Financial Audit: Federal Deposit Insurance Corporation's 1994 and 1993
Financial Statements (Letter Report, 03/31/95, GAO/AIMD-95-102).

GAO audited the financial statements of the Bank Insurance Fund (BIF),
the Savings Association Insurance Fund (SAIF), and the Federal Savings
and Loan Insurance Corporation Resolution Fund for the years ended
December 31, 1993 and 1994.

GAO found that: (1) the financial statements were reliable in all
material respects and presented fairly the funds' financial position and
results of operations and cash flows for the years ended December 31,
1994 and 1993; (2) the Federal Deposit Insurance Corporation's (FDIC)
internal controls provided reasonable assurance that fund assets were
safeguarded from unauthorized use, transactions were executed in
accordance with management authority, and transactions were properly
recorded, processed, and summarized in accordance with generally
accepted accounting principles; (3) FDIC internal controls were
effective in ensuring compliance with selected laws and regulations; (4)
although material weaknesses existed in the FDIC asset valuation
process, these weaknesses did not have a material effect on the funds'
1994 financial statements; (5) there were no instances of noncompliance
with laws and regulations; and (6) although FDIC has taken actions to
address internal control weaknesses in its recovery process, it needs to
ensure that sound methodologies are used, clarify guidance to ensure
that sufficient criteria are applied, and further implement prior
recommendations that address control weaknesses.

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

 REPORTNUM:  AIMD-95-102
     TITLE:  Financial Audit: Federal Deposit Insurance Corporation's 
             1994 and 1993 Financial Statements
      DATE:  03/31/95
   SUBJECT:  Bank management
             Funds management
             Financial statement audits
             Federal corporations
             Internal controls
             Compliance
             Financial records
             Accounting procedures
             Reporting requirements
             Corporate audits
IDENTIFIER:  BIF
             SAIF
             Bank Insurance Fund
             Savings Association Insurance Fund
             FSLIC Resolution Fund
             
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Cover
================================================================ COVER


Report to the Congress

March 1995

FINANCIAL AUDIT - FEDERAL DEPOSIT
INSURANCE CORPORATION'S 1994 AND
1993 FINANCIAL STATEMENTS

GAO/AIMD-95-102

FDIC's 1994 and 1993 Financial Statements


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

  BIF - Bank Insurance Fund
  CAOG - Contractor Accounting Oversight Group
  CFO - Chief Financial Officers Act
  COMB - Contractor Oversight and Monitoring Branch
  DAS - Division of Depositor and Asset Services
  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
  REMIC - Real Estate Mortgage Investment Conduit
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund
  SEC - Securities and Exchange Commission

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


B-259232

March 31, 1995

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, 1994 and 1993.  These financial
statements are the responsibility of the Federal Deposit Insurance
Corporation (FDIC), the administrator of the three funds.  This
report also presents our opinion on FDIC management's assertions
regarding the effectiveness of its system of internal controls as of
December 31, 1994.  FDIC continues to make progress in addressing the
internal control weaknesses we reported in our previous audits. 
However, our work identified several nonmaterial weaknesses in FDIC's
system of internal controls.  This report also discusses our
evaluation of FDIC's compliance with laws and regulations during
1994. 

In addition, this report presents our recommendations to improve
FDIC's internal controls and discusses the improvements in the
banking and savings association industries which have significantly
accelerated the recapitalization of the Bank Insurance Fund.  This
report also discusses our concerns about the capitalization of the
Savings Association Insurance Fund and a potential premium rate
differential which could develop in 1995 between the insured
institutions of the Bank Insurance Fund and the Savings Association
Insurance Fund. 

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 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 and Financial Services; 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-259232

To the Board of Directors
Federal Deposit Insurance Corporation

We have audited the statements of financial position as of December
31, 1994 and 1993, of the three funds administered by the Federal
Deposit Insurance Corporation (FDIC), the related statements of
income and fund balance (accumulated deficit), and statements of cash
flows for the years then ended.  In our audits of 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

the financial statements, taken as a whole, were reliable in all
material respects;

FDIC management fairly stated that internal controls in place on
December 31, 1994, were effective in safeguarding assets against
unauthorized acquisition, use, or disposition, assuring the execution
of transactions in accordance with management's authority and with
provisions of selected laws and regulations that have a direct and
material effect on the financial statements, and assuring that there
were no material misstatements in the financial statements of the
three funds administered by FDIC; and

no reportable noncompliance with laws and regulations we tested. 

During our audits of the 1993 financial statements of the three
funds,\1 we identified a material weakness\2 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.  This weakness adversely
affected FDIC's ability to ensure that consistent and sound
methodologies were used and proper documentation was maintained to
estimate recoveries on failed institution assets.  In addition to
this material weakness, we identified other weaknesses in FDIC's
internal controls which, while not material reportable conditions,
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 1993 audits. 

