Farm Credit Administration: Safety and Soundness Oversight of the
Farm Credit System (28-FEB-02, GAO-02-324R).
GAO reviewed the Farm Credit Administration's (FCA) oversight of
the safety and soundness of the Farm Credit System (FCS). Its
review showed that the various elements of FCA's safety and
soundness oversight and supervision appeared to be timely,
comprehensive, and effective. FCA required FCS institutions to
take appropriate and timely corrective actions to address any
identified weaknesses and closely monitored the institutions'
compliance. FCA had special supervisory and enforcement
procedures in place and used them when it found more serious
weaknesses at FCS institutions. In addition, off-site monitoring
efforts included timely analyses of relevant qualitative and
quantitative information that allowed FCA to identify, monitor,
evaluate, and proactively address risks faced by FCS
institutions. FCA follows processes designed to ensure the
quality and reliability of its safety and soundness examination
process through periodic quality assurance reviews and the
Inspector General's audits and inspection reports.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-324R
ACCNO: A02815
TITLE: Farm Credit Administration: Safety and Soundness
Oversight of the Farm Credit System
DATE: 02/28/2002
SUBJECT: Best practices
Farm credit
Financial institutions
Internal controls
Performance measures
Quality assurance
Farm Credit System
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GAO-02-324R
United States General Accounting Office Washington, DC 20548
February 28, 2002
The Honorable Richard G. Lugar
Ranking Minority Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate
Subject: Farm Credit Administration: Safety and Soundness Oversight of the
Farm
Dear Senator Lugar:
In addition to other issues you asked us to study,1 you requested that we
consider whether to undertake a comprehensive review of the Farm Credit
Administration's (FCA) oversight of the safety and soundness of the Farm
Credit System (FCS). To decide whether a comprehensive review is required,
we conducted a limited review of FCA's current oversight program. As
discussed with your staff, this correspondence summarizes the objectives,
scope, methodology, and conclusions of our limited review.
The specific objectives of our limited review were to (1) determine FCA's
current safety and soundness policies and processes and (2) review FCA's
oversight of selected institutions and their corrective responses to any
weaknesses FCA identified. Our scope included analyses of selected
examination reports and other oversight materials related to key FCS
institutions. These materials included (1) the last three FCA examinations
for the three largest FCS banks, which represent about 60 percent of total
FCS assets and of the gross loan volume; (2) the last three examinations for
the Federal Agricultural Mortgage Corporation; (3) the last two examinations
for the Federal Farm Credit Banks Funding Corporation, the FCS fiscal agent;
(4) the last three examinations for the Farm Credit Leasing Services
Corporation; and (5) the last three examinations of and other materials
related to an institution under "special supervision," a category primarily
for entities experiencing weaknesses that FCA believes cannot be corrected
in the normal course of business.
1 Other issues included FCA's (1) administrative expenses and assessment
process and (2) oversight of FCS mission compliance. We have published a
report on the first issue. See Farm Credit Administration: Analysis of
Administrative Expenses and Funding Through Assessments (GAO-01-949, Aug. 2,
2001). We plan to report to you on FCA's oversight of certain aspects of
FCS's mission compliance on March 8, 2002.
In addressing both objectives, we reviewed and analyzed FCA policies,
procedures, and reports relevant to conducting on-site examinations,
performing off-site monitoring, and imposing increased supervisory actions
related to safety and soundness. We also reviewed relevant GAO work, plus
recent reports and other materials from the FCA Office of Inspector General
and the Farm Credit System Insurance Corporation (FCSIC). To enhance our
understanding of the safety and soundness oversight policies and procedures,
we met with FCA officials to discuss questions we had about specific
examinations, other reports, and analytical tools used in oversight
activities. We also interviewed the Inspector General about the findings of
evaluations completed by his office that relate to safety and soundness.
Finally, we interviewed FCSIC officials about their ongoing monitoring of
FCS safety and soundness and the use of their authority to conduct special
examinations.
On the basis of our limited review of FCA's current oversight program, we do
not believe that a comprehensive review is warranted at this time. We take
this position because our review showed that the various elements of FCA's
safety and soundness oversight and supervision appeared to be timely,
comprehensive, and effective. For example, FCA's examinations were timely
and covered key areas of risk, such as capital adequacy and internal
controls. We observed that FCA required FCS institutions to take appropriate
and timely corrective actions to address any identified weaknesses and
closely monitored the institutions' compliance. We also found that FCA had
special supervisory and enforcement procedures in place and used them when
it found more serious weaknesses at FCS institutions. In addition, FCA's
off-site monitoring efforts included timely analyses of relevant qualitative
and quantitative information that allowed FCA to identify, monitor,
evaluate, and proactively address risks faced by FCS institutions. Examples
of these efforts include analyses of internal and external audit reports and
quarterly stress tests of institutions' loan portfolios. Finally, FCA
follows processes designed to ensure the quality and reliability of its
safety and soundness examination process through periodic quality assurance
reviews and the Inspector General's audits and inspection reports. The
enclosure outlines the elements of FCA's oversight program that we reviewed
and discussed with your staff.
We provided FCA with an opportunity to review and comment on this
correspondence. On February 13, 2002, FCA's Executive Assistant to the Chief
Operating Officer noted that only oral technical comments on the
correspondence would be provided. We have incorporated these comments into
the final product as appropriate.
We are sending copies of this correspondence to the Chairman of the Senate
Committee on Agriculture, Nutrition, and Forestry; the Chairmen and Ranking
Minority Members of the Senate Committee on Banking, Housing, and Urban
Affairs, the House Committee on Financial Services, and the House Committee
on Agriculture; and Michael M. Reyna, Chairman and Chief Executive Officer
of the Farm Credit Administration. The letter will be available on GAO's
Internet home page at http://www.gao.gov.
If you have any questions, please contact me or Katie Harris at (202)
512-8678. Joe Hunter was a major contributor to this correspondence.
Sincerely yours, Davi M. D'Agostino
Director, Financial Markets and Community Investment
Enclosure
Enclosure
Elements of the FCA Oversight Program That Are Subject to GAO's Limited
Examinations
* Statutory requirements on the frequency of periodic exams and FCA's policy
* Risk-based examination approach
* Special examinations
* Planning of examination scope: follow-up to prior findings, ratings,
monitoring activities, external and internal audits, and reviews
* Examination manual and areas covered by examinations, including capital
adequacy, loan underwriting, and internal controls
* Reports of examination
* Prompt corrective action, tracking and evaluating of responses
Increased Supervisory Actions and Oversight
* Special supervision
* Enforcement supervision
* Office of Examination -Special Examination and Supervision Division
Off-site Monitoring Efforts
Proactive efforts to ensure safety and soundness and identify weaknesses
early include
* Early Warning System: quarterly call reports; Financial Institution Rating
System; quarterly benchmark rating and trends report; semi-annual Stress
Analysis Report; quarterly loan portfolio stress model analysis; semi-annual
analyses of new money, refinancings, and rollover trends; annual analysis of
loan underwriting standards
* monthly analysis and reports to FCA Board on high-profile institutions
* analysis of FCS Contractual Interbank Performance Agreement scores and
data and Market Access Agreement reports
* periodic analysis of documents obtained from FCS institutions, such as
board minutes, strategic and operational plans, and internal and external
audit report
Requirements for compliance and increased supervisory action include
* reporting
* board involvement * on-site follow-up
Enclosure
Examination Staff
* Professional certification; internal and external training
* Office of Inspector General's annual survey of FCS Quality Assurance
Program
* FCA field office supervisory review and verification of exam results
* Peer review program
* Office of Inspector General
(250062)
*** End of document. ***