oversight

Federal Supervision of State and National Banks by the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation

Published by the Government Accountability Office on 1977-03-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United      States General Accounting                Office
                                 Washington,  D.C. 20548



                                                        FOR RELEASE ON DELIVERY
                                                        Expected at 10 a.m., EST
                                                                   February 5, 1976

                                                                                       Ill11
                                                                         ’ Illllll~lllll
                                                                                 Ill11111
                                                                                     lllllIll11
                                                                                   LMlOO320
                                                                                            Ill11
                                                                                              Ill1
                                                                                                Ill1
                               STATEMENTOF
                              ELMER B. STAATS
                  COMPTROLLERGENERAL OF THE UNITED STATES
                                BEFORE THE
                      COMMITTEEON BANKING, HOUSING AND
                               URBAN AFFAIRS
                           UNITED STATES SENATE
                                    ON
                    PROPOSEDGAO STUDY OF BANK REGUUTORY
                                 FUNCTIONS



         We are here at your           invitation       to discuss         a proposed

GAO study        of the bank regulatory              functions     of the Comptroller

of the Currency,             the Federal      Reserve Board,            and the Federal

Deposit        Insurance      Corporation      as described        in your Committee's

staff     memorandum of January              26, 1976.       The specific          guidelines

for     this    study,      as proposed      by your    staff,     are appended to

my statement             (Attachment   1).

         We have had preliminary              discussions        with     members of the           .

Committee        staff      as to a possible         GAO study     of this        nature.

These discussions             were in terms         of a review         only   of the
                                                  -    2 -


activities        of the Comptroller                  of the Currency        in relation

to several       problem           banks suggested            by the Committee          staff.

The written           proposal       on which you have asked for                 our comments

of course       goes much further                than these       discussions.           The scope

of the proposed             study     has been extended            beyond the Comptroller

of the Currency             to include          in addition       the regulatory           and

supervisory           activities        of the Federal           Reserve     Board and the

FDIC.        The proposed           study     would cover        a representative            sample

of problem       banks leading               to our evaluation          of the effectiveness

of the agencies             in carrying          out their       responsibilities            rather

than    a limited         number of case studies.

        We have several              comments on the proposed                guidelines:

        1.     They provide           that     we would not be permitted                 to copy

               examination           reports      and work papers          but that        we

               could      take notes.            We do not believe           in making such

               a study       that     we should         be precluded       from making

               copies       of whatever          documents we consider              necessary         to

               have for        study,        evaluation       and support       of our conclu-

               sions.        In accordance             with    our regular      audit      practice,

               we would want to make copies                      of pertinent        parts       of

               examination           reports      and related        work papers         in addi-

               tion      to notes       about     them so that        we can properly             make

               our evaluations               and use such materials             in our follow-up
                                           -3-


     discussions          with         agency officials.               This is our

     practice      in connection                 with     our annual          audits     of

     the Federal          Savings         and Loan Insurance                  Corporation

     where,      as discussed              later,        we have access             to the

     examination          reports         of the insured              savings        and loan

     associations.               All     of our work papers                  on these     audits

     including       whatever            information         we copy are kept                 in

     locked      cabinets          at our audit            site     in the agency's

     office      and are not removed from the premises.

2.   The guidelines              state      that        we would prepare             a report

     setting      forth     our conclusions                 on how effective              the

     agencies      have been in carrying                      out their         supervisory

     responsibilities.                   We believe         that      this     calls     for

     too comprehensive                  a conclusion          based on the somewhat

     limited      examination             we would be expected                  to make as

     we understand           it.         In the first             place,      we would not

     be going behind               the examination                reports      and our sample

     of examination              reports         that     we would review              would be

     limited      to a few of those                     on problem         banks.       To reach

     a general       conclusion             on the effectiveness                    of super-

     visory      responsibilities,                  we would have to examine a

     much greater          sample including                 not only          examination
                                            -4-


     reports       and actions              on problem          banks but also               on non-

     problem       banks.