In conducting our 1994 audits, we found that FDIC continued to make
progress to address the internal control weaknesses identified during
our previous audits.  FDIC's actions during 1994 partially resolved
the one weakness considered material to the extent that we no longer
consider it to be material.  In addition, FDIC's actions during 1994
adequately addressed one of the three other weaknesses identified
during our 1993 audits.\3

While FDIC continues to improve its system of internal controls,
further improvements are needed.  Our 1994 audits continued to
identify weaknesses, though not considered material, in controls over
FDIC's process for estimating recoveries from failed institution
assets, documentation used to support the estimated recoveries from
failed institution assets, and oversight of entities contracted to
service and liquidate assets from failed financial institutions.  In
addition, we continued to identify weaknesses in FDIC's time and
attendance processes. 

During our 1994 audits, we noted continued improvement in the
condition of the nation's banks and savings associations.  The
improved condition of the banking industry, and the higher premiums
BIF-member institutions have paid in the last several years, have
resulted in an acceleration of BIF's recapitalization.  Given BIF's
current condition and short-term outlook, it is likely that the Fund
will reach its designated capitalization level in 1995.  Currently,
FDIC plans to lower premium rates charged to BIF-member institutions
when BIF achieves its designated ratio of reserves to insured
deposits.  While the improved condition of the nation's thrifts and
higher premiums have helped improve SAIF's condition, it remains
thinly capitalized.  SAIF is not expected to reach full
capitalization until 2002, and thus remains vulnerable to financial
institution failures.  Additionally, a significant premium rate
differential between BIF and SAIF will develop in 1995 if FDIC lowers
BIF rates as soon as BIF attains its designated reserve ratio.  This
differential could have an adverse impact on the thrift industry and
SAIF. 


--------------------
\1 Financial Audit:  Federal Deposit Insurance Corporation's 1993 and
1992 Financial Statements (GAO/AIMD-94-135, June 24, 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, and (3) properly record,
process, and summarize transactions to permit the preparation of
financial statements.  Reportable conditions which are not considered
material weaknesses nevertheless represent deficiencies in the design
or operation of internal controls and need to be corrected by
management. 

\3 Our 1993 audit report also identified a weakness in FDIC's general
controls over its information systems mainframe computer, which was
also discussed in our 1992 audit report.  However, prior to the
issuance of our 1993 audit report, FDIC took corrective actions which
fully addressed this weakness. 


   OPINION ON FINANCIAL STATEMENTS
------------------------------------------------------------ Letter :1


      BANK INSURANCE FUND
---------------------------------------------------------- Letter :1.1

In our opinion, the financial statements and accompanying notes
present fairly, in conformity with generally accepted accounting
principles, in all material respects, the Bank Insurance Fund's
financial position as of December 31, 1994 and 1993, and the results
of its operations and its cash flows for the years then ended. 

As discussed in note 9 of BIF's financial statements, during 1994,
FDIC securitized a portion of BIF's portfolio of performing loans
acquired from failed financial institutions.  This securitization was
in the form of a Real Estate Mortgage Investment Conduit (REMIC)
Trust 1994-C1 (Trust).  To facilitate the sale of certificates issued
by the Trust and to maximize the return on the sale of the assets,
BIF provided a limited guaranty to cover certain losses on the loans. 
Securities and Exchange Commission (SEC) regulations required the
Trust to file an Annual Report (Form 10-K) with the SEC within 90
days after the financial year-end as part of the securitization
transaction.  Because of the limited guaranty provided by BIF, the
Trust was required to include BIF's 1994 audited financial statements
as an exhibit in the SEC filing, including the auditor's opinion.  At
FDIC's request, on March 15, 1995, we provided a separate opinion
letter on BIF's financial statements to FDIC to facilitate the
Trust's SEC filing.  The BIF audit opinion provided to FDIC for
inclusion in the Trust's 1994 annual 10-K filing is presented in
appendix II. 


      SAVINGS ASSOCIATION
      INSURANCE FUND
---------------------------------------------------------- Letter :1.2

In our opinion, the financial statements and accompanying notes
present fairly, in conformity with generally accepted accounting
principles, in all material respects, the Savings Association
Insurance Fund's financial position as of December 31, 1994 and 1993,
and the results of its operations and its cash flows for the years
then ended. 


      FSLIC RESOLUTION FUND
---------------------------------------------------------- Letter :1.3

In our opinion, the financial statements and accompanying notes
present fairly, in conformity with generally accepted accounting
principles, in all material respects, the FSLIC Resolution Fund's
financial position as of December 31, 1994 and 1993, and the results
of its operations and its cash flows for the years then ended. 

As discussed in note 9 of FRF's financial statements, there are
approximately 50 pending lawsuits which stem from legislation that
resulted in the elimination of supervisory goodwill from regulatory
capital.  These lawsuits assert a breach of contract or an
uncompensated taking of property resulting from the Financial
Institutions Reform, Recovery, and Enforcement Act's (FIRREA)
provisions regarding minimum capital requirements for thrifts and
limitations as to the use of supervisory goodwill to meet minimum
capital requirements.  One case has resulted in a final judgment of
$6 million against FDIC, which was paid by FRF, and FDIC expects
additional cases will be filed.  While FDIC believes that judgments
in such cases are more properly paid from the Judgment Fund,\4 the
extent to which FRF will be the source of paying such judgments in
subsequent goodwill cases, as well as the amounts of such judgments,
is uncertain. 


