Financial Audit: Federal Deposit Insurance Corporation's 1993 and 1992
Financial Statements (Letter Report, 06/24/94, GAO/AIMD-94-135).

This report presents GAO's opinions on the financial statements of the
Bank Insurance Fund, the Savings Association Insurance Fund, and the
Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund
for the years ended December 31, 1993 and 1992. These financial
statements are the responsibility of the Federal Deposit Insurance
Corporation, the administrator of the three funds. GAO found that the
financial statements, taken as a whole, were fairly stated as of
December 31, 1993. The report also included GAO's opinion on FDIC's
system of internal controls as of December 31, 1993. FDIC has made
significant progress in addressing the internal control weaknesses
identified in 1992. However, a material weakness existed as of December
31, 1993, in FDIC's controls over its process for valuing assets of
failed institutions. The report also discusses GAO's evaluation of
FDIC's compliance with laws and regulations during 1993.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-135
     TITLE:  Financial Audit: Federal Deposit Insurance Corporation's 
             1993 and 1992 Financial Statements
      DATE:  06/24/94
   SUBJECT:  Bank management
             Funds management
             Federal corporations
             Internal controls
             Banking regulation
             Financial records
             Accounting procedures
             Corporate audits
             Financial statement audits
             Reporting requirements
IDENTIFIER:  Bank Insurance Fund
             Savings Association Insurance Fund
             FSLIC Resolution Fund
             FDIC Liquidation Asset Management Information System
             BIF
             SAIF
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Congress

June 1994

FINANCIAL AUDIT - FEDERAL DEPOSIT
INSURANCE CORPORATION'S 1993 AND
1992 FINANCIAL STATEMENTS

GAO/AIMD-94-135

FDIC's 1993 and 1992 Financial Statements


Abbreviations
=============================================================== ABBREV

  BIF - Bank Insurance Fund
  CFO - Chief Financial Officers Act
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act
  FICO - Financing Corporation
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act
  FRF - FSLIC Resolution Fund
  FSLIC - Federal Savings and Loan Insurance Corporation
  LAMIS - Liquidation Asset Management Information System
  REFCORP - Resolution Funding Corporation
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund

Letter
=============================================================== LETTER


B-253861

June 24, 1994

To the President of the Senate and the
Speaker of the House of Representatives

This report presents our opinions on the financial statements of the
Bank Insurance Fund, the Savings Association Insurance Fund, and the
Federal Savings and Loan Insurance Corporation (FSLIC) Resolution
Fund for the years ended December 31, 1993 and 1992.  These financial
statements are the responsibility of the Federal Deposit Insurance
Corporation (FDIC), the administrator of the three funds.  This
report also includes our opinion on FDIC's system of internal
controls as of December 31, 1993.  FDIC has made significant progress
in addressing the internal control weaknesses we reported in 1992. 
However, a material weakness existed as of December 31, 1993, in
FDIC's internal controls over its process for valuing failed
institution assets.  This report also discusses our evaluation of
FDIC's compliance with laws and regulations during 1993. 

In addition, this report includes our recommendations to improve
FDIC's internal controls and discusses our concerns about the
capitalization of the Savings Association Insurance Fund, the
continued uncertainties surrounding the cost of financial institution
failures, and improvements in the banking and savings association
industries which have substantially accelerated the recapitalization
of the Bank Insurance Fund and reduced the exposure of both the Bank
Insurance Fund and the Savings Association Insurance Fund to losses
from failed institutions.  This report also discusses a $410 million
reduction in the Bank Insurance Fund's estimated liability for
troubled institutions, which FDIC reported on the fund's first
quarter 1994 financial statements but which resulted from conditions
as of December 31, 1993, and, therefore, more appropriately should
have been reflected in the Bank Insurance Fund's financial statements
as of December 31, 1993. 

We conducted our audits pursuant to the provisions of section 17(d)
of the Federal Deposit Insurance Act, as amended (12 U.S.C. 
1827(d)), and in accordance with generally accepted government
auditing standards. 

We are sending copies of this report to the Acting Chairman of the
Board of Directors of the Federal Deposit Insurance Corporation; the
Chairman of the Board of Governors of the Federal Reserve System; the
Comptroller of the Currency; the Acting Director of the Office of
Thrift Supervision; the Chairmen and Ranking Minority Members of the
Senate Committee on Banking, Housing and Urban Affairs and the House
Committee on Banking, Finance and Urban Affairs; the Secretary of the
Treasury; the Director of the Office of Management and Budget; and
other interested parties. 

This report was prepared under the direction of Robert W.  Gramling,
Director, Corporate Financial Audits.  Other major contributors to
this report are listed in appendix III. 

Charles A.  Bowsher
Comptroller General
of the United States


Letter
=============================================================== LETTER


B-253861

June 24, 1994

To the Board of Directors
Federal Deposit Insurance Corporation

We have audited the statements of financial position as of December
31, 1993 and 1992, of the three funds administered by the Federal
Deposit Insurance Corporation (FDIC), and the related statements of
income and fund balance (accumulated deficit) and statements of cash
flows for the years then ended.  For these three funds--the Bank
Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF),
and the Federal Savings and Loan Insurance Corporation (FSLIC)
Resolution Fund (FRF)--we found that the financial statements, taken
as a whole, were fairly stated as of December 31, 1993. 

During our prior year's audits of the 1992 financial statements of
the three funds,\1 we identified several significant weaknesses in
FDIC's internal controls which adversely affected its ability to
manage, liquidate, and report on the large volume of assets acquired
from failed financial institutions.  These weaknesses also affected
FDIC's ability to accurately report transactions associated with
BIF's and FRF's resolution and liquidation activity, and increased
the risk of misappropriation of assets.  We noted that this could add
to the losses on failed institution assets being incurred by the
funds.  We also identified significant weaknesses in FDIC's time and
attendance processing controls which increased the risk of
inappropriate payroll expenditures and exposed SAIF to significant
misapplication of payroll and other overhead expenditures.  In
addition to these weaknesses, which we considered material,\2 we
identified other weaknesses in FDIC's internal controls which
affected its ability to ensure that internal control objectives were
achieved.  We made a number of recommendations to address each of the
weaknesses identified in our 1992 audits. 

In conducting our 1993 audits, we found that FDIC had made
significant progress in addressing the internal control weaknesses we
identified in our 1992 audits.  FDIC's actions during 1993 fully
resolved one weakness we considered material and resolved the other
weaknesses to the extent that, while still significant conditions, we
no longer consider them material.  Also, FDIC's actions prior to
year-end 1993 adequately addressed four of the six other weaknesses
we identified during our 1992 audits.  Additional actions FDIC took
prior to the completion of our 1993 audits corrected one of the other
two weaknesses. 

While FDIC has acted aggressively to improve its system of internal
controls, additional improvements are needed.  Our 1993 audits
identified a material weakness in FDIC's internal accounting controls
over its process for estimating recoveries it will realize on the
management and disposition of BIF's and FRF's inventory of failed
institution assets.  In addition, despite progress made by FDIC, we
continued to identify weaknesses, though not material, in controls
over FDIC's time and attendance processes and oversight of contracted
asset servicing entities.  We also continued to note weaknesses in
computer security, although these weaknesses were corrected prior to
the completion of our 1993 audits. 

