to agricultural producers, credit and mortgage life or disability insurance, various types of crop insurance, estate planning, recordkeeping services, tax planning and preparation, and consulting.

Proceeds from sale of systemwide debt securities and assessments of system institutions. In addition to revenues from its lending activities, system banks and associations receive investment income from investments held for the purposes of maintaining a liquidity reserve, managing surplus funds, and managing interest rate risk. (continued)

Foster the development of a secondary market for mortgage loans secured by first liens on agricultural real estate or rural housing by guaranteeing the timely payment of principal and interest on securities representing interest in, or obligations backed by, such loans. It also guarantees the timely payment of principal and interest on securities backed by portions of farm ownership and farm operating loans, rural business and community development loans, and certain other loans guaranteed by the Department of Agriculture.

Derives financial support and funding from sale of common and preferred stock, issuance of debt obligations, gain on sale of guaranteed loan-backed securities, guarantee fees, and income from investments. The Secretary of the U.S. Treasury is authorized to purchase obligations of this entity in cumulative amounts not to exceed $1.5 billion for the purpose of fulfilling the entity’s guarantee obligations.

Help provide access to housing by making loans, called advances, and providing other credit products and services to over 6,400 member commercial banks, savings associations, insurance companies, and credit unions. The Federal Home Loan Bank System consists of 12 Federal Home Loan Banks and the Office of Finance.

Derives funding from the sale of consolidated obligations to the public; other sources of lendable funds include members’ deposits and capital. The Secretary of the U.S. Treasury is authorized, at the Secretary’s discretion, to purchase up to $4 billion in the Federal Home Loan Bank System’s obligations.

Provide stability in the secondary market for residential mortgages, provide ongoing assistance to the secondary market for residential mortgages, and promote access to mortgage credit throughout the nation by increasing the liquidity of mortgage investments and improving the distribution of investment capital for residential mortgage financing.

Sale of capital stock and mortgage-backed securities, the issuance of debt obligations, interest, and fee income. The Secretary of the U.S. Treasury is authorized to purchase, at the Secretary’s discretion, up to $2.25 billion of the Federal Home Loan Mortgage Corporation’s obligations. (continued)

Provide stability in the secondary market for residential mortgages, provide ongoing assistance to the secondary market for residential mortgages, and promote access to mortgage credit throughout the nation by increasing the liquidity of mortgage investments and improving the distribution of investment capital for residential mortgage financing.

Sale of capital stock and mortgage-backed securities, the issuance of debt obligations, interest, and fee income. The Secretary of the U.S. Treasury is authorized, at the Secretary’s discretion, to buy up to $2.25 billion of the Federal National Mortgage Association’s obligations.

Expand funds available for student loans by promoting liquidity in the student loan marketplace through secondary market purchases. Its products and services include student loan purchases, commitments to purchase student loans, and secured advances to originators of student loans. It also offers operational support to originators of student loans and to postsecondary education institutions. Pursuant to authority enacted in the Student Loan Marketing Association Act of 1996, the Association’s shareholders approved a plan on July 31, 1997, to reorganize as a fully private, state-chartered entity. Under the reorganization, which became effective on August 8, 1997, the Association became a wholly owned subsidiary of SLM Holding Corporation.

Issuance of debt securities to the public and domestic and overseas capital markets is the primary means of financing. Other sources of financing include the sale of common and preferred stock, the securitization of its student loans, and interest income. The Secretary of the U.S. Treasury is authorized to purchase up to $1 billion in the Student Loan Marketing Association’s obligations.

Ensure the timely payment of principal and interest on Farm Credit System debt obligations purchased by investors.

Collects insurance premiums from Farm Credit System member banks to pay administrative expenses and fund insurance reserves. (continued)

Support eligible cooperatives with credit and technical assistance and encourage broad-based ownership, control, and participation in the Bank. In general, cooperatives eligible for Bank loans and services are organizations operating on a cooperative, not-for-profit basis to produce or furnish goods, services, or facilities primarily for the benefit of their member-stockholders who are the ultimate consumers.

Primary source of funding is from private lenders. Its major creditors are banks and insurance companies. Initial funding was provided through Treasury purchases of its class A stock. The Treasury-held stock was subsequently exchanged for class A notes that must be repaid by October 31, 2020.

