Information on Selected Issues Concerning Banking Activities	 
(30-APR-07, GAO-07-593R).					 
                                                                 
This letter responds to Congress's request for information on (1)
selected federal expenditures, policies, and programs that affect
the U.S. banking industry and (2) certain banking industry	 
trends. These include the savings and loan industry crisis, trade
finance, tax policies, and profits and executive compensation.	 
Congress's letter also asked us for information on bank fees; as 
agreed with Congressional staff, we will discuss this topic in a 
separate report. On December 11, 2006, we briefed Congressional  
staff on information gathered during our preliminary work. This  
letter summarizes and updates the information presented at the	 
briefing.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-593R					        
    ACCNO:   A68987						        
  TITLE:     Information on Selected Issues Concerning Banking	      
Activities							 
     DATE:   04/30/2007 
  SUBJECT:   Banking law					 
	     Banking regulation 				 
	     Credit unions					 
	     Executive compensation				 
	     Financial institutions				 
	     Financial management				 
	     International trade				 
	     Lending institutions				 
	     Policy evaluation					 
	     Regulatory agencies				 
	     Savings and loan associations			 
	     Tax credit 					 
	     Commercial banks					 
	     Policies and procedures				 

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GAO-07-593R

   

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          * [2]Order by Mail or Phone

April 30, 2007

The Honorable Bernard Sanders
United States Senate

Subject: Information on Selected Issues Concerning Banking Activities

Dear Senator Sanders:

This letter responds to your request for information on (1) selected
federal expenditures, policies, and programs that affect the U.S. banking
industry and (2) certain banking industry trends. These include the
savings and loan industry crisis, trade finance, tax policies, and profits
and executive compensation. Your letter also asked us for information on
bank fees; as agreed with your staff, we will discuss this topic in a
separate report. On December 11, 2006, we briefed your staff on
information gathered during our preliminary work. This letter summarizes
and updates the information presented at the briefing.

The U.S. banking industry encompasses different types of federally insured
depository institutions, including over 8,000 state and national banks,
over 860 savings and loan associations (known as "thrifts"), and nearly
8,700 federally insured credit unions. Five federal banking regulatory
agencies are collectively responsible for supervision of the industry: the
Federal Deposit Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), the Board of Governors of the Federal
Reserve System (the Federal Reserve), the Office of Thrift Supervision
(OTS), and the National Credit Union Administration (NCUA). During the
1980s, many thrifts experienced severe financial losses. In response to
this crisis, Congress took a number of steps, including augmenting the
Federal Savings and Loan Insurance Corporation's (FSLIC) insurance fund
through the issuance of bonds and ultimately creating new insurance funds
administered by FDIC. Congress also established new organizations to
resolve the failing thrifts, and incentives were offered for financially
healthy banks and thrifts to take over the troubled ones. These incentives
included certain tax benefits administered by the Department of the
Treasury's Internal Revenue Service (IRS).

Banks engaged in financing international trade may participate in programs
offered by the Export-Import Bank of the United States (Ex-Im), which
helps finance exports of goods and services.^1 Among other things, Ex-Im
guarantees loans--including loans made by U.S. banks--to private companies
engaged in exporting and provides credit insurance.

^1 First established by executive order in 1934, Ex-Im currently operates
as an independent agency of the U.S. government and is the official export
credit agency of the United States.

As discussed with your office, this letter provides information on (1) the
cost of resolving the savings and loan industry crisis; (2) the extent of
U.S. banks' use of Ex-Im products, and factors affecting banks' use of
these products; (3) federal tax deductions, credits, and other provisions
available to banks and thrifts and their use of transactions that IRS has
found to be abusive; (4) trends in depository institutions' profits and
income; and (5) trends in executive compensation in the banking industry.
This letter summarizes these issues; further details can be found in
enclosures II through VI.