3.   The guidelines               state       that        our report      would remain                con-

     fidential           withthe.Committee                  to be released               only pursuant

     to a Committee               vote.        As I will            discuss       later,       we also

     have a request               from a House subcommittee                        for      an audit

     of bank regulatory                    activities.              In addition,            another

     House subcommittee                    is conducting             a separate            investi-

     gation       of these          activities.              For these          reasons,        we be-

     lieve       that     any report           we prepare             on any study           we make

     of these           functions          should        be made available                 to all

     committees           who are actively                  involved.

4.   The guidelines               specify         that      any questions              as to the

     scope and methods of our study                             would be determined

     by the Committee                staff.          If     we are to make the study
r
     for      the Committee,               we believe          that     any questions               that

     come up should               be worked out on a cooperative                              basis

     as to what is practicable,                            rather      than placing            our

     office       in the position                 of being          directed       by the

     Committee           staff.        This       relates,      to the need for                us to

     remain       sufficiently               independent            to do "an objective

     and nonpartisan                job"      as the Committee                 staff       memorandum

     says.
.


                                                       -5-


             As the written               proposal     points        out,        the key to this            kind

    of a study           is    full    access to the bank examination                           reports      and

    related      files         and records        of the regulatory                  agencies,           GAO

    has been authorized                   to audit     the financial               transactions            of the

    FDIC for many years                   in accordance            with     the principles           and pro-

    cedures      applicable             to commercial          corporate           transactions.

    As you know, this                  Corporation       provides           deposit      insurance           for

    commercial           banks.         However,       in making our audits,                    we have never

    been given           access        to the bank examination                     reports       except     those

    relating          to closed          banks and therefore                we have been able only

    to make a very               limited      audit     each year.               I have described

    this      situation          at some length          in my letter               addressed       to the

    Chairman of this                  Committee       on January           22,     1976, and a copy

    is attached               to my statement          (Attachment           2).

              Also,      as you know, except                 for     the authority              to audit      the

    cancellation              and destruction           of U.S.           currency      unfit      for     circu-

    lation      as provided              in the act of May 20,                   1966, we do not have

    any authority               to audit      the activities               of the Federal           Reserve

    Board or the banks and other                        facilities           of the Federal               Reserve

    System.           Bills      are pending          in both        the House and Senate to

    provide       this        authority       and both bills,               as presently           drafted,

    provide       that        we would have access                 to bank examination                   reports

    from whatever               source     in making our audits.
                                                  -    6 -



          We do not have any statutory                       authority       to audit            the Office

of the Comptroller             of the Currency.                  The expenses of the Comp-

troller      of the Currency             are paid         from assessments               levied         against

regulated         banks and the law specifically                         provides        that       these

funds      are not to be construed                    as Government          funds       or appropriated

monies.       For this         reason,      our general           audit       authority            over

Government          agencies      does not include               the Office           of the Comp-

troller      of the Currency             and we have never                 been given            specific

authority         to audit       its    activities.

          Because of our lack              of audit          authority        over the Comptroller

of the Currency           and the Federal                Reserve System and the limita-

tions      placed     by the FDIC on our audit                     of its         activities,           we

could      only     make the study          proposed          by the Committee                  staff       if

the Committee          makes satisfactory                 arrangements             for    our access

to the pertinent             bank examination                reports       and related             files

and records          including         those     pertaining         to management actions

on the reports.              To make a satisfactory                      study,      we would also

need the full          cooperation             of agency officials                 to discuss              the

management's          use of the bank examination                         reports        once they

are completed          and the nature                 of the actions          taken       on the find-

ings      and recommendations              of the examiners.                  Without           appropriate

access      to the necessary              reports        and records          and the cooperation
                                                   -7-


of agency officials,                  we could      not make the study          contemplated

in the Committee              staff     proposal.