Conduct programs to stimulate the development of local public/private resident partnerships committed to reversing neighborhood decline. It works with financial institutions and local governments to stimulate reinvestment in locally selected neighborhoods by offering rehabilitation and financial services to community residents.

Federal appropriations and nonfederal funding, such as contributions from local government agencies and private foundations, and other revenue sources. (continued)

Afford certain protections for customers who experience loss as a result of broker-dealer failure and promote investor confidence in the nation’s securities markets. Members of the Corporation are generally registered broker-dealers and all persons who are members of a national securities exchange.

Assessments collected from its members and interest earned from investments in U.S. government securities. It is authorized to maintain confirmed lines of credit with banks and other financial institutions. Additionally, the Securities and Exchange Commission is authorized to make up to $1 billion in loans to the corporation in the event that its funds appear to be insufficient for its intended purposes.

Authorized to makes grants, loans, and loan guarantees to any African private group, association, or other entity engaged in peaceful activities that enable the people of Africa to develop more fully. The Foundation also develops strategic partnerships, funds development research and dissemination, and provides technical assistance.

Congressional appropriations.

Promote activities to strengthen and enhance production or marketing of sheep and goats and their products in the United States. It may provide loans or grants to eligible entities to provide assistance to the industry for infrastructure development, business development, production and resource development, and market and environmental research.

Has funding through appropriations placed in a revolving fund. (continued)

Maintain and lease property in the Presidio of San Francisco consistent with the surrounding National Park Service lands.

Congressional appropriations; also authorized to borrow up to $50 million from the U.S. Treasury, but only if the Secretary agrees to purchase such obligations, to rehabilitate and prepare facilities for leasing.

Selected Oversight Mechanisms and Controls by Financial Services Institution

Farm Credit System Insurance Corporation

Institution required to have annual reports generated on its actuarial soundness.

Self-Reported Adherence to Selected Federal Statutes That Promote Accountability and Control

As agreed with your office, we obtained information on coverage by or voluntary adherence to five selected federal statutes that promote accountability and control for those institutions without a federal regulator (see table III.1). The Government Corporation Control Act of 1945 (GCCA) mandates audit, accounting, and budget requirements for mixed-ownership and wholly owned government corporations. The Government Performance and Results Act of 1993 (GPRA) was intended to improve the efficiency and effectiveness of federal programs by establishing a system to set goals for program performance and to measure results. Specifically, GPRA requires the preparation of multiyear strategic plans, annual performance plans, and annual performance reports.

The Chief Financial Officers Act of 1990 (CFO Act), as subsequently expanded through the Government Management Reform Act of 1994, requires the preparation and audit of annual financial statements. Additionally, the CFO Act set expectations for (1) the deployment of modern systems to replace existing antiquated, often manual processes; (2) the development of better performance and cost measures; and (3) the design of results-oriented reports on the government’s financial condition and operating performance by integrating budget, accounting, and program information.

The Federal Managers’ Financial Integrity Act of 1982 (FMFIA) requires that heads of executive agencies evaluate and report on their internal control and accounting systems. The Federal Credit Reform Act of 1990 (FCR Act) requires that the full estimated cost to the government (on a net present value basis) over the life of a loan or loan guarantee be reflected in the budget before the credit is extended. Federal accounting standards were subsequently developed that are consistent with the intent of this act.

The majority of government corporations reported that they fully or partially adhered to these five statutes. All of the government corporations said that they fully or partially adhered to GCCA and GPRA. All but one of the government corporations reported full or partial adherence to the CFO Act and FMFIA. The two government corporations that provided deposit insurance reported that they were exempt from the requirements of the FCR Act. As agreed with your office, we did not independently determine the applicability of these statutes to the institutions.