--------------------
\4 The Judgment Fund is a permanent, indefinite appropriation
established by 31 U.S.C.  Sec.  1304. 


   OPINION ON FDIC MANAGEMENT'S
   ASSERTIONS ABOUT THE
   EFFECTIVENESS OF FDIC'S
   INTERNAL CONTROLS
------------------------------------------------------------ Letter :2

For the three funds administered by FDIC, we evaluated FDIC
management's assertions about the effectiveness of its internal
controls designed to

safeguard assets against unauthorized acquisition, use, or
disposition;

assure the execution of transactions in accordance with management's
authority and with provisions of selected laws and regulations that
have a direct and material effect on the financial statements of the
three funds; and

properly record, process, and summarize transactions to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. 

FDIC management fairly stated that those controls in effect on
December 31, 1994, provided reasonable assurance that losses,
noncompliance, or misstatements material in relation to the financial
statements of each of the three funds would be prevented or detected
on a timely basis.  However, our work identified the need to improve
certain internal controls, which were summarized above and are
described in detail in a later section of this report.  These
weaknesses in internal controls, although not considered to be
material, represent significant deficiencies in the design or
operation of internal controls which could adversely affect FDIC's
ability to meet the internal control objectives listed above. 

While FDIC management's assertions about the effectiveness of
internal controls were reasonable, misstatements may nevertheless
occur in other FDIC-reported financial information on the three funds
administered by FDIC.  In addition, because of inherent limitations
in any system of internal controls, losses, noncompliance, or
misstatements may nevertheless occur and not be detected. 


   COMPLIANCE WITH LAWS AND
   REGULATIONS
------------------------------------------------------------ Letter :3

Our tests for compliance with significant provisions of selected laws
and regulations disclosed no instances of noncompliance that would be
reportable under generally accepted government auditing standards. 


      FDIC'S COMPLIANCE WITH THE
      CHIEF FINANCIAL OFFICERS ACT
---------------------------------------------------------- Letter :3.1

The Chief Financial Officers (CFO) Act requires that government
corporations submit an annual statement on internal accounting and
administrative controls, including management's assessment of 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 the three funds administered by FDIC satisfy the
act's auditing requirement.  Also, FDIC has completed its assessment
of internal accounting and administrative controls for 1994 and is in
the process of compiling the results.  FDIC anticipates issuing a
management report on the results of its 1994 internal control
assessment by June 30, 1995, as required by the CFO Act. 


   RESPONSIBILITIES OF FDIC
   MANAGEMENT AND THE AUDITOR
------------------------------------------------------------ Letter :4

FDIC management is responsible for

preparing the annual financial statements of BIF, SAIF, and FRF in
conformity with generally accepted accounting principles;

establishing, maintaining, and assessing the Corporation's internal
control structure to provide reasonable assurance that internal
control objectives as described in GAO's Standards for Internal
Controls in the Federal Government are met; and

complying with applicable laws and regulations. 

We are responsible for obtaining reasonable assurance about whether
(1) the financial statements of each of the three funds are free of
material misstatement and are presented fairly in conformity with
generally accepted accounting principles and (2) relevant internal
controls are in place and operating effectively.  We are also
responsible for testing compliance with significant provisions of
selected laws and regulations and for performing limited procedures
with respect to certain other information in FDIC's annual financial
report. 

Our audits were conducted in accordance with generally accepted
government auditing standards.  We believe our audits provide a
reasonable basis for our opinion.  The scope and methodology of our
audits is presented in appendix I. 

FDIC commented on our findings and conclusions regarding the
reportable conditions discussed in this report.  FDIC's comments are
presented and evaluated in a later section of this report. 


   SIGNIFICANT MATTERS
------------------------------------------------------------ Letter :5

The following section is provided to highlight the condition and
outlook of the banking and thrift industries and the insurance funds. 
In addition, we discuss FDIC's progress in addressing internal
control weaknesses identified during our previous audits. 


      CONDITION OF FDIC-INSURED
      INSTITUTIONS SHOWED
      CONTINUED IMPROVEMENT
      IN 1994
---------------------------------------------------------- Letter :5.1

During 1994, the banking and thrift industries continued their strong
performances.  Commercial banks reported record profits of $44.7
billion in 1994, marking the third consecutive year of record
earnings.  The main sources of earnings improvement in 1994 were
higher net interest income and lower loan-loss provisions.  The
increase in net interest income was attributable to strong growth in
interest-bearing assets, even though net interest margins were
slightly lower than in 1993. 

The continued strong performance of banks was also reflected in the
continued reduction in the number of banks identified by FDIC as
problem institutions.  At December 31, 1994, 247 commercial banks,
with total assets of $33 billion were identified by FDIC as problem
institutions, representing a significant improvement over 1993 when
426 commercial banks with assets of $242 billion were identified as
problem institutions.  Eleven commercial banks failed during 1994,
the fewest number of failures in any year since 1981. 