To accomplish our first objective, we reviewed relevant past GAO reports,
obtained and analyzed information from FDIC and the Federal Housing
Finance Board,^2 and interviewed FDIC officials regarding costs associated
with resolving the savings and loan industry crisis that have been
identified since 1996.^3 For the second objective, we obtained and
analyzed available data from Ex-Im on the trade finance activities of U.S.
lenders between 2000 and 2005 and interviewed officials from Ex-Im and the
federal banking regulators. We also interviewed industry representatives
and participants about changes in trade finance over the past decade and
reviewed past GAO work on various aspects of Ex-Im. For the third
objective, we analyzed IRS data on tax deductions and credits claimed by
depository institutions in 2004--the most recent year for which data were
publicly available--and used Treasury's tax expenditure list to identify
tax expenditures available to banks and thrifts.^4 We also interviewed IRS
officials, attended IRS briefings on tax issues affecting the banking
industry, and reviewed relevant past GAO work. For the fourth objective,
we analyzed data from FDIC and NCUA on profits, retained earnings, and
income for depository institutions from 1996 to 2006. We also interviewed
officials from the federal banking regulatory agencies about trends in the
data and the potential causes of these trends. For the last objective, we
performed a literature search for relevant professional or academic
papers, articles, or studies on executive compensation in the banking
industry. We reviewed relevant past GAO work that addressed executive
compensation issues in the credit union industry and results from a recent
survey of community banks on compensation issues. We also reviewed
congressional testimony regarding executive compensation and relevant
sections of the Internal Revenue Code. We conducted this work from August
2006 to April 2007 in Washington, D.C., in accordance with generally
accepted government auditing standards. See enclosure I for a detailed
description of our scope and methodology.

^2 The Federal Housing Finance Board oversees the system of 12 Federal
Home Loan Banks (FHL Banks), a government-sponsored enterprise that is
cooperatively owned by member financial institutions, typically commercial
banks and thrifts. The FHL Banks have a role in financing the costs
associated with resolving the savings and loan crisis.

^3 GAO last examined costs associated with resolving the savings and loan
industry's financial difficulties in a 1996 report, GAO, Financial Audit:
Resolution Trust Corporation's 1995 and 1994 Financial Statements, 
GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996).

^4 Tax expenditures result in forgone revenue for the federal government
due to preferential provisions in the tax code, such as deductions and
credits. These provisions grant special tax relief for certain kinds of
behavior by taxpayers or for taxpayers in special circumstances.

Summary

Since 1996, when we reported that the total estimated cost of resolving
the savings and loan industry crisis was $160.1 billion (equivalent to
$198 billion in 2006 dollars), there have been limited additional costs
associated with litigation expenses; however, our 1996 estimates of tax
benefit costs and the interest expense on certain bonds issued to provide
financing are consistent with recent FDIC and Federal Housing Finance
Board data.^5 Litigation costs have arisen from cases against the
government regarding both the use of accounting practices by institutions
that acquired failing thrifts and the tax benefits associated with certain
FSLIC-assisted acquisitions. FDIC data indicate that since 1996, these
cases have resulted in judgments, settlements, and related litigation
expenses that total $2 billion ($2.1 billion in 2006 dollars). FDIC's
current estimates of realized and future tax benefits for institutions
that acquired failed thrifts generally correspond with our 1996 estimate
of $7.5 billion ($9.3 billion in 2006 dollars) for the total cost of these
tax benefits. Specifically, according to FDIC, through tax year 2005,
acquiring institutions have received approximately $6.51 billion in tax
benefits and will receive an estimated $609.24 million in such benefits in
subsequent tax years. In addition, while the Gramm-Leach-Bliley Act of
1999 changed the method of determining the annual interest amounts the FHL
Banks pay on certain bonds issued to provide financing to FSLIC, our
estimate of the total interest expense on these bonds remains unchanged.