During our 1993 audits, we noted continued improvement in the
condition of the nation's banking and savings institutions.  These
improvements have resulted in an acceleration of BIF's
recapitalization and have reduced both BIF's and SAIF's exposure to
significant losses from financial institution failures.  We caution,
however, that BIF's exposure to losses from past and future
institution failures continues to be subject to significant
uncertainties.  In addition, SAIF is significantly undercapitalized,
and building up SAIF's reserves through premium assessments of
insured members is a slow process which can be affected by events
impacting the savings association industry. 


--------------------
\1 Financial Audit:  Federal Deposit Insurance Corporation's 1992 and
1991 Financial Statements (GAO/AIMD-93-5, June 30, 1993) and
Financial Audit:  Federal Deposit Insurance Corporation's Internal
Controls as of December 31, 1992 (GAO/AIMD-94-35, February 4, 1994). 

\2 A material weakness is a reportable condition in which the design
or operation of the controls does not reduce to a relatively low
level the risk that losses, noncompliance, or misstatements in
amounts that would be material in relation to the financial
statements may occur and not be detected promptly by employees in the
normal course of their assigned duties.  Reportable conditions
involve matters coming to our attention relating to significant
deficiencies in the design or operation of internal controls that, in
the auditor's judgment, could adversely affect an entity's ability to
(1) safeguard assets against loss from unauthorized acquisition, use,
or disposition, (2) ensure the execution of transactions in
accordance with laws and regulations, or (3) properly record,
process, and summarize transactions to permit the preparation of
financial statements.  Reportable conditions which are not considered
material nevertheless represent significant deficiencies in the
design or operation of internal controls and need to be corrected by
management. 


   SUMMARY OF RESULTS
------------------------------------------------------------ Letter :1

The following section presents (1) our opinions on the 1993 financial
statements of the three funds administered by FDIC, (2) our opinion
on FDIC's internal controls as of December 31, 1993, as it relates to
the three funds, (3) the results of our tests for compliance with
significant provisions of selected laws and regulations, and (4) the
responsibilities of FDIC and the auditor with regard to the financial
statements, internal controls, and compliance with laws and
regulations. 


      OPINIONS ON FINANCIAL
      STATEMENTS
---------------------------------------------------------- Letter :1.1

In our opinion: 

  The financial statements and accompanying notes of the Bank
     Insurance Fund present fairly, in all material respects, BIF's
     financial position as of December 31, 1993 and 1992, and the
     results of its operations and its cash flows for the years then
     ended, in conformity with generally accepted accounting
     principles. 

  The financial statements and accompanying notes of the Savings
     Association Insurance Fund present fairly, in all material
     respects, SAIF's financial position as of December 31, 1993 and
     1992, and the results of its operations and its cash flows for
     the years then ended, in conformity with generally accepted
     accounting principles. 

  The financial statements and accompanying notes of the FSLIC
     Resolution Fund present fairly, in all material respects, FRF's
     financial position as of December 31, 1993 and 1992, and the
     results of its operations and its cash flows for the years then
     ended, in conformity with generally accepted accounting
     principles. 


      OPINION ON INTERNAL CONTROLS
---------------------------------------------------------- Letter :1.2

We evaluated whether FDIC's internal controls in effect on December
31, 1993, provided reasonable assurance that losses, noncompliance,
or misstatements material in relation to the financial statements
would be prevented or detected. 

In our opinion, internal controls as of December 31, 1993, provided
reasonable assurance that (1) assets of BIF, SAIF, and FRF were
safeguarded against loss from unauthorized acquisition, use, or
disposition, (2) transactions of SAIF were properly recorded,
processed, and summarized to permit the preparation of financial
statements in accordance with generally accepted accounting
principles, and (3) transactions of BIF, SAIF, and FRF were executed
in accordance with significant provisions of selected laws and
regulations. 

However, in our opinion, because of the material weakness in FDIC's
process for estimating recoveries on failed institution assets,
internal controls as of December 31, 1993, did not provide reasonable
assurance that transactions of BIF and FRF were properly recorded,
processed, and summarized to permit the preparation of financial
statements in accordance with generally accepted accounting
principles.  Through substantive audit procedures, we were able to
satisfy ourselves that this weakness did not have a material effect
on the 1993 financial statements of the two funds. 

Misstatements may nevertheless occur in other FDIC-reported financial
information on BIF and FRF as a result of the material internal
control weakness we identified.  Also, significant uncertainties
associated with the cost of past and future financial institution
failures as discussed below and disclosed in the applicable notes to
BIF's and FRF's financial statements may ultimately result in
substantial changes in the recovery value of advances to
receiverships and corporate-owned assets held by BIF and FRF. 

Also, because of inherent limitations in any system of internal
controls, losses, noncompliance, or misstatements may nevertheless
occur and not be detected.  We also caution that projecting our
favorable evaluation of certain controls to future periods is subject
to the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with such controls may
deteriorate. 


      COMPLIANCE WITH LAWS AND
      REGULATIONS
---------------------------------------------------------- Letter :1.3

Our tests for compliance with significant provisions of selected laws
and regulations disclosed no material instances of noncompliance. 
With respect to laws and regulations that we tested, our limited
tests would not necessarily detect all material instances of
noncompliance.  However, nothing came to our attention in the course
of our work to indicate that material noncompliance with such
provisions occurred. 


      RESPONSIBILITIES OF THE
      CORPORATION AND THE AUDITOR
---------------------------------------------------------- Letter :1.4

The management of FDIC is responsible for (1) preparing the financial
statements of BIF, SAIF, and FRF in conformity with generally
accepted accounting principles, (2) establishing and maintaining
internal controls and systems to provide reasonable assurance that
the internal control objectives previously mentioned are met, and (3)
complying with applicable laws and regulations. 

As the auditor of record, we are responsible for (1) obtaining
reasonable assurance about whether the financial statements are free
of material misstatement and presented fairly in conformity with
generally accepted accounting principles, (2) obtaining reasonable
assurance about whether relevant internal controls are in place and
operating effectively, and (3) testing compliance with significant
provisions of selected laws and regulations. 

Our audits were conducted in accordance with generally accepted
government auditing standards.  We believe our audits provide a
reasonable basis for our opinions. 

Discussed in the following sections are significant matters
considered in performing our audits and forming our opinions.  This
report also discusses each of our conclusions in more detail.  The
scope and methodology of our audits is presented in appendix I. 


   SIGNIFICANT MATTERS
------------------------------------------------------------ Letter :2

The following information is presented to highlight the condition and
outlook of the banking and thrift industries and the insurance funds. 
We also discuss significant uncertainties that could affect the
future financial condition of the insurance funds.  Also, we discuss
FDIC's significant progress in addressing internal control weaknesses
we identified during our 1992 audits. 


      THE CONDITION OF
      FDIC-INSURED INSTITUTIONS
      HAS CONTINUED TO IMPROVE
---------------------------------------------------------- Letter :2.1

The condition of FDIC-insured commercial banks improved significantly
during 1993.  Commercial banks posted record earnings of over $43.4
billion, an increase of 36 percent over the previous record of $32
billion set in 1992.  The substantial improvements in the condition
of commercial banks have been attributable primarily to continued
favorable interest rates and significant improvements in asset
quality.  Both noncurrent loans and other real estate owned
(repossessed collateral) have declined from a peak of 3.19 percent of
total assets in mid-1991, to 1.61 percent of total assets at the end
of 1993, the lowest level since 1986.  Commercial banks have also
realized large increases in noninterest income, which accounted for
over 23 percent of total earnings in 1993.  As a result of improved
earnings and asset quality, commercial banks' equity capital
increased to over 8 percent of total assets for the first time in 30
years. 