Savings institutions reported earnings of $6.4 billion for 1994, down
from the $6.8 billion earned in 1993.  Reduced net interest margins,
coupled with securities losses and extraordinary losses contributed
to the reduction in earnings.  However, the industry remained strong,
as reflected in the reduction in troubled institutions.  At December
31, 1994, FDIC identified 71 savings institutions with a total of $39
billion in assets as problem institutions, which was a significant
improvement over 1993 when 146 institutions with $92 billion in
assets were identified as problem institutions. 


      BIF'S CAPITAL POSITION IS
      MUCH STRONGER THAN SAIF'S
---------------------------------------------------------- Letter :5.2

The strengthened condition of the banking industry, coupled with the
relatively high insurance premiums that banks have been paying since
1990, has resulted in a significant improvement in BIF's financial
condition.  As of December 31, 1994, BIF's reserves had increased to
almost $22 billion, or about 1.15 percent of insured deposits.  The
Fund will likely reach its designated reserve ratio of 1.25 percent
in 1995. 

Although the thrift industry has also experienced significant
improvements over the past few years, SAIF has not experienced a
similar increase in its ratio of reserves to insured deposits.  As of
December 31, 1994, SAIF had reserves of $1.9 billion, or about 0.28
percent of deposits. 

SAIF's capitalization has been slowed by its members' premiums being
used to pay for certain obligations of the thrift crisis, including
interest on 30-year bonds issued by the Financing Corporation
(FICO).\5 Under current law, FICO has authority to assess SAIF
members to cover its annual interest expense, which will continue
until the 30-year recapitalization bonds mature in the years 2017
through 2019. 

FDIC projections for SAIF indicate that SAIF will attain its
designated reserve ratio in the year 2002, 7 years later than BIF. 
However, significant uncertainties relating to asset failure rates
exist, and higher-than-projected failures could delay SAIF's
capitalization.  Currently, SAIF does not have a large capital
cushion to absorb the cost of thrift failures.  Although it appears
that SAIF can manage projected failures, the failure of a single
large institution or a higher-than-projected level of failures could
delay SAIF's capitalization and increase the risk of SAIF becoming
insolvent. 


--------------------
\5 FICO was established in 1987 to recapitalize the Federal Savings
and Loan Insurance Fund, the former insurance fund for thrifts. 


      A SIGNIFICANT PREMIUM RATE
      DIFFERENTIAL BETWEEN BANKS
      AND THRIFTS COULD DEVELOP IN
      1995
---------------------------------------------------------- Letter :5.3

In response to BIF's improved financial position and its current
outlook, on January 31, 1995, FDIC's Board of Directors issued for
public comment a proposal that would significantly reduce the average
annual premium rates charged to BIF-insured institutions.  Based on
current projections for BIF, FDIC's Board of Directors could lower
premium rates as early as the September 1995 payment after it
determines that BIF has, in fact, attained the designated reserve
ratio.  FDIC projects that BIF insurance premium rates will average 4
to 5 basis points\6 after BIF reaches its designated reserve ratio. 

FDIC's projections indicate that SAIF will continue charging average
premium rates of 24 basis points, more than five times the projected
rate for BIF-insured institutions, until SAIF reaches its designated
reserve ratio.  Therefore, a significant differential in premium
rates charged by BIF and SAIF will develop in 1995, if FDIC lowers
BIF rates as soon as BIF reaches its designated reserve ratio. 

The projected premium rate differential is likely to have a
significant impact on the thrift industry's costs and its ability to
attract deposits.  Although uncertainties exist regarding the extent
of the impact, the lower cost of insurance coverage could motivate
banks to increase interest rates paid on deposits and improve
customer services in order to compete more aggressively for deposits. 
Thrifts would likely incur additional costs in their attempt to match
bank actions and remain competitive with banks for deposits.  The
cost increase as a percentage of earnings will be greater for thrifts
that depend heavily on deposits for funding and have low earnings. 

To reduce the burden of a significant cost disadvantage in relation
to BIF members, SAIF members may be motivated to replace deposits
with other sources of funding or take other measures to avoid paying
SAIF's higher premium rates.  Recently, several large institutions
with SAIF-insured deposits have announced plans to obtain bank
charters in an attempt to avoid paying SAIF's higher premium rates. 
Thus, the premium differential will likely motivate significant
future shrinkage in SAIF's assessment base, thereby increasing the
uncertainties surrounding SAIF's future. 

In our recent report and related testimony on the results of our
analysis of the potential premium differential between BIF and
SAIF,\7 we discuss in more detail the issues and risks associated
with this potential premium differential.  We also discuss a number
of options to address the potential premium rate disparity. 


--------------------
\6 One hundred basis points are equivalent to 1 percentage point.  In
this context, the 4 to 5 basis points would translate into a 4- to
5-cent premium charge for every $100 in insured deposits. 

\7 Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
Between Banks and Thrifts (GAO/AIMD-95-84, March 3, 1995), and
Deposit Insurance Funds:  Analysis of Insurance Premium Disparity
Between Banks and Thrifts (GAO/T-AIMD-95-111, March 23, 1995). 