         As far      as staff         and other      resources     that     would be required

to make a satisfactory                  study     are concerned,          at this     time we

have no way of estimating                     how many staff       members would be

required,         how much travel             would be involved,           or how long such

a study      would take.'             These requirements          would depend on the

number,      size     and complexity             of the problem      banks selected

for   study,        satisfactory         resolution         of the access       to records

problem,       and the cooperation                of agency officials           and employees.

         Because of the restrictions                     on our audit       authority,           our

experience          in working         with     bank examination          reports     is limited.

As stated         earlier,       we do have access             to them in our work at

the FDIC for          banks that         have been closed           (see Attachment              3).

However,       we have never            been able to persuade              Corporation           officials

to permit       us to examine other                 bank examination          reports      or

obtain      information          about        them except      under conditions           that

would exclude           all     identifying         data and we felt          these      conditions

were too restrictive                  to be useful.

         Our staff       has had experience               in reviewing        the examination

reports      on savings          and loan associations             insured      by the Federal

Savings      and Loan Insurance                 Corporation.       We have never had
                                                    -    8    -



any problem           with     obtaining       access             to those      reports        in connec-

tion      with      our annual      audits      of that             Corporation.             By reviewing

examination           reports      for     a selected              number of problem             and non-

problem          associations,       we are able to evaluate                         the impact         of

problem          or potential       problem         associations              on the financial

condition          of the Corporation               (see Attachment                 4).      For this

reason,       we can make more satisfactory                            audits       than in the case

of the FDIC.               In the latter        case,             we have repeatedly             recommended

in our audit           reports      that     the Congress               amend the FDIC Act to

clarify          our authority,          but this          has not been done.

          In 1968, the House Committee                            on Banking        and Currency         held
hearings          on our recommendation.                      In our testimony,               we discussed

at length          our continuing           problem with               respect       to bank examina-

tion      reports      on insured          banks.          However,         no change in the law

was    made as a result             of these            hearings.

          I believe          you are aware that                   the Chairman of the Domestic

Monetary          Policy      Subcommittee          of the House Committee                      on

Banking,          Currency       and Housing            is also very            much interested

in the subject               of the bank regulatory                    activities           of the three

agencies.            On January          24, he addressed               a formal           written   request

to us that           we "'conduct         a full-scale              audit     of the bank regu-

latory       functions          of the Federal               Deposit        Insurance        Corporation,

the Office           of the Comptroller                 of the Currency,                  and the Federal

Resewe           System over the past               five          years."
                                            -9-



         This    request    of course        calls      for       a more farreaching                  study

than that        contemplated         in your       staff's        proposal      although             I

believe      that    the objectives          are the same.                In any event,               if

you wish        to have us make a study,                 it      seems to me that              its

nature      and scope ought           to be worked out so that                   it     will         be

satisfactory         for   the needs of both                  your Committee           and the

House Committee.

         The Chairman          of the House Subcommittee                   has written               also

to the heads of the three                  regulatory           agencies      requesting              that

they voluntarily           allow      our auditors             to review      and evaluate

their      supervisory         responsibilities               relating     to the banks under

their      jurisdiction         and that     they make available                 to us all                 of

the records,         books and documents,                and other         material        relating

to their        bank examination           and supervisory               functions.            We have

inquired        of these       agencies     as to what arrangements                     will         be

made to make available                to us the necessary                 reports,       records,

and files        which we will         need to examine in order                       to carry             out

the Subcommittee's              request.          At this       time,     we do not know what

decisions        have been made by the three                      agencies     on the Sub-

committee's         request.
                                                                - 10 -




--
            You have asked for                      our views            on the necessity                  for      a study

     of bank regulatory                    activities.                We believe           that     there         are these

     alternatives:

            1.       Since we lack                 statutory            authority          to make audits                 of .

                     the Comptroller                  of the Currency                 and the Federal

                     Reserve      System and since                        we have had a long-standing

                     disagreement                 with     the FDIC on the extent                         of our audit

                     of its     activities,                     we believe          that     we could            best

                     serve     the Committee                     if     the study          proposed        by the

                     Committee             staff         were made by the Committee                         itself.

                     We would be willing                         to assist       in such a study                    by

                     assigning             members of our staff                      to the Committee                    to

                     help     carry         it     out.          Under the circumstances,                         we would
                     prefer     this             course         of action      at this            time.

            2.       If     the Committee                 wishes        such a study              to be made and

                     that     we should             do it         for     the Committee,             we would do

                     our best         to      carry        it     out in accordance                 with         the

                     Committee's             wishes,            assuming       that        satisfactory                arrange-

                 ments could                 be made with                the three          regulatory              agencies

                     for    access          to the necessary                  records.            In this           case,

                 the scope of the study                               could    be confined                to selected

                 case studies                    of problem             banks which          is what we under-

                 stand would be the intent                                of the Committee                  staff
                                              -     11    -

                        I

     proposal.               A second possibility                       would be to limit

     the case studtes                 to closed                banks,     tracing        the history
                                                                                          -.
     of actions              over    a period             of time,        possibly        beginning

     from the time                the banks were placed                     in a classified

     category.                                                                      I

     However,           a more comprehensive                      study     might        be made by

     examining              a statistically                   drawn sample of problem

     banks of the three                  agencies               and examining            what is

     done about              the findings                and recommendations                of the

     examiners              in the cases reviewed.

3.   Another        approach          would be for                the Committee             to

     arrange        for       us to make a survey                       of these        activities

     as we normally                 do in auditing                other     Government            pro-

     grams and activities                         and on the basis          of such survey
                                                                                   _..
     reach preliminary                 conclusions                as to.what should be

     examined           in more depth.


     If   this      course          of action             were followed,            we could

     advise       the Committee                   later       of our preliminary                 find-

     ings and recommendations                             about    the kind         of audit         or

     study       that       we believe             could       be helpful       to the Committee

     in its       oversight           work.




 /
                                                   - 12 ir


              One reason         for     suggesting              this    alternative           is the fact

              that     the Comptroller                 of the Currency             engaged the

              public     accounting             firm     of Haskins          & Sells        to make a

              major     study     of his         agency and to propose                     recommenda-

              tions     that     would enable              it     to achieve        its     objectives

              more efficiently              and effectively.                  The accounting

              firm     submitted         a comprehensive                 report     in May 1975

              which contained             numerous recommendations                         and we

              understand         that     many of these                 recommendations             are

              now being placed              into        effect.


              For this         reason,      there        is some question                 as to whether

              a review         of the handling                  of examination            reports        on

             problem      banks in the past                      will    lead to observations

              or conclusions             that      are relevant            in the light             of

              changing         procedures          in the Office             of the Comptroller

             of the Currency.                A preliminary                survey       of current

             operations          including             changes in procedures                   would be

             helpful      in making decisions                       as to what further               studies

             would be hel,pful             to the Committee.

       It    is our view         that     an independent                 review    of how bank

regulatory      functions         are carried             out would be desirable                     as a

means of assisting              the Congress             in carrying          out its          oversight
responsibilities.               Under present               arrangements,              there     is no
                                                      -    13     -



provision           for     such independent               review.            To depend on unofficial

investigations               by the press            and disclosures               in the press           of

information               used by the regulatory                      agencies     to carry        out their

functions           is not,      in my judgment,                  a satisfactory            situation.

Public       confidence          in the commercial                     banking     industry        is important

in our society               and the effectiveness                      of Government         supervision

and regulation               has much to do with                      that    confidence.          However,

as with       all         Governmental       activities,                 I think    there     should        be

provision           for     an independent            review           of how important            responsi-

bilities       are carried            out and I think                   in this     area there           is a

serious       gap.

           I think         the best      solution          is for            the Congress      to give          us

statutory           authority         to make audits                  of the activities            of the

bank supervisory                and regulatory              agencies            in the same way that

we do for           almost      all    other    Governmental                   programs     and activities.

The fact        that        the information               that        we would be working            with

is highly           sensitive         should    not in itself                  be an overriding

reason why our office,                     as a part             of the legislative             branch,
should       be barred          from making               such audits.

           In devising          our work plans              and programs            where we have

statutory           audit     authority,        it        is our continuing               policy     to keep

abreast       of the interests               of the congressional                    cormnittees          so

as to enable               us to concentrate               our work on matters                that       will

be as helpful               as possible        to them.
.-               -

                                                               Attachment     1



                            Guidelines    for   the GAO Study

           If the Committee       determines   to request a GAO study
     of the bank regulatory        process,  the following  guidelines
     are suggested:

           1. The GAO study would begin by reviewing       the
     examination    reports and associated  working papers for a
     representative     sample of problem banks.    The reports examined
     would go back far enough in time to the point where difficulties
     first  began to be noted.

           2. All examination     reports   and working papers would be
     reviewed in the offices    of the respective     regulatory agencies,
     GAO would not be permitted      to remove these documents or to
     copy them.   GAO auditors    would, however, be permitted     to take
     notes to assist    them in their    subsequent follow up interviews
     with agency officials.

           3. After reviewing         the examination        reports and working
     papers y the GAO would interview         officials        in the three agencies
     to determine what action was taken by the agencies with respect
     to problems noted in the examination              report.      These examina-
     tion reports and working papers would be taken as given.                    GAO
     would not be permitted        to challenge      the accuracy of an
     examiner's   findings     by conducting     a separate examination         of
     the bank involved.        Instead,   the focus of the GAO study would
     be on what actions were taken or not taken by the agency on
     the examiner's     findings.

            ,4. After completing         their    interviews   with agency
     offici&ls,       the GAO would prepare a report for the Committee
     setting     forth     its conclusions     as to how effective        the agency
     has been in carrying          out its supervisory       responsibilities.
     In preparing        its report,theGAO        would not discuss the con-
     dition     of any individual'bank         included in its sample unless
     the bank has already failed            or merged with another insti-
     tution     and such discussion        would not impair public confidence
     in the solvency of the successor institution.                  An advance
     copy of the report would be made available                 to the head of
     each agency before it is delivered                to the Committee.       Each
     agency would be afforded           an adequate opportunity         to comment
     on the GAO's conclusions           as an addendum to the report.
                                                Atkachment 1

                               - 2 -

     5. The report would remain confidential     with the
Committee and would be released only pursuant    to a vote   of
the Committee.

     6.   At all times throughout   the study, the GAO would
work closely with the Committee staff.      Any questions as
to the scope and method of the study would be determined
by the Committee staff   in accordance with the policies   of
the Committee.




                   :
                       /.i
                                                                             --


                                                                                    Attachment   2
         ,             COMPTROLLER     GENERAL      OF   THE      UNITED   STATEB
                                     WAsHINGTOr4,    O.C.      zowe


                                                    January            22, 1976

 B- 114831


The Honorable William           Proxmire
Chairman,    Committee         on Banking,
  Housing,   and Urban         Affairs
United States Senate

Dear Mr.      Chairman:

    Recent stories in the press raising questions about the financial
condition of two large New York banks based on apparently unauthorized
access to bank examination     reports of the Comptroller    of the Currency
prompts me to write to you about the recurring       problem faced by the
General Accounting    Office in its required  audits of the FDIC.

     The Federal Deposit Insurance Act requires         us to audit the financial
transactions  of the corporation    in accordance    with the principles   and pro-
cedures applicable    to commercial    corporate   transactions    and under such
rules and regulations    as may be prescribed     by the Comptroller     General.

      That law also specifically     provides that we shall have access to all
‘books, accounts,       records,  reports,   files,    and all other papers, things,
 or property     belonging to or iri use by the Corporation        pertaining to its
 financial   transactions    and necessary    to facilitate   the audit.

     Despite the specific provisions        of this law, for many years the
Corporation     has refused to give our auditors access to the reports of
examinations     of banks which are insured by the Corporation,              except
those pertaining     to closed banks.      Corporation    officials    have in effect
taken the position that these records involve matters               beyond the scope
of audit intended by the Congress when it specified that our audit would
be of financial   transactions     of the Corporation.      Corporation     officials
do not regard their function of examining           banks or their use of reports
of bank examinations       performed     by examiners    of the Comptroller         of the
Currency    and the Federal Reserve Board as coming within the meaning
of the term financial     transactions.