The substantial improvement in the condition of FDIC-insured
commercial banks has also been reflected in the continued reduction
in the number of these banks identified by FDIC as problem
institutions.  At year-end 1993, 426 commercial banks, with total
assets of $242 billion, were identified by FDIC as problem
institutions, the lowest number since 1982.  This represents a
substantial decline from the 787 commercial banks, with total assets
of $408 billion, which FDIC identified as problem institutions at
year-end 1992.  Similarly, bank failures have declined significantly. 
During 1993, 42 FDIC-insured commercial banks failed.  In comparison,
during 1992, 98 commercial banks failed.  Commercial bank failures in
1993 represent the fewest since 1982, when 34 failed. 

The condition of FDIC-insured savings institutions also continued to
improve during 1993.  Privately-held FDIC-insured savings
institutions (those not under the government's control) earned $7
billion in 1993.  This is the third consecutive year of positive
earnings for savings institutions after four consecutive years of
losses.  Full-year net income and the average return on assets were
the highest reported by savings institutions during the past 10
years, with nearly 95 percent of savings institutions reporting
positive earnings for 1993.  Positive earnings were attributable
primarily to favorable interest rates and the decline in troubled
assets.  Troubled assets, such as noncurrent loans and leases and
other real estate owned, declined to 2.1 percent of total industry
assets in 1993 from 3.07 percent in 1992.  As a result of improved
earnings and asset quality, savings institutions' 1993 equity capital
increased to 7.85 percent of total industry assets from 7.22 percent
in 1992. 

Continued improvements in the financial condition of FDIC-insured
savings institutions has also resulted in a significant decline in
the number and size of savings institutions identified by regulators
as problem institutions.  As of December 31, 1993, regulators
identified 146 savings institutions, with assets totaling $92
billion, as problem institutions.  In comparison, as of December 31,
1992, 276 savings institutions, with assets totaling $184 billion,
were identified as problem institutions by the regulators. 


      STRENGTHENED BANKING
      INDUSTRY HAS ACCELERATED
      BIF'S RECAPITALIZATION
---------------------------------------------------------- Letter :2.2

The continued improvements in the condition of the banking industry
have substantially accelerated the recapitalization of BIF.  During
1993, BIF reported net income of $13.2 billion, the second
consecutive year of positive results after four consecutive years of
losses.  This improvement resulted principally from insurance
assessments and the reduction of reserves no longer considered
necessary for insurance losses.  The net income increased the fund
balance from a $101 million deficit as of December 31, 1992, to a
$13.1 billion positive balance, or about 0.69 percent of insured
deposits as of December 31, 1993.  FDIC currently projects that by
1996, BIF will achieve the ratio of reserves to insured deposits of
1.25 percent designated by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA).  This is 10 years
earlier than anticipated by FDIC in its initial recapitalization
schedule prepared in September 1992.  Under the fund recapitalization
requirements of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), FDIC was required to establish a
recapitalization schedule for BIF to achieve the designated reserve
ratio not later than 15 years after the schedule was implemented and
to set insurance assessments in accordance with this schedule. 
However, if this goal is achieved sooner, as currently projected,
FDIC will be able to significantly reduce assessment rates far
earlier than had been anticipated. 


      SAIF REMAINS SIGNIFICANTLY
      UNDERCAPITALIZED
---------------------------------------------------------- Letter :2.3

While the current condition of BIF is very positive, SAIF continues
to be significantly undercapitalized.  SAIF was created by FIRREA in
1989 without any initial capitalization.  Over the past 4 years,
assessments from SAIF-insured members have increased SAIF's fund
balance to $1.2 billion as of December 31, 1993.  Despite this
growth, SAIF's ratio of reserves to estimated insured deposits as of
December 31, 1993, was only 0.17 percent--substantially below the
reserve ratio of 1.25 percent designated by FIRREA.  FDIC's most
recent projections indicate that SAIF will not achieve the designated
1.25 percent ratio of reserves to estimated insured deposits until
the year 2004, when its fund balance is estimated to be about $7
billion. 

The projected growth of SAIF's fund balance is based, in part, on the
assumption that SAIF will not incur substantial losses from the
failure of insured members.  The Congress provided safeguards for
this risk by enacting legislation to further strengthen SAIF. 
Specifically, FDICIA authorized FDIC to borrow up to $30 billion from
the U.S.  Treasury, on behalf of SAIF or BIF, to cover insurance
losses.\3 Also, in December 1993, the Resolution Trust Corporation
(RTC) Completion Act extended RTC's resolution responsibility through
a date between January 1, 1995, and
July 1, 1995.\4

The act also restored to RTC through December 31, 1995, $18.3
billion\5 to resolve troubled savings associations and provided that
any of these funds not used by RTC would become available for SAIF's
insurance losses from December 31, 1995, through 1997.  In addition,
the act authorized up to $8 billion for insurance losses in fiscal
years 1994 through 1998.  However, as explained in the notes to
SAIF's financial statements, both FDICIA and the RTC Completion Act
contain certain requirements and restrictions regarding SAIF's access
to and use of these funding sources.  If these funds are not
available to SAIF when needed, the impact of a single large
institution failure could adversely affect SAIF's ability to achieve
the designated reserve ratio within the currently projected period
and may ultimately affect its solvency. 

In addition, the future growth of SAIF's fund balance depends on the
amount of assessments collected from insured members.  However, from
its inception through December 31, 1992, the share of industry
assessments received by SAIF was minimal because FIRREA mandated that
the Financing Corporation (FICO), the Resolution Funding Corporation
(REFCORP), and FRF have prior claim on SAIF member assessments.\6
Beginning in 1993, only FICO continues to have prior claim on
assessments from SAIF members, with SAIF receiving all remaining
assessments.  Each year, FICO receives approximately $800 million of
SAIF member assessments to pay bond interest.  In 1993, this amounted
to approximately 46 percent of SAIF's gross assessment revenue.  This
claim and its impact on SAIF member assessments will continue until
the year 2019, when FICO's bonds fully mature. 

Until January 1, 1998, FDIC must set assessment rates at a level that
will enable SAIF to achieve the designated reserve ratio within a
reasonable period.  After January 1, 1998, FDIC must set assessments
for SAIF to meet the designated reserve ratio according to a 15-year
schedule.\7 Once the ratio is met, FDIC can reduce the assessment
rates charged to SAIF members.  Since SAIF's fund balance is not
projected to achieve the designated reserve ratio until the year
2004, FDIC anticipates that SAIF member assessment rates will be
significantly higher than those projected for BIF members.  FDIC
predicts that BIF will achieve its designated reserve ratio 8 years
earlier than SAIF, thus allowing FDIC to substantially reduce
assessment rates for BIF members long before it can implement similar
rate reductions for SAIF members.  During this period, FDIC expects
the average BIF assessment rate to range from 5 to 12 basis points (5
cents to 12 cents per $100 of deposits), compared to a projected
average SAIF assessment of approximately 25 basis points. 

Once SAIF reaches the designated reserve ratio, SAIF member
assessment rates will continue to be significantly higher than those
projected for BIF members because of the required future FICO
payments, which equate to approximately 11 basis points.  The SAIF
Industry Advisory Committee\8 reported in March 1994 that this
potentially wide disparity in the assessment rates charged to BIF and
SAIF members could adversely affect SAIF members' ability to raise
sufficient capital because of their competitive disadvantage with
banks.  This, in turn, could lead to failures of SAIF members which
would result in a shrinking assessment base and less assessments
available to fund future FICO payments and build SAIF's reserves to
its designated ratio of reserves to estimated insured deposits.  The
SAIF Industry Advisory Committee recommended a merger of BIF and SAIF
to resolve these concerns. 