      FDIC ACTIONS ADDRESS SEVERAL
      WEAKNESSES IDENTIFIED IN
      PREVIOUS AUDITS
---------------------------------------------------------- Letter :5.4

In our 1993 financial statement audit report on the three funds
administered by FDIC, 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.  Specifically, FDIC
lacked adequate controls to ensure that (1) sound and consistent
methodologies were used to estimate recoveries on failed institution
assets and (2) adequate documentation was maintained to support
recovery estimates.  This weakness adversely affected FDIC's ability
to ensure 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. 

FDIC's actions during 1994 partially addressed the concerns
identified in our 1993 audit report.  In response to recommendations
in our 1993 audit report, FDIC developed a procedures handbook to
supplement the Division of Depositor and Asset Services (DAS) Credit
Manual.  This handbook was developed to provide more uniformity in
estimating recovery amounts for failed institution assets and to
provide a standard format to document the rationale for these
recovery estimates.  In our 1994 audits, we found that asset recovery
estimates determined by contracted servicers were more consistent
with those determined by FDIC personnel. 

However, we continued to find other weaknesses in FDIC's methodology
to determine recovery estimates for failed institution assets and
documentation to support asset recovery estimates.  Through
substantive audit procedures, we were able to satisfy ourselves that
these weaknesses did not have a material effect on the financial
statements of the three funds administered by FDIC.  Similarly, our
audit procedures conducted in our 1992 and 1993 financial audits
provided us with reasonable assurance that these weaknesses did not
have a material effect on the funds' financial statements.  Based on
the results of our audits over the last 3 years and the progress FDIC
has made thus far to address our prior audit findings, we no longer
consider these weaknesses to be material.  However, we do consider
these weaknesses to be nonmaterial reportable conditions as of
December 31, 1994. 

Our report on our 1993 audits also identified other reportable
conditions which affected FDIC's ability to ensure that internal
control objectives were achieved.  These weaknesses involved FDIC's
internal controls over (1) time and attendance reporting processes,
(2) reconciliation and verification of records for contracted asset
servicers, and (3) safeguarding of assets and reporting of
transactions for one contracted asset servicer. 

During 1994, FDIC took actions to address some of these weaknesses. 
Specifically, FDIC improved procedures at the one contracted servicer
with pervasive control weaknesses.  FDIC required the servicer to
implement an accounting system to allow reconciliation of servicer
asset balances to FDIC's information system.  In addition, the
servicer's internal auditors and FDIC verified the accuracy of the
servicer's manually prepared monthly reports used to record asset
management and disposition activity on FDIC's information system.  As
a result of FDIC's actions, we no longer considered this to be a
reportable condition as of December 31, 1994. 

However, FDIC has not fully addressed our concerns regarding controls
over its time and attendance reporting process and the verification
of contracted asset servicer records to FDIC's information systems. 
We continued to find weaknesses in FDIC's implementation of its time
and attendance reporting procedures.  Also, while FDIC has
implemented procedures to regularly reconcile asset balances reported
by contracted asset servicers to the Corporation's information
system, FDIC does not properly verify the accuracy of servicer
reported monthly asset activity and balances.  Consequently, we still
consider these weaknesses to be reportable conditions as of December
31, 1994. 


   REPORTABLE CONDITIONS
------------------------------------------------------------ Letter :6

The following reportable conditions represent significant
deficiencies in FDIC's internal controls and should be corrected by
FDIC management. 

1.  Controls to ensure that sound methodologies are used to determine
recovery estimates for assets acquired from failed institutions are
not working effectively.  Specifically, FDIC's methodology does not
ensure that estimates of recoveries from the management and
disposition of these assets are reasonable and are based on the most
probable liquidation strategy.  These estimates are used by FDIC to
determine the allowance for losses on receivables from resolution
activity and investment in corporate-owned assets for the three
funds.  Consequently, this weakness, which was also identified during
our 1993 and 1992 audits, could result in future misstatements to
BIF's, SAIF's, and FRF's financial statements if corrective action is
not taken by FDIC management. 

We found that FDIC's guidance does not ensure that estimates of
recoveries on assets in liquidation reflect the asset's most probable
liquidation strategy.  For example, for loans classified as
performing, FDIC's guidance requires the estimated recoveries to be
calculated as the outstanding book value of the loan plus 4 quarters
of interest.  We found that account officers used this formula to
estimate recoveries for loans classified as performing with
anticipated dispositions of less than 1 year, and to others where
disposition was not anticipated for more than 1 year.  We also found
that account officers applied this methodology in estimating
recoveries on nonperforming loans where the liquidation strategy was
to restructure the existing loan terms, even though no performance
history existed for the restructured terms.  In some cases, such
negotiations take several months or even years to complete.  We
question the reasonableness of this methodology to estimate
recoveries for all loans classified as performing, particularly for
loans that are not performing in accordance with the contractual
terms and loans that may be restructured.  For these assets, a more
appropriate methodology would be to consider the recovery value
consistent with the asset's disposition strategy. 