     We have contended from the start, however,          that the intended audit,
which is to be in accordance     with the principles    and procedures    appli-
cable to commercial    corporate    transactions,    of necessity   covers the
regulatory  activities including   the bank examination      work.

    This difference     of opinion has existed for many years.         Although we                   .
have repeatedly    recommended       in our audit reports on the FDIC that the
Congress amend the law to specifically        provide for our access to the
examination    reports and related records pertaining        to insured banks,
no action has been taken to do so. As a result,          our annual audits of the
Corporation    are limited   in nature and we have so stated in our reports.
                                                                                Attachment    2
      A bill (S. 2268) now pending in the Congress to revise and restate
 certain functions of our Office includes a provision        which would give the
 Comptroller     General the means of enforcing our existing right of access
 to information    needed for audit purposes.     This provision    would authorike
 us to institute  court action to compel the production      of documents   in cases
 where an executive department       or establishment   fails to comply with a
 request for information,     books, documents,     papers, or records.

     GAO can be more helpful to the Congress in carrying         out its legislative
and oversight   responsibilities  in the field of bank insurance    and regulation
if our authority to have access to bank examination       reports prepared by
Federal agencies is clarified    in the law.

     The FDIC Act also specifies         what kind of an audit report shall be sub-
mitted by the Comptroller         General to the Congress.       One of the specific
requirements      is that these reports      include such comments      and information
as may be deemed necessary           to inform the Congress of the financial        opera-
tions and condition of the Corporation.            Because of the importance      of the
conduct of bank examinations         to the insurance process and the use of the
resulting   reports,    the auditors must have unrestricted        access to those
reports and related working papers if they are to obtain the understanding
of all of the important     factors   affecting the Corporation’s     financial   opera-
tions and condition as necessary          to enable them to prepare the kind of
reports contemplated       by the law.

     The examination   reports  contain facts, opinions,, and recommendations
of vital importance  to the conduct of the Corporation’s    affairs.  Without
access to these reports    and the related supporting files and records,     the
auditors cannot evaluate the financial    operations  and condition of the Cor-
poration,  which is inseparably   linked with that of the banks it insures.

     Without   access   to these   reports,       the auditors   cannot   evaluate:

     Q whether bank examinations     were of sufficient    scope and
       could be relied upon to identify   all banks that should have
       been classified as problem    banks,              .
     @ whether the management            of the Corporation  has taken
       effective followup action        on findings disclosed by bank
       examiners,     and

    e   the significance of possible           adverse    effect of problem
        banks on the Corporationls            financial   position.

      A further basis of need is the fact that the employees of the Corpora-
tion’s examination       division,   who make the examinations          of State banks            .
that are not members          of the Federal    Reserve System, constitute          about
three-fourths      of the total personnnel      of the Corporation.       A very substan-
tial part of the salaries       and related benefits paid by the Corporation            are
therefore     applicable    to this function.    Therefore,,    it is essential   from an
audit standpoint that the auditors          have an opportunity      to examine the pro-
ducts of their efforts in order to evaluate the effectiveness              of their work
and how good a job is being done.
                A-

                                                                                                                 -_




                                                                                                         ,




                                                                                    Attachment               2
     The, question is sometimes          raised that bank examination             reports   con-
tain much confidential     information        relating     to the financial     condition   and
operations   of banks and that rthis information             is so sensitive     that it should
not be entrusted or otherwise         made available          to the auditors for the Coti-          ,
gress. It should be borne in mind in connection                  with any discussion       of this
question that in our audit operations            throughout      the Government        we have
access to the most sensitive        information        including     that which, is given the
highest national security      ciassification,         We have strict procedures           for
safeguarding    such information        from unauthorized          disclosure      and there is
no reason to believe that any confidential              information      contained in bank
examination    reports would be treated with any less care.