We could not determine the precise extent to which U.S. banks use Ex-Im
products because Ex-Im records do not specifically distinguish between
banks and nonbank lenders. However, relatively few U.S. commercial banks
appear to use Ex-Im products or participate in trade finance. In fiscal
year 2005 (the most recent year for which Ex-Im could provide data), U.S.
lenders--including both banks and nonbank lenders--accounted for about
$1.8 billion in Ex-Im loan guarantees and over $2 billion in Ex-Im
insurance products. However, U.S. lender participation in trade finance,
including Ex-Im programs, has generally been declining in recent years,
and Ex-Im data show that for fiscal years 2000 through 2005, only about
100 U.S. lenders (both banks and nonbank lenders) participated in Ex-Im
programs annually. Trade finance industry participants noted that most
U.S. banks involved in trade finance are large, money center banks, along
with a limited number of regional and small banks. Ex-Im officials and
industry participants noted that transactions involving Ex-Im products
generally result in high internal administrative costs and low profit
margins for banks. However, officials and participants also identified a
number of factors that might prompt bank use of Ex-Im products, including
risk mitigation through Ex-Im's loan guarantees and insurance and
increased liquidity through the sale of certain Ex-Im products in the
secondary market. Furthermore, Ex-Im officials and industry participants
said that using Ex-Im products offers U.S. banks the opportunity to
develop broader relationships with their customers and, in turn, offer
them other services.

According to IRS data and officials, banks and thrifts use tax deductions,
credits, and other provisions that are generally available to all
corporations. Treasury considers only one tax provision--the deduction of
excess bad debt reserves--a tax expenditure available exclusively to banks
and thrifts and estimates revenue losses for this tax expenditure at $10
million in 2007. IRS data indicate that the largest deductions banks and
thrifts took in 2004--the most recent year for which data were
available--were for business expenses, such as interest paid, as well as
salaries and wages. The largest tax credits banks and thrifts claimed in
2004 were for the general business credit and foreign tax credit. To
bypass federal corporate income taxation, some eligible banks and thrifts
also have taken advantage of the option to elect Subchapter S tax status
(companies that elect this option are referred to as S-corporations).
Instead of being taxed directly at the entity level, an S-corporation's
income is passed through to its shareholders, who are then taxed (as
individuals) on their portion of the corporation's income. As of December
2006, 2,356 depository institutions, including 31 percent of banks, had
elected Subchapter S status, according to FDIC data. IRS officials also
noted that some banks have participated in tax shelters and transactions
the IRS considers to be abusive. For example, in a January 2007 summary
judgment decision, a U.S. district court ruled in favor of IRS in
disallowing over $9 million in tax deductions associated with a bank's
participation in a certain transaction in 1997 that IRS considered
abusive.^6

5 Where noted, we have adjusted expenditures for inflation and we report
them in 2006 dollars.

The profits of U.S. depository institutions have grown over the last 15
years, accompanied by changes in sources of income. FDIC data indicate
that in 2006, banks and thrifts reported a total of $146 billion in net
income, representing an inflation adjusted 7 percent average growth rate
over the previous 10 years. NCUA data indicate that credit unions, which
are not-for-profit organizations, reported $6 billion in net income in
2006, representing a 3 percent average annual inflation adjusted growth
rate over the previous 10 years. The industry's growth in profits has been
accompanied by a gradual shift toward greater reliance on noninterest
income--investments, fees, and service charges, among other things. Since
the early 1990s, banks, thrifts, and credit unions have all experienced an
increase in noninterest income relative to net operating revenue. For
example, as of 2003, noninterest income at banks accounted for 43 percent
of net operating revenue, up from 32 percent in 1990.

Although publicly available information on executive compensation in the
banking industry is limited, several studies that we reviewed identified
an increase in bank executives' compensation over the past decade, and
some generally attributed the increase to the elimination of interstate
banking barriers and competitive pressures. Federal banking statutes limit
executive compensation in certain circumstances--for example, the
compensation of senior executive officers at significantly