Similarly, FDIC's guidance does not provide sufficient recovery
estimation criteria for some asset disposition strategies being
pursued by account officers.  For nonperforming loans where FDIC
intends to foreclose on the underlying collateral, FDIC's guidance
requires inclusion of operating income in estimating recoveries on
these assets.  However, the guidance does not specify whether this
method to estimate the recovery amount is applicable only for assets
where FDIC's legal right to the income has been established.  To
include this income would be inappropriate without first establishing
the legal right to such income. 

In addition, FDIC's guidance specifically prohibits the use of
present value techniques to determine asset recovery estimates.  Many
of FDIC's failed institution assets have large balloon payments or
are not easily liquidated and often have significant payment streams
extending beyond 1 year.  Use of present value techniques to estimate
recovery amounts would allow FDIC to approximate market values for
failed institution assets.  In addition, this would make FDIC's
methodology for estimating asset recoveries consistent with accepted
industry practice for valuing distressed assets. 

We also found other problems in FDIC's asset recovery estimation
process that are attributable to the lack of adequate guidance. 
FDIC's guidance allows account officers to assign to one asset the
estimated recoveries for multiple assets with a common debtor (asset
relationship).  However, for most assets with a book value below
$250,000, FDIC's asset management information system automatically
calculates the estimated recovery value based on recovery formulas. 
For all other assets, the estimated recoveries are individually
determined by account officers.  Consequently, by allowing account
officers to attribute an aggregate recovery estimate for asset
relationships to one asset, FDIC's guidance creates the potential for
double-counting recoveries.  We found instances where account
officers had recorded the aggregate recovery for the asset
relationship on one asset without properly adjusting the aggregate
recovery to reflect formula-determined recovery estimates for certain
assets in the asset relationship. 

In response to recommendations in our 1993 audit report, in September
1994 FDIC supplemented the DAS Credit Manual with a procedures
handbook.  These revised procedures to estimate recoveries require
two supervisory reviews to verify that recovery amounts were accurate
and adequately supported.  However, we found that these reviews were
cursory in nature and did not always identify inaccurate or
unsupported asset recovery estimates.  For assets that were reviewed
by supervisory level personnel, we found recovery amounts that
contained mathematical errors, outdated information, and unsupported
account officer opinion. 

2.  Controls to ensure that adequate documentation is maintained to
substantiate asset recovery estimates are not working effectively. 
In our previous 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.  While FDIC
continues to make progress to address this weakness, we found similar
deficiencies during our 1994 audits. 

We continued to find that asset recovery estimates were not always
supported by current or complete documentation.  Specifically, we
found that some recovery estimates were based on outdated
documentation although current information was available.  We also
found other asset recovery estimates that were based on account
officer opinions that could not be substantiated. 

Additionally, we found that some policies within FDIC's guidance for
determining asset recovery estimates were not supported by documented
historical data or other evidential data.  For example, FDIC's
guidance requires that the estimated recovery value for assets
classified as performing loans be based on the asset's outstanding
book value plus 4 quarters of interest.  However, FDIC was unable to
provide evidence to support the contention that, in the aggregate,
the portfolio of performing loans will generate recoveries equal to
the current book value of the loans plus 4 quarters of interest.  In
addition, during 1994, FDIC was not able to provide evidence to
support the formulas used to estimate recoveries for assets with a
book value of less than $250,000.  In January 1995, FDIC revised the
formulas for these assets.  However, we were unable to verify the
reasonableness of the revised formulas as part of this year's audit. 
We will review these formulas and the underlying support as part of
our 1995 audits. 

FDIC continues to reduce the number of staff responsible for
liquidating failed institution assets, and many of its third party
servicing contracts are scheduled to terminate during the next 2
years.  Weaknesses in file documentation thus become more significant
as responsibility for liquidating these assets is transferred between
locations and account officers.  This, in turn, increases the risk
that estimates of recoveries may not be reasonable and based on the
most current and accurate information available.  In addition, use of
policies that are not properly supported by historical or other
evidential data may result in unreasonable asset recovery estimates. 

3.  Internal accounting controls over third party entities contracted
to manage and dispose of failed institution assets did not ensure
that assets were properly safeguarded and that asset activity was
properly reported to FDIC.  During 1994, we found that FDIC performed
limited verification procedures on the balances and activity reported
by contracted asset servicers and did not ensure that collections
from failed institution assets were properly safeguarded and
reported.  FDIC does not maintain subsidiary records for these
assets, but rather, relies on the contracted servicers to maintain
detail records and report monthly activity to FDIC. 

We found that FDIC did not routinely perform fundamental verification
procedures of the activity and balances reported by contracted asset
servicers.  On a monthly basis, FDIC records asset activity reported
by the servicers on its accounting system.  However, FDIC does not
always verify the accuracy of this reported activity to servicers'
detail accounting records.  When verification procedures were
performed, we found that the procedures were limited.  For example,
FDIC verified limited samples of servicer activity to source
documents.  However, FDIC did not reconcile the total monthly
activity to the servicers' accounting records.  If proper
verification procedures had been performed, FDIC would have
identified that one servicer did not maintain a general ledger system
since the servicing contract's inception in November 1992.  We
identified similar weaknesses in our 1993 audits. 