Table III.1: Self-Reported Adherence to Selected Federal Statutes (continued)

Financial Services Institution Regulators’ Enforcement Authority

As agreed with your office, we obtained information on the enforcement authorities of the regulators covered in this report (see table IV.1). Our work with banks and thrifts shows that to be effective, the regulator needs to be able to take prompt enforcement actions when safety and soundness problems are identified. Enforcement actions available to bank and thrift regulators include informal actions, such as requiring plans to rectify identified problems; and range to more serious or formal actions, such as those identified in table IV.1. Some of the regulators reported having formal enforcement authorities in addition to those captured in table IV.1. For example, the Department of the Treasury and the Securities and Exchange Commission had the authority to bring action in district court for enforcement purposes against the Student Loan Marketing Association and Securities Investor Protection Corporation, respectively. In addition, the Department of the Treasury had various capital-based enforcement authorities, such as requiring the Student Loan Marketing Association to obtain additional capital or requiring the submission of a capital restoration plan. The Farm Credit Administration had similar capital-based enforcement authorities over the Farm Credit System and Federal Agricultural Mortgage Corporation.

Additional Financial Information for Institutions

Total commitments/contingencies (FY 1996)

Items included in total commitments/contingencies ($3,675)

Production flexibility contracts, letters of commitment, purchasing commitments, export credit guarantees, ground waste contamination, market access program 39 Capital leases, grants instruments, outstanding loans receivable, outstanding subrogated claims (1,621)

2,691,951 Capital leases, letters of credit, pledged securities, receivables from bank/thrift resolutions, insured deposits, asset securitization guarantees, anticipated failures of insured institutions, litigation losses (3,843)

434,833 Mortgage insurance in force, section 221(g)(4) program debentures Total guaranteed mortgage-backed securities, commitments to guarantee mortgage-backed securities 275,543 Capital leases, unsecured term coverage exposure, pending insurance claims, investment guarantees, outstanding claims settlement guarantees, undisbursed commitments on investment guarantees Insured pension plans, operating leases (continued)

Total commitments/contingencies (FY 1996)

Items included in total commitments/contingencies 880 Capital leases, off-balance sheet 41,958 Commitments to extend credit, standby letters of credit, interest rate swaps, forwards and futures contracts, interest rate caps, floors, and other options contracts 254 Capital leases, loan purchase commitments, outstanding principal balance of securities guaranteed and not held in portfolio, forward sales contracts advances, standby letters of credit, pledged collateral for interest rate exchange agreements, capital leases, required Resolution Funding Corporation annual payment commitment, Affordable Housing Program commitment, interest-rate exchange agreements purchase mortgages, off-balance sheet financial instruments (mortgage participation certificates, derivative financial instruments) securities not held in portfolio (outstanding and commitments), off-balance sheet financial instruments (interest rate swaps, asset swaps, credit enhancements, options, and other guarantees) 60,237 Capital leases, commitments to purchase loans and lend funds, letters of credit guaranteeing repayment of state student loan revenue bonds, pending litigation, interest rate swaps, foreign currency agreements (continued)

Total commitments/contingencies (FY 1996)

Items included in total commitments/contingencies Financial Assistance Corporation bonds, insured Farm Credit System debt obligations 107 Capital leases, standby letters of (>1)

Comments From the Office of Management and Budget

Major Contributors to This Report

General Government Division, Washington, D.C.

San Francisco Office

Related GAO Products

Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, Feb. 10, 1998).

Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, Jan. 7, 1998).

Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, Sept. 30, 1997).

Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, Sept. 1997).

GSEs: Recent Trends and Policy (GAO/T-OCE/GGD-97-76, July 16, 1997).

Government-Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE Regulator (GAO/GGD-97-139, July 9, 1997).

Housing Enterprises: Potential Impacts of Severing Government Sponsorship (GAO/GGD-96-120, May 13, 1996).

Government Corporations: Profiles of Existing Government Corporations (GAO/GGD-96-14, Dec. 13, 1995).

Government Corporations: Profiles of Recent Proposals (GAO/GGD-95-57FS, Mar. 30, 1995).

Government-Sponsored Enterprises: A Framework for Limiting the Government’s Exposure to Risks (GAO/GGD-91-90, May 22, 1991).

Budget Issues: Profiles of Government-Sponsored Enterprises (GAO/AFMD-91-17, Feb. 1991).

Government-Sponsored Enterprises: The Government’s Exposure to Risks (GAO/GGD-90-97, Aug. 15, 1990).

Federal Credit and Insurance: Programs May Require Increased Federal Assistance in the Future (GAO/AFMD-90-11, Nov. 16, 1989).

The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.