--------------------
\3 Through December 31, 1993, FDIC had borrowed no funds from the
U.S.  Treasury to cover insurance losses of either BIF or SAIF. 

\4 RTC was responsible for assisting and resolving troubled SAIF
members whose accounts had been insured by FSLIC and that had been
placed in conservatorship or receivership from January 1, 1989,
through September 30, 1993.  The RTC Completion Act extended RTC's
resolution responsibility and requires the chairperson of the Thrift
Depositor Protection Oversight Board to select the actual date of
termination.  However, the date is to be no earlier than January 1,
1995, and no later than July 1, 1995. 

\5 The act amended section 21A(i) of the Federal Home Loan Bank Act
by removing the April 1, 1992, deadline for obligating $25 billion
provided to RTC by Public Law 102-233 for resolution activity;
through April 1, 1992, RTC had obligated $6.7 billion of the $25
billion. 

\6 FICO was established in 1987 to recapitalize FSLIC, and was given
first claim on insurance assessments of SAIF members for payment of
interest and custodial costs on its bonds.  Although FICO no longer
has authority to issue bonds, its claim to the insurance assessments
will continue until the 30-year recapitalization bonds mature.  In
addition, REFCORP, established in 1989 to provide funding for RTC,
was entitled to insurance assessments of SAIF members to finance
payment of bond principal.  REFCORP ceased all future bond issuances
in early 1991 and therefore has no further claim to insurance
assessments.  Finally, FRF, established in 1989 to liquidate the
assets and liabilities of the former FSLIC, was entitled, through
December 31, 1992, to the insurance assessments not taken by FICO or
REFCORP.  Any remaining assessments belonged to SAIF. 

\7 FDIC may extend the date specified in the schedule to a later date
that it determines will, over time, maximize the amount of
assessments received by SAIF, net of insurance losses incurred by
SAIF. 

\8 The SAIF Industry Advisory Committee was created by FIRREA to
advise the Congress on regulatory and other matters affecting
financial institutions that are SAIF members.  The committee is
comprised of 12 representatives of SAIF members and 6 representatives
of the public interest.  The committee meets quarterly (or more
frequently, if requested by the Congress), and reports to the
Congress semiannually.  FIRREA specified that the committee will
cease to exist on August 9, 1999. 


      UNCERTAINTIES AFFECT THE
      COST OF PAST AND FUTURE
      INSTITUTION FAILURES
---------------------------------------------------------- Letter :2.4

Estimates of the ultimate cost of past and potential failures are
subject to significant uncertainties, such as future market
conditions and changes in interest rates.  FDIC's estimates of the
costs of past resolutions depend, to a large degree, on the level of
recoveries FDIC expects to realize on BIF's and FRF's inventory of
failed institution assets.  Similarly, estimates of future resolution
costs encompass both FDIC's judgment concerning the likelihood of the
failure of troubled institutions, and the expected cost of those that
do fail, based on past resolution experience.  Both the realizable
value of assets acquired from previously failed institutions and the
future viability of troubled institutions can be significantly
affected by market conditions and interest rates. 

The continued improvement in the condition of BIF-insured
institutions allowed FDIC to reduce its estimate of the cost likely
to be incurred by BIF in the resolution of troubled institutions by
nearly $8 billion during 1993.  As of December 31, 1993, BIF's
estimated liability for troubled institutions considered likely to
fail, as reported on its financial statements, totaled
$3 billion.  In comparison, as of December 31, 1992, this estimate
totaled
$10.8 billion.  However, the December 31, 1993, estimated liability
does not include an additional $410 million reduction which FDIC
estimated based upon continued financial improvement of certain
institutions as reflected in 1993 year-end reports they filed with
regulators.  This additional reduction in BIF's exposure to troubled
institutions reflects events which occurred during 1993 and,
accordingly, should have been recognized in BIF's December 31, 1993,
financial statements.  However, FDIC reflected the reduction in BIF's
March 31, 1994, quarterly financial statements.  The effect of
omitting this adjustment from BIF's 1993 financial statements is not
considered material to the overall fair presentation of BIF's 1993
financial statements.  However, it represents nearly 20 percent of
BIF's net income for the 3 months ended March 31, 1994. 
Nevertheless, if the interest rate environment remains relatively
stable and levels of problem assets continue to decline, the
estimated liability for troubled institutions could be reduced
further during 1994. 

Significant uncertainties also affect the receivables from bank or
thrift resolutions and investments in corporate-owned assets reported
on the financial statements of BIF and FRF.  These amounts represent
funds advanced to resolve previously failed institutions or to
purchase assets of terminated receiverships.  As of December 31,
1993, BIF's and FRF's financial statements included $14.4 billion and
$2.8 billion, respectively, of such advances, net of an allowance for
losses.  These advances are repaid from collections from the
management and disposition of failed institution assets.  The
allowance for losses represents the difference between amounts
advanced and the expected repayment, based on estimates of recoveries
to be received from the management and liquidation of the failed
institution assets, net of all estimated liquidation costs.  In the
event of a deterioration in economic conditions, the marketability of
these assets could be adversely affected, as could the ability of the
responsible debtors to repay their outstanding loans.  Should this
occur, actual recoveries on these assets could be significantly less
than current estimates. 


      SIGNIFICANT PROGRESS ON 1992
      AUDIT RECOMMENDATIONS
---------------------------------------------------------- Letter :2.5

In our reports on the results of our 1992 audits of FDIC's financial
statements, we identified material weaknesses in FDIC's internal
accounting controls over (1) contractors engaged to service and
liquidate failed bank assets, (2) data maintained in FDIC's asset
management information system and reconciliations between this system
and FDIC's general ledger system, (3) reconciliations between FDIC's
primary performing commercial and residential loan servicer's systems
and FDIC's asset management and general ledger systems, and (4)
FDIC's time and attendance reporting process.  The weaknesses in
FDIC's internal accounting controls over its management and
liquidation of failed institution assets adversely affected its
ability to safeguard these assets against loss from unauthorized
acquisition, use, or disposition and ensure that transactions
associated with asset servicing and disposition activities were
properly accounted for and reported on BIF's and FRF's financial
statements.  Also, the weaknesses in internal accounting controls
over FDIC's time and attendance reporting process adversely affected
its ability to ensure that established policies and procedures were
adhered to or that payroll and other related expenses were properly
allocated among the three funds. 

During 1993, FDIC implemented a number of our recommendations to
address these weaknesses.  FDIC's actions during the year fully
resolved one weakness we deemed material and resolved the other
weaknesses to the extent that, while still significant conditions
during 1993, we no longer consider them material weaknesses. 
Specifically, FDIC: 

  Developed a computerized report to identify differences between the
     systems of its performing commercial and residential loan
     servicer and FDIC's asset management information and general
     ledger systems.  As a result of this automation, FDIC can more
     efficiently use its resources in identifying and resolving the
     reconciling items associated with the differences between these
     systems. 

  Progressed in identifying and resolving differences between book
     values of receivership and corporate-owned assets recorded in
     its financial information and asset management information
     systems.  While some consolidated receivership offices continue
     to experience differences in reported asset book values between
     the two systems, these differences are not considered material
     in the aggregate.  In addition, FDIC progressed in maintaining
     and updating system data files to reflect current information
     affecting the condition and potential recoveries on assets in
     liquidation. 