     It should also be pointed out that it is not our intention to include in our
audit reports specific information     of an adverse nature on specific          banks
drawn from these reports if the disclosure          of such information     is regarded
by the Corporation     or other responsible    officials   as being contrary     to the
public interest because of its confidentiality        or sensitivity.   Our concerns
are with how well the system of supervision           and regulation   works,   including
the important    element of bank examinations,         and its impact on financial
operations    and condition of the Corporation.

     In making annual audits of the Federal         Savings and Loan Insurance        Corpo-
ration as required by the Government          Corporation     Control Act, we consider
it an important   part of our audit procedure        to review the reports by the Office
of Examination     and Supervision    of the Federal Home Loan Bank Board on its
examinations    of individual   savings and loan associations.         In these audits we
have been given full access to the examination           reports as well as to supporting
working papers and related correspondence             and other files.     Access to these
records by our auditors has never caused any problems                to the Federal agen-
cies concerned or to the savings and loan associations             and, to our knowledge,
such access has not jeopardized        the relationships     that exist between the agen-
cies and the associat+onn with which they deal.

      Legislation    now being considered     in the Congress providing    for an inde-
pendent audit of the Federal Reserve System by GAO provides for access to
bank examination        reports irrespective    of the source of those reports.    This
is a very important        provision  and one which we wholeheartedly     endorse.    A
satisfactory      audit simply cannot be made if the agency under audit is per-
mitted to withhold from examination          an9 important   documents   and records
that. bear on their operations.

      In the case of the FDIC, we know of no satisfactory           reason why our capa-
 city to assist the Congress in its legislative       and oversight     work relating    to the
broad field of Federal bank insurance         and regulation     should be obstructed      be-
cause of the refusal of the FDIC to give our auditors access tobank examina-
tion reports.     We believe it to be highly desirable       that the Congress      assist us                    L
in this long-standing      problem by clarifying    the law as recommended          in our
periodic    audit reports.                                            A




                                           Comptroller      General
                                           of the United    States
                                                                                  Attachment               3


                FEDERAL DEPOSIT INSURANCE CORPORATION
          GAO REVIEW OF EXAMINATION REPORTSON CLOSED BANKS


          Since the early          1950's      GAO has made various              requests        to

the Chairman         of the Board of Directors,                   Federal     Deposit       Insur-

ance Corporation,            for    complete      and unrestricted            access to all

of the corporation's               records      deemed necessary            to carry       out

GAO's audit         responsibility.             The Chairman        of the Board has

refused      these    requests.         The Corporation            has taken       the position

that      GAO's right      to access of its             records     is limited         to those

administrative          or housekeeping           records       pertaining        to its     financial

transactions.           The position           of GAO and the Corporation                  on this

matter      are set forth          in detail      in our report          to the Congress,

"Audit      of the Federal          Deposit      Insurance        Corporation,         Year Ended

June 30, 1964"          (B-114831,        February       28, 1966).

         Although     GAO has been denied               unrestricted         access       to the

Corporatiori's        examination         reports,       we have been provided               access

to the records          of closed       banks.         As a part       of our annual         audit
of the Corporation's               financial      statements,          we review       the exami-

nation      files    on the banks closed               during     and subsequent           to the

audit     period.       These files          contain     examination         reports       and

related      correspondence.            In our review,            the reasons       for     the

bank closing         are identified            and the need for          a loss     reserve           is

determined.
                                                                                  Attachment             3


                                             - 2-


         In identifying          the reasons          for    the bank closing,         we review

correspondence            among the regulatory               agencies     and between       these

agencies      and the bank officials.                    The identified         reasons     are

discussed      with       Corporation        officials         and substantiated          with

information         in the examination              reports.

         The information          in the examination              reports     also    is used

to substantiate            the expenses           incurred      by the Corporation          for

bank closings           and to evaluate            the adequacy of the Corporation's

reserves      for      bank losses.          The Corporation            computes these           costs

based on actual            expenditures           and their      valuation      of the acquired

assets      and obligations.