To address the weaknesses over contractor oversight reported in our
1993 audits, FDIC's Division of Finance and the Contractor Oversight
and Monitoring Branch (COMB) of FDIC's Division of Depositor and
Asset Services executed the Letter of Understanding on Accounting
Roles and Responsibilities of CAOG and COMB to clarify contractor
oversight responsibilities.  This letter outlined specific
procedures, timing, and reporting responsibilities for oversight of
contracted asset servicers.  To implement certain requirements of the
letter, the Division of Finance developed procedures to verify, on a
quarterly basis, asset servicing activity as reported by the
servicers to the servicers' detail records.  These control procedures
were effective November 1994; however, they were not fully
implemented by December 31, 1994.  Furthermore, these procedures
verify only a limited judgmental sample of servicer activity and do
not address reconciliation of total monthly asset activity to
servicer records.  The requirements of the letter of understanding,
if effectively implemented, should ensure proper safeguarding of, and
accountability for, asset balances and activity reported by
contracted asset servicers. 

Contracted asset servicers accounted for $9 billion in collections
during 1993 and 1994 and over $13.8 billion since FDIC began
contracting with third party servicers in 1986.  However, FDIC does
not have adequate procedures to ensure that the servicers' daily
collections are properly safeguarded and completely and accurately
recorded.  Specifically, three of eight servicers we visited in 1994
did not use more than one individual to verify collections received
(dual control), and five of eight did not reconcile collections
processed and deposited to the daily collections.  These weaknesses
over the collection process coupled with the lack of adequate
verification of activity recorded by the contracted asset servicers
could adversely affect the reliability of recorded asset balances and
servicer accountability. 

4.  Implementation of FDIC's time and attendance reporting procedures
was not effective.  In response to our recommendations from prior
audits, FDIC developed and implemented revised time and attendance
reporting procedures during 1993.  While we noted some improvements,
our 1994 audits continued to find deficiencies in adherence to
required procedures in preparing time and attendance reports,
separation of duties between timekeeping and data entry functions,
and reconciliation of payroll reports to time cards.  These
weaknesses could adversely affect FDIC's ability to properly allocate
expenses among the three funds.  Continued monitoring by FDIC
management is needed to ensure effective implementation of procedures
and guidance to address these weaknesses. 


   MORE ACTION NEEDED ON PRIOR
   AUDIT RECOMMENDATIONS
------------------------------------------------------------ Letter :7

While FDIC continued to make progress in 1994 to address the internal
control weaknesses identified in our prior audits, FDIC has not fully
implemented all of the recommendations we made in these audits. 
Specifically, FDIC has not ensured that estimates of recoveries from
the management and disposition of failed institution assets are (1)
determined utilizing appropriate methodologies and (2) based on
current and appropriate documentation.  Additionally, FDIC has not
revised its Credit Manual to provide more detailed guidance on
recovery estimation methods that take into consideration (1)
liquidation strategies and (2) discounting of cash flows that extend
beyond 1 year.  Also, FDIC has not promptly and routinely reconciled
asset balances reported by servicing entities with its financial
information system records, has not verified and documented the
accuracy and completeness of balances and activity reported by
servicing entities to servicer records, and has not ensured timely
and adequate audit coverage of certain critical areas of asset
servicing operations through the use of asset servicing entities'
internal audit departments and FDIC's site visitations.  In addition,
FDIC has not ensured that revised Time and Attendance Reporting
Directive requirements are effectively implemented.  FDIC needs to
continue pursuing corrective actions to fully satisfy these
recommendations. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

In addition to pursuing further action on recommendations from our
prior audits, FDIC needs to take action to address the concerns
raised in our 1994 audits of the three funds.  Specifically, to
address weaknesses identified in this year's audits in the area of
safeguarding and reporting contracted asset servicers' activity, we
recommend that the Chairman of the Federal Deposit Insurance
Corporation direct the heads of the Division of Finance and the
Division of Depositor and Asset Services to

implement the provisions of the October 1994 Letter of Understanding
on Accounting Roles and Responsibilities of CAOG and COMB that
require quarterly verification of servicer activity to source
documents and reconciliation of total monthly servicer activity to
servicers' accounting records;

establish dual controls over the opening of collections and establish
control totals for daily collections; and

reconcile collections deposited or processed to daily collection
control totals. 


   CORPORATION COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

FDIC concurred with several of our audit findings regarding its
system of internal controls, but disagreed with others.  For some of
the weaknesses we identified, FDIC has indicated that corrective
actions were implemented subsequent to December 31, 1994.  We will
evaluate the effectiveness of these actions as part of our 1995
financial statement audits.  For other internal control weaknesses we
identified, FDIC believes that its current policies and procedures
are appropriate. 

FDIC believes its methodology for estimating recoveries for failed
institution assets is appropriate.  FDIC believes that specific
guidance for each possible strategy for disposing of these assets is
not feasible due to the significant number of failed institution
assets and the numerous strategies available to dispose of these
assets. 

However, we found that FDIC's guidance does not ensure that estimates
of recoveries on these assets approximate anticipated collections
based on the disposition strategy being pursued.  While we agree that
specific guidance for all possible disposition strategies is not
feasible, the Credit Manual should clearly link the methods used to
estimate recoveries to the strategies being pursued to dispose of
these assets.  Additionally, we believe FDIC should consider the use
of present value techniques, when appropriate, to estimate recoveries
for failed institution assets.  This would better approximate the
collections anticipated to be realized under certain disposition
strategies that could be pursued for these assets. 

FDIC acknowledges that improvements can be made to verify the
accuracy of the asset balances and activity reported by third party
servicing entities.  FDIC noted that, subsequent to December 31,
1994, it fully implemented the requirements of the Letter of
Understanding on Accounting Roles and Responsibilities of CAOG and
COMB.  We will evaluate the effectiveness of these procedures during
our 1995 audits. 

Additionally, FDIC acknowledges the lack of a general ledger at one
of its asset servicers, but believes that the accounting system in
use at this servicer is adequate.  However, our review of the
servicing agreement between FDIC and this servicer found that it
specifically requires the use of a general ledger.  Additionally, a
general ledger is a fundamental control to ensure that transactions
are properly recorded and that assets are properly accounted for and
reconciled to subsidiary records. 

FDIC also noted that, prior to year-end, corrective actions were
taken regarding controls over collection activity at its servicing
entities.  However, we found that, through year-end 1994, only one
servicer effectively implemented controls over collections. 
Additionally, we found that other servicers did not consider it
cost-effective to implement changes in their collections process due
to the limited time remaining under their servicing agreements with
FDIC. 

FDIC noted that its Division of Finance and Office of Personnel
Management are working together to ensure adherence to the Time and
Attendance Reporting Directive.  Additionally, FDIC is working to
streamline its time and attendance process. 

Charles A.  Bowsher
Comptroller General
of the United States

March 15, 1995


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.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   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.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   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.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   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;

obtained an understanding of the internal control structure designed
to (1) safeguard assets against loss from unauthorized acquisition,
use, or disposition, (2) assure the execution of transactions in
accordance with management's 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;

tested relevant controls and assessed control risk over the following
significant cycles, classes of transactions, and account balances: 

troubled institutions,

closed assistance,

assessments,

open assistance,

expenses,

treasury, and

financial reporting; and

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,

disbursements for bank and thrift resolutions,

maximum obligation limitation,

external financial reporting, and

accounting for administrative expenses. 

We limited our work to accounting and other controls necessary to
achieve the objectives outlined in our opinion on internal controls. 
We conducted our audits between August 1994 and March 1995.  Our
audits were conducted in accordance with generally accepted
government auditing standards.  We believe our audits provide a
reasonable basis for our opinions. 




(See figure in printed edition.)Appendix II
OPINION ON THE BANK INSURANCE
FUND'S 1994 FINANCIAL STATEMENTS
PROVIDED FOR SECURITIES AND
EXCHANGE COMMISSION FILING
=========================================================== Appendix I


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

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Steven J.  Sebastian, Assistant Director
Jeanette M.  Franzel, Manager
Michael C.  Hrapsky, Manager
Salim R.  Mawani, Manager
Gregory J.  Ziombra, Manager
Christopher M.  Salter, Senior Auditor
Kevin A.  Carey, Auditor
Dennis L.  Clarke, Auditor
John C.  Craig, Auditor
Douglas A.  Delacruz, Auditor
Bonnie L.  Lane, Auditor
Elizabeth Martinez, Auditor
Laurie A.  O'Connell, Auditor
Michelle A.  Winfrey, Auditor
Kelly J.  Zambito, Auditor
Abraham D.  Akresh, Senior Computer Specialist
Wilfred Holloway, Senior Computer Specialist
Sharon O.  Byrd, Computer Specialist

DALLAS REGIONAL OFFICE

Patrick J.  Cogley, Senior Auditor
George Jones, Senior Auditor
Leonard E.  Zapata, Senior Auditor
James B.  Smoak, Senior Auditor
Michael J.  Coy, Auditor
Ruth K.  Joseph, Auditor
Pamela Y.  Valentine, Auditor
Charles M.  Vrable, Computer Specialist

DENVER REGIONAL OFFICE

Paul S.  Begnaud, Senior Auditor
David C.  Merrill, Senior Auditor
Alva J.  Cain, Auditor
Mary B.  Gaston, Auditor
Miguel A.  Lujan, Auditor

CHICAGO REGIONAL OFFICE

William E.  Bailey, Senior Auditor
John R.  Rechter, Senior Auditor

ATLANTA REGIONAL OFFICE

Shawkat Ahmed, Manager
Johnny Barnes, Auditor
Rhonda P.  Rose, Auditor
Cynthia C.  Teddleton, Auditor
Lisa M.  Warde, Auditor

NORTHEAST REGIONAL OFFICE

Morgan J.  Donahue, Senior Auditor
Joseph G.  Evans, Auditor
Ligia I.  Magnus, Auditor
Ralph S.  Meister, Auditor