  Increased the number of personnel under its Contractor Accounting
     Oversight Group and assigned to them the responsibility for
     reconciling monthly the reported asset pool balances between
     contracted asset servicers' records and FDIC's general ledger
     control accounts.  It also distributed to the servicers'
     internal audit departments a list of critical audit areas that
     should be addressed through internal audits each year.  In
     addition, it established a policy requiring the servicers to
     adopt FDIC's procedures for calculating recovery estimates on
     serviced assets.  While weaknesses still exist in reconciling
     the serviced asset pool balances to FDIC's general ledger system
     and performing audit procedures on critical servicer functions,
     the affect of these weaknesses is no longer considered material. 

  Revised its Time and Attendance Reporting Directive and issued
     other related guidance to (1) require separation of the
     timekeeping, data input, and reconciliation functions, (2)
     emphasize the importance of charging time to the proper fund,
     (3) address the proper use of the common services fund, and (4)
     ensure review of time and attendance reports.  While FDIC
     improved time and attendance reporting guidance enough that we
     no longer consider this weakness material, additional action is
     needed to ensure consistent adherence to the revised procedures. 

In addition to the material weaknesses discussed above, our reports
on our 1992 audits also noted other reportable conditions which
affected FDIC's ability to ensure that internal control objectives
were achieved.  These involved weaknesses in FDIC's controls over (1)
access to computerized information systems' hardware and software,
(2) cash receipts at some consolidated receivership sites, (3)
accounting methodologies used by certain asset servicers, (4)
recording assessment revenue due SAIF, (5) recording exit fee
transactions, and (6) authorization of adjustments to the financial
statements.  We reported that these weaknesses, though not material,
impaired the ability of FDIC's system of internal accounting controls
to ensure accurate reporting of financial transactions and proper
safeguarding of assets, and we made several recommendations to
correct them. 

During 1993, FDIC acted to address these weaknesses.  For four of the
six weaknesses, FDIC's actions addressed our concerns to the extent
that, as of December 31, 1993, we no longer considered them to be
reportable conditions.  Specifically, FDIC: 

  Adopted uniform procedures for processing and reconciling cash
     receipts at its consolidated receivership offices.  Because FDIC
     is in the process of merging certain consolidated receivership
     offices as part of its downsizing efforts, continued monitoring
     of these new procedures is particularly important in view of the
     anticipated increase in activity at key offices. 

  Established a systematic ongoing process for conducting audits of
     assessments due SAIF.  This process, if implemented as designed,
     can be an effective internal control.  However, if the full
     potential of this control is to be realized, FDIC will need to
     ensure that (1) these audits encompass all institutions owing
     material levels of assessments to SAIF and (2) any resulting
     material audit adjustments are reflected in the proper
     accounting period, consistent with generally accepted accounting
     principles. 

  Improved its process for reconciling exit fee reports.  During
     1993, this improved reconciliation successfully identified
     material discrepancies, and all adjustments arising out of
     audits of exit fees were properly recorded in the general
     ledger. 

  Developed written procedures governing the processing of financial
     reporting adjustments.  The requirements of these procedures, if
     adhered to, appear adequate to address the concerns we reported
     during our 1992 audits. 

However, FDIC's actions during 1993 did not fully correct the
weaknesses we identified in its internal controls over access to
computerized information systems software and hardware and accounting
methodologies used by certain asset servicers.  Thus, we continue to
consider these weaknesses reportable conditions as of December 31,
1993.  However, actions to strengthen controls over computer
security, which FDIC took before the completion of our audits, if
adhered to, should correct this weakness.  These actions are
discussed in a later section of this report. 


   MATERIAL INTERNAL CONTROL
   WEAKNESS EXISTS IN ASSET
   RECOVERY ESTIMATION PROCESS
------------------------------------------------------------ Letter :3

During our 1993 audits, we identified a material weakness in FDIC's
internal accounting controls over its process for estimating
recoveries it will realize on the management and disposition of BIF's
and FRF's inventory of failed institution assets.  These estimates
form the basis for establishing BIF's and FRF's allowance for losses
on their respective balances of subrogated claims and investment in
corporate-owned assets.  Specifically, internal accounting controls
are not adequate to ensure that consistent and sound methodologies
are used to estimate recoveries on failed institution assets.  Also,
internal controls are not effective in ensuring that proper
documentation is maintained to support recovery estimates. 

Although we were able to satisfy ourselves that this weakness did not
have a material effect on the 1993 financial statements of the funds,
this weakness could result in material misstatements in future
financial statements and other financial information if not corrected
by FDIC.  The magnitude of these misstatements could be further
exacerbated when FDIC assumes responsibility for managing and
disposing of failed institution assets transferred from RTC when it
terminates its asset disposition operations.  RTC is currently
scheduled to terminate its operations and transfer any remaining
receivership assets to FDIC no later than December 31, 1995. 

FDIC uses the Liquidation Asset Management Information System (LAMIS)
to assist in managing assets of failed institutions that are
primarily serviced internally by FDIC personnel.  FDIC also contracts
with private entities to service large pools of receivership and
corporate-owned assets from failed banks resolved by BIF.  As of
December 31, 1993, BIF and FRF held failed institution assets with a
book value of $25 billion and $2.7 billion, respectively.  Estimates
of recoveries from the management and disposition of these assets are
used to determine the allowance for losses on BIF's and FRF's
balances of subrogated claims and investments in corporate-owned
assets.  To ensure the reliability of the aggregate estimated
recovery on BIF's and FRF's inventories of failed institution assets,
consistent and sound methodologies should be used to develop asset
recovery estimates and adequate documentation should be maintained to
support them. 

During 1993, we found that both FDIC and servicer personnel used
inconsistent and unsupported methodologies for estimating recoveries
on assets with similar liquidation strategies.  Also, the methods for
developing the estimates did not always result in recovery estimates
which represented the net realizable value of these assets.  These
weaknesses result in estimates that lose their comparability,
diminishing FDIC's ability to accurately report on these assets. 

We found: 

  For anticipated loan restructurings and performing loans, most
     servicers' personnel included in recovery estimates interest
     income anticipated for the duration of either the loan or the
     servicing contract.  In contrast, FDIC personnel did not include
     in their estimates any interest income for anticipated loan
     restructurings and limited anticipated interest income for
     performing loans to 1 year. 

  For nonperforming loans which are expected to be foreclosed,
     recovery estimates prepared by servicers' personnel included
     operating income associated with the loans' underlying
     collateral, even though FDIC's legal right to rental income had
     not yet been established.  For similar assets serviced by FDIC
     personnel, operating income was not included in estimating
     recoveries until the foreclosure actually occurred or FDIC's
     legal right to the rental income was established. 

  For assets with similar liquidation strategies, certain FDIC and
     servicers' account officers applied across-the-board discounts
     to appraised values in estimating recoveries, while other
     account officers estimated recoveries at 100 percent of
     appraised value.  Similarly, for assets to be disposed of
     through bulk sales, certain account officers discounted
     appraised values of these assets, some used 100 percent of the
     appraised value, and others used FDIC's minimum acceptable price
     assigned to the assets in estimating recoveries. 

  For failed institution assets constituting investments in
     subsidiaries, account officers at one servicer estimated
     recoveries based on the net cash flow to FDIC that was expected
     from subsidiary dividends, while account officers at another
     servicer estimated recoveries based on the expected return on
     specific subsidiary assets without deducting subsidiary
     liabilities. 

  For assets whose recoveries are estimated based on predetermined
     formulas,\9 the personnel of one servicing entity applied the
     recovery formulas against the adjusted pool value of the
     serviced assets.\10 In contrast, FDIC and other servicing entity
     personnel followed the guidance in FDIC's Credit Manual, which
     instructs account officers to apply the predetermined recovery
     formulas to the assets' book values.  The adjusted pool value is
     generally less than book value because interest income and other
     income collected on these assets are deducted from the assets'
     principal balance. 

  For assets whose estimated recoveries are based on payment streams
     that extend for several years, these cash flows were not
     discounted to their net present value.  Assets with large
     balloon payments, assets recently or currently in the process of
     being restructured, and assets which are not easily liquidated
     often have large payment streams beyond 1 year.  The differences
     between the estimated recoveries calculated by FDIC and servicer
     personnel on a gross basis and the net present value of these
     recoveries could be substantial. 

During our 1992 audits, we found that estimates of recoveries on
failed institution assets were not always supported by documentation
in asset files maintained by FDIC and servicer personnel.  This
weakness increases the risk that estimates of recoveries may not be
reasonable and based on the most current information available. 
While FDIC has made some progress in addressing these weaknesses, we
found similar documentation deficiencies during our 1993 audits.  In
addition, methodologies used to estimate asset recoveries were not
always supported by historical or other evidential data.  We found: 

  For assets whose recoveries are based on discounted appraised
     values, neither FDIC or servicing personnel could provide any
     data or analysis to support these discounts. 

  For assets whose recoveries are calculated by predetermined
     formulas, FDIC was unable to provide an analysis of historical
     data to support the recovery rates.  In addition, FDIC did not
     consider the appraised value of the underlying collateral in
     calculating recoveries for these assets even though FDIC
     requires at least one current appraisal (less than 1 year old)
     for property pledged as collateral except when the collateral
     value is less than $25,000.  Using book values, rather than
     available appraised values, as a basis for determining
     recoveries does not consider changes in recoveries that would
     occur due to changing economic conditions. 

The use of inconsistent and unsupported methodologies in determining
recovery estimates on failed institution assets is largely due to the
lack of comprehensive procedures for estimating recoveries.  Although
FDIC's Credit Manual provides some illustrations on estimating asset
recoveries, the guidance and examples provided are not comprehensive
enough to consider the numerous liquidation strategies that account
officers may use.  For a given asset, the Credit Manual does not
specifically instruct account officers to base the recovery estimate
on the liquidation strategy being pursued.  Further, the guidance
available in the Credit Manual is often vague and subject to
different interpretations by the various user groups. 

The weaknesses in FDIC's internal controls over its asset recovery
estimation process have resulted in a significant number of errors in
asset recovery estimates.  We found that for 714 failed institution
assets we reviewed, FDIC's recovery estimates were misstated for 372
(52 percent).  Because some errors understated recovery estimates
while other errors overstated them, the net aggregate effect of these
errors did not result in a material misstatement of BIF's or FRF's
financial statements as of December 31, 1993.  However, these
weaknesses could result in material misstatements if not corrected. 


--------------------
\9 For assets with book values of $250,000 or more and for all
judgments, subsidiaries, claims, and restitutions, account officers
assigned to manage and liquidate the assets are responsible for
preparing complete and accurate recovery estimates for each asset. 
For those assets with book values less than $250,000, recoveries are
calculated using recovery rates contained in FDIC's Credit Manual. 

\10 Adjusted pool balance represents the principal balance of the
asset, net of specific reserves, as reflected on the accounting
records of the relevant failed bank or assuming bank less all
subsequent collections, such as principal, interest, and other
income. 


   REPORTABLE CONDITIONS
------------------------------------------------------------ Letter :4

Although FDIC made significant progress during 1993 in addressing the
internal control weaknesses identified in our 1992 audits, certain
internal control deficiencies still existed in the following areas
during 1993 to the point that we consider them reportable conditions. 

1.  During 1993, FDIC acted to address the weaknesses we identified
during our 1992 audits in its time and attendance reporting
processes.  This action included issuing improved time and attendance
reporting procedures and related additional written guidance. 
However, our 1993 audits found that these required procedures and
guidance were not always followed, resulting in deficiencies similar
to some of those we identified during our 1992 audits.  These
deficiencies included continued lack of adherence to required
procedures in preparing time and attendance reports, lack of
separation of duties between timekeeping and data entry functions,
and failure to reconcile payroll reports to timecards to verify that
the data on the timecards were properly entered into the payroll
system.  While FDIC's issuance of revised time and attendance
reporting procedures and guidance was a positive step, these revised
procedures do not in themselves ensure that time and attendance
reporting requirements are being followed.  Effective implementation
of the revised procedures and guidance should correct the weaknesses
that continued to exist in 1993. 

2.  FDIC uses its computer systems extensively, both in its daily
operations and in processing and reporting financial information. 
Therefore, general controls over the systems are critical to
producing accurate and reliable financial statements.  During our
1992 audits, we found that general controls\11 over FDIC's
computerized information systems did not adequately ensure that data
files, computer programs, and computer hardware were protected from
unauthorized access and modification.  Our 1993 audits showed that
this weakness continued through 1993.  However, prior to completion
of our fieldwork in May 1994, FDIC revised procedures to address the
weakness in its computerized information systems security controls. 
Specifically, FDIC revised procedures to restrict access to sensitive
financial and operating system programs and files.  As a result,
FDIC's general controls, as revised, should adequately preclude
unauthorized access to or modification of data files and programs. 
Because these changes were recently implemented, this condition will
require future monitoring to ensure that general controls remain
adequate. 

3.  In our report on our 1992 audits, we reported that internal
controls over contracted asset servicers were not being consistently
implemented or were too limited to effectively assist FDIC in
overseeing its contracted asset servicers.  Although FDIC is
addressing these weaknesses and has made significant progress, we
found that some of these weaknesses continued during 1993. 
Specifically, we found that reconciling items related to the
reconciliation of servicer pool balances were not cleared promptly
for 22 percent of the serviced asset pools.  We also found that
reconciliations were not performed consistently for an additional 10
percent of the pool balances and, when performed, the reconciliations
did not sufficiently document and account for all reconciling items. 
In addition, we found that FDIC performed only limited review
procedures on the balances and activity reported by asset servicing
entities, which are the source for recording transactions to FDIC's
financial information system. 

FDIC attributes the lack of consistent and timely reconciliations to
insufficient staff.  In addition, we believe the lack of sufficient
verification of servicer balances and activity is attributable to
inadequate coordination of oversight responsibilities between FDIC's
Division of Finance and the Contractor Oversight and Monitoring
Branch of its Division of Depositor and Asset Services.  These
weaknesses in reconciliation and verification procedures may
adversely affect the reliability of the recorded asset balances and
servicer accountability. 

4.  Because FDIC does not maintain subsidiary records for assets in
serviced asset pools, it must rely on contracted servicers to
establish adequate safeguarding and reporting controls over these
serviced assets.  In our reports on our 1992 audits, we noted that
FDIC had not prepared a detailed reconciliation between asset
balances in its financial information system and one of its
contracted asset servicer's reported asset pool balance since the
pool's inception in August 1991.  While FDIC has acted to address
this weakness, our work in 1993 found that weak internal controls at
this servicing entity persisted.  This prevented FDIC from having
assurance that assets serviced by this entity were adequately
safeguarded and that transactions associated with this serviced asset
pool were properly reported to FDIC. 

  We found that the asset pool balance reported on FDIC's financial
     information system could not be verified to the servicer's
     general ledger or to its subsidiary records.  This is because
     the servicer did not maintain a general ledger consistent with
     receivership accounting and because reconciling differences
     between the subsidiary records and amounts reported to FDIC had
     not been resolved.\12

  Because of the limitations in the servicer's accounting systems,
     the servicer manually prepares monthly reports to present
     activity associated with these serviced assets on a basis
     consistent with FDIC.  These reports are the primary source
     documents FDIC uses to record transactions to its financial
     information system and to reconcile the asset balances. 
     However, neither FDIC nor the servicer's internal audit
     department verify activity reflected in these reports. 

  We also found that controls over accountability and timely
     processing of this servicer's collections need improvement. 
     Control totals should be established for receipts and the total
     of each day's processed receipts should be reconciled to these
     control totals.  Also, receipts received before an entity's
     depository deadline should be deposited the same day.  However,
     the servicer does not reconcile checks received each day to
     checks processed and deposited, nor does the servicer promptly
     process all checks received on assets assigned for bulk sale. 

Although the servicer was required to maintain a subsidiary record
reflecting the legal balances of the serviced assets, its servicing
agreement did not specifically require the servicer to maintain its
general ledger system on a basis consistent with receivership
accounting.  Consequently, because the servicer's accounting systems
were not maintained so as to reflect the legal balances of the
serviced assets, the manually prepared activity reports became
necessary in order for FDIC to appropriately apply collections
between principal, interest, and other income.  However, the accuracy
of these reports was not verified by FDIC.  We believe this is due to
inadequate guidance and coordination of oversight responsibilities
between FDIC's Division of Finance and its Contractor Oversight
Monitoring Branch. 

Because of these limitations in the servicer's accounting systems and
the inadequate review of the manually prepared activity reports,
significant adjustments were needed to both the activity reports and
to FDIC's financial information system to appropriately apply
collections each month from August 1991 through August 1993.  In
addition, large balances of unapplied collections as reported by the
servicer have accumulated in FDIC's suspense account.  Overall, these
conditions have resulted in inaccurate balances on FDIC's financial
information system and have prevented FDIC from ensuring that all
account balances and activity reflected in its accounting system are
complete and accurate.  Also, the servicer's failure to reconcile
checks received to checks deposited and the holding of checks
increases the risk that checks may be lost, misplaced, or stolen, and
that cash transactions may be unrecorded or incomplete. 

In addition to the weaknesses we have discussed, we noted other less
significant matters involving FDIC's system of internal accounting
control and its operations which we will be reporting separately to
FDIC management. 


--------------------
\11 General controls are the policies and procedures that apply to an
entity's overall effectiveness and security of operations, and that
create the environment in which application controls and certain user
controls operate.  General controls include the organizational
structure, operating procedures, software security features, system
development and change control, and physical safeguards designed to
ensure that only authorized changes are made to computer programs,
that access to data is appropriately restricted, that back-up and
recovery plans are adequate to ensure the continuity of essential
operations, and that physical protection of facilities is provided. 

\12 Under receivership accounting, collections on assets are applied
among principal, interest, and other income so that the legal balance
of the asset can be maintained. 


   FDIC'S COMPLIANCE WITH THE
   CHIEF FINANCIAL OFFICERS ACT
------------------------------------------------------------ Letter :5

The Chief Financial Officers (CFO) Act requires that government
corporations submit an annual statement on internal accounting and
administrative controls, including management's assessment on the
effectiveness of these controls, consistent with the requirements of
the Federal Managers' Financial Integrity Act.  The CFO Act also
requires that government corporations have their financial statements
audited annually and that corporations submit an annual management
report to the Congress. 

Our annual audits of FDIC's financial statements satisfy the act's
auditing requirement.  Also, FDIC's 1992 report on internal
accounting and administrative controls, issued in July 1993,
contained the results of management's assessment of internal controls
in place during 1992.  FDIC's assessment identified several
deficiencies in internal controls that it considered material.\13 The
1992 report contained specific plans to correct these weaknesses. 

FDIC is finalizing its 1993 management report.  Based on our review
of a draft of this report, we anticipate that FDIC will fulfill the
act's reporting requirement by submitting a management report to the
Congress that contains the financial statements of the three funds
administered by FDIC, the annual audit report, and a statement on
internal accounting and administrative controls by the Acting
Chairman of FDIC consistent with the requirements of the Federal
Managers' Financial Integrity Act. 


--------------------
\13 FDIC considers a deficiency material if (1) it violates a
statutory requirement, (2) it results in a conflict of interest, (3)
it significantly impairs the fulfillment of FDIC's mission, (4) it
significantly weakens safeguards against waste, loss, or unauthorized
use or misappropriation of funds, property, or other assets, (5) it
merits the attention of the Congress, or (6) omitting it from the
statements of internal accounting and administrative controls could
adversely reflect on the management integrity of FDIC. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

FDIC has not fully implemented all of the recommendations we made
following our 1992 audits.  Specifically, FDIC has not promptly and
routinely reconciled asset balances reported by servicing entities
with its general ledger control accounts, and has not ensured timely
and adequate audit coverage of all critical areas of asset servicing
operations through the use of asset servicing entities' internal
audit departments and FDIC's personnel site visitations.  Also, FDIC
has not ensured that estimates of recoveries from the management and
disposition of failed institution assets are determined utilizing
consistent and sound methodologies.  FDIC needs to continue pursuing
corrective actions to fully satisfy these recommendations. 

In addition, to address the weaknesses identified during 1993
regarding inconsistent and unsupported asset recovery estimation
methodologies, we recommend that the Acting Chairman of the Federal
Deposit Insurance Corporation direct the heads of the Division of
Depositor and Asset Services and the Division of Finance to: 

  Revise the Credit Manual to provide more detailed guidance on
     recovery estimation methods to be used, and ensure that this
     expanded guidance is strictly adhered to by both consolidated
     offices and contracted asset servicers' personnel. 
     Specifically, the revised Credit Manual should require that (1)
     recoveries be estimated based on the type of asset and the
     liquidation strategy being pursued, (2) cash flows projected to
     be received beyond 1 year be discounted to their net present
     value, and (3) account officers adequately document the
     underlying assumptions they use to calculate the recovery
     estimates. 

  Analyze and document the basis for the formulas used to calculate
     recoveries for assets with book values less than $250,000.  In
     analyzing these formulas, FDIC should consider the use of
     appraised values to calculate recovery estimates for
     collateralized assets even if the asset's book value is under
     $250,000. 

To address the weaknesses identified during 1993 in the oversight of
asset servicing entities, we recommend that the Acting Chairman of
the Federal Deposit Insurance Corporation direct the heads of the
Division of Depositor and Assets Services and Division of Finance to
verify and document the accuracy and completeness of the balances and
activity reported to FDIC by contracted asset servicers back to the
servicers' detail records. 

To address the weaknesses identified during 1993 in the internal
controls of one contracted servicer, we recommend that the Acting
Chairman of the Federal Deposit Insurance Corporation direct the
heads of the Division of Depositor and Asset Services and the
Division of Finance to

  promptly reconcile servicer asset balances each month and resolve
     and document reconciling items within 30 days of the
     reconciliation date;

  require the servicer to maintain a general ledger and subsidiary
     records consistent with receivership accounting, and require
     FDIC's oversight personnel to verify the accuracy of the
     activity and balances on these systems; and

  require the servicer to reconcile checks received to checks
     deposited each day, and reconcile the final month-end balances
     in FDIC's unapplied collections account to the servicer's
     subsidiary records and clear these amounts within 30 days after
     month-end. 

To address weaknesses identified in FDIC's time and attendance
reporting process, we recommend that the Acting Chairman of the
Federal Deposit Insurance Corporation direct FDIC's division and
office heads to enforce the revised policies and procedures in FDIC's
Time and Attendance Reporting Directive and related guidance to
ensure that employee time charges are valid, payroll expenses are
charged to the correct fund, and timekeeping and data input functions
are separated. 


   CORPORATION COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In commenting on a draft of our report, FDIC agreed that improvements
were needed in its process for estimating recoveries to be received
on assets acquired from failed institutions.  FDIC outlined major
initiatives currently underway which are designed to correct the
weaknesses identified in our 1993 audits.  FDIC also outlined actions
it is currently taking or plans to take to address the other
reportable conditions identified in our 1993 audits.  These actions,
if implemented as intended, should adequately address the weaknesses
discussed in our report.  During the course of our audits of the 1994
financial statements of the three funds administered by FDIC, we will
review the implementation of these corrective actions. 

FDIC disagreed that the $410 million reduction in BIF's estimated
liability for unresolved cases, which FDIC recognized in the first
quarter of 1994, should have been recognized as of December 31, 1993. 
FDIC noted that financial information it received from financial
institutions as of year-end 1993 was just one of a number of factors
considered in its quarterly analysis of BIF's exposure to troubled
institutions.  FDIC noted that other factors used to determine that
BIF's estimated liability for unresolved cases should be reduced
incorporated information subsequent to December 31, 1993, and
therefore, it was appropriate to include the adjustment in BIF's
March 1994 financial statements. 

We agree that other factors beyond the financial condition of insured
institutions as reported in their unaudited statements of condition
and income should be considered in evaluating BIF's exposure to
future institution failures.  However, the primary accountable event
which triggers the reduction of an estimated loss for a troubled
institution is the point at which improvements in the institution's
financial condition render the loss no longer probable, as defined
under generally accepted accounting principles and embodied in FDIC
policy.\14 Our review of these institutions' unaudited statements of
condition and income as of December 31, 1993, showed from this
information alone that an improvement in financial condition
sufficient to necessitate a reduction in the estimated loss for these
institutions had occurred prior to year-end 1993.  The additional
information considered in evaluating the likelihood of an
institution's failure, such as input from field examiners, only
reinforced this conclusion.  In fact, in several cases, the examiners
referred to specific events, such as capital infusions, which had
occurred prior to year-end 1993, as the basis for their opinion that
an estimated loss was no longer necessary.  Therefore, we believe
this $410 million reduction in BIF's estimated liability for
unresolved cases should have been recognized on BIF's financial
statements as of December 31, 1993. 

The complete text of FDIC's response to our report is included in
appendix II. 

Charles A.  Bowsher
Comptroller General
of the United States

May 6, 1994


--------------------
\14 Statement of Accounting Policy (CORP-17, April 6, 1994). 
Retroactive to December 31, 1993. 


BANK INSURANCE FUND'S FINANCIAL
STATEMENTS
=========================================================== Appendix 0

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and the
   Fund Balance (Deficit)

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


SAVINGS ASSOCIATION INSURANCE
FUND'S FINANCIAL STATEMENTS
=========================================================== Appendix 1

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and the
   Fund Balance

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


FSLIC RESOLUTION FUND'S FINANCIAL
STATEMENTS
=========================================================== Appendix 2

   Statements of Financial
   Position

   (See figure in printed
   edition.)

   Statements of Income and
   Accumulated Deficit

   (See figure in printed
   edition.)

   Statements of Cash Flows

   (See figure in printed
   edition.)

   Notes to the Financial
   Statements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


SCOPE AND METHODOLOGY
=========================================================== Appendix I

In order to fulfill our responsibilities as auditor of record for the
Federal Deposit Insurance Corporation, we: 

  Examined, on a test basis, evidence supporting the amounts and
     disclosures in the financial statements of each of the three
     funds. 

  Assessed the accounting principles used and significant estimates
     made by FDIC management. 

  Evaluated the overall presentation of the financial statements of
     each of the three funds. 

  Evaluated internal controls designed to (1) safeguard assets
     against loss from unauthorized acquisition, use, or disposition,
     (2) assure the execution of transactions in accordance with
     management authority and with laws and regulations, and (3)
     properly record, process, and summarize transactions to permit
     the preparation of financial statements in accordance with
     generally accepted accounting principles.  These included
     relevant internal controls over the following significant
     cycles, classes of transaction, and account balances. 

Troubled institutions. 

Closed assistance. 

Assessments. 

Open assistance. 

Expenses. 

Treasury. 

Financial reporting. 

  Tested compliance with significant provisions of the Federal
     Deposit Insurance Act, as amended; the Chief Financial Officers
     Act; and the Federal Home Loan Bank Act, as amended.  The
     provisions selected for testing included, but were not limited
     to, those relating to

assessment rates,

investment of amounts held by the funds,

maximum obligation limitations,

disbursements for bank and thrift resolutions,

external financial reporting, and

accounting for administrative expenses. 

We limited our work to accounting and other controls necessary to
achieve the objective outlined in our opinion on internal controls. 
We conducted our audits between August 1993 and May 1994.  Our audits
were conducted in accordance with generally accepted government
auditing standards. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

Steven J.  Sebastian, Assistant Director
Charles R.  Fox, Manager
Salim R.  Mawani, Manager
Gregory J.  Ziombra, Manager
Lynda E.  Downing, Senior Auditor
David C.  Merrill, Senior Auditor
Christopher M.  Salter, Senior Auditor
Kevin A.  Carey, Auditor
John C.  Craig, Auditor
Douglas A.  Delacruz, Auditor
Bonnie L.  Lane, Auditor
Laurie A.  O'Connell, Auditor
Celia M.  Washington, Auditor
Michelle A.  Winfrey, Auditor


   DALLAS REGIONAL OFFICE
------------------------------------------------------- Appendix III:2

Shannon D.  Rapert, Manager
George Jones, Site Senior
Miguel A.  Salas, Site Senior
Patrick J.  Cogley, Auditor
Ruth K.  Joseph, Evaluator
Angela J.  Reznicek, Evaluator
Charles M.  Vrabel, Evaluator


   DENVER REGIONAL OFFICE
------------------------------------------------------- Appendix III:3

Bennet E.  Severson, Site Senior
Alva J.  Cain, Evaluator
Jamelyn A.  Smith, Evaluator
Elena S.  Tomorwitz, Evaluator


   CHICAGO REGIONAL OFFICE
------------------------------------------------------- Appendix III:4

Daniel M.  Johnson, Evaluator
John A.  Rose, Evaluator
Richard S.  Tsuhara, Evaluator
Barbara A.  Mulliken, Evaluator


   NEW YORK REGIONAL OFFICE
------------------------------------------------------- Appendix III:5

Vincent R.  Morello, Site Senior
Ralph S.  Meister, Evaluator


   ATLANTA REGIONAL OFFICE
------------------------------------------------------- Appendix III:6

Shawkat Ahmed, Site Senior
Philip Amon, Evaluator
Johnny Barnes, Evaluator
Sharon S.  Kittrell, Evaluator
Suzanne Murphy, Evaluator