         As a part        of our review           of the records         on closed     banks,

we also      attempt       to analyze        the examination            procedures     which

have been employed in past                   examinations         by the Corporation              or

the Federal         Reserve.           In particular,          we attempt     to determine

that     (1) the CorporationS               examination         guidelines      were followed,

0)     th e examiners'         suggestions          were acted       upon,    (3) examination

intervals      were proper,             and (4) examiners          performing        the review

were rotated           periodically.          We cannot,         however,     make an overall

evaluation       of the Corporation's                bank examination           process     based

on this      limited       assessment.          Such an evaluation            would require

that     GAO have unlimited              access     to all      examination      reports,         files,

and other      records        of the Corporation,               the Federal      Reserve Banks,
and the Comptroller             of the Currency.
                                         _ .-,   .
                                                           Attachment    3


                                 -3-



                      Number of Insured   Banks Which Failed
Fiscal                    State
Year              Nonmember     Member          National         Total

1970                                                               7

1971                                                               8

1972                                                               3

1973                                                               3

1974                                                               3

1975                    7         1                               10

July    l-Dee.   31,
       1975            -5         1                -1             - 7

         Total         29         2                 10            41
                       C          =                               C
          FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION
GAO REVIEW OF EXAMINATION REPORTSOF SAVINGS AND LOAN ASSOCIATIONS


          The Federal             Savings         and Loan Insurance          Corporation,         a wholly

owned Government                  corporation,         insures     withdrawable           share and deposit

accounts       up to $40,000                for     each insured      member in all            Federally

chartered          savings         and loan associations                 and similar       institutions

upon their          request         and upon approval             by the Federal           Home Loan Bank

Board.       The Board,             an independent           supervisory        and regulatory             agency,

carries      out certain              functions        of the Corporation              such as processing

insurance          applications             and examining         insured      institutions.

          The Government              Corporation        Control      Act requires           GAO to make

an examination              of the Corporation's                 financial      statements.          An

important          part     of our audit             is a review         of the Federal         Home Loan

Bank Board's              Office      of Examinations            and Supervision's             reports      on

the results          of its         examinations         of individual          savings        and loan

associations.                    The Office         of Examination         and Supervision          is respon-

sible      through         its     examination         process     for     protecting        the Corporation's

assets      against         losses       caused by the financial                failure        of any insured

savings      and loan association.

         During      the audit           we have been given               unlimited       access    to exami-

nation      reports         and supporting             working     papers,      classified         and unclassi-

fied      correspondence              files,       minutes    of Board meetings              and related

data      on all     savings          and loan associations                including       those    institu-

tions      the Board has classified                     as vsproblem" cases.               In making our
                                                                                                 Attachment           4


                                                      -2-


audit,       we examine selected                "problem“           cases to ascertain             the basis

for      their     classification            and the reasonableness                    of the Board's

allowance          for    estimated         losses.

          We also        review     on a sample basis                 the Board's            examination         reports

on "non-problem"                associations          to determine            the reasonableness             of

these      classifications               and the adequacy of the Corporation's                            primary

and seconday reserves.                      This work includes                an evaluation          of the

Board's          procedures        for    identifying         problem         institutions         and the

effectiveness             of follow-up         action        taken      on examiner           findings.

          On occasion,            we have questioned                the classification             of a parti-

cular       savings       and loan association                or the amount of allowance                     or

reserve          established.            We have always             been able to resolve              these

questions          informally        with     officials        of the Corporation.

          We have experienced                no difficulty            in obtaining            access to records

in the audits             of the Federal          Savings           and Loan Insurance             Corporation

and the Federal             Home Loan Bank Board.                     Access to these             records        by

our auditors             has never        caused the Federal              agencies           concerned      or

the savings           and loan assocations                  any problems          and, to our knowledge,

such access has not jeopardized                           the relationships              that     exist     between

the agencies             and the associations                with     which     they     deal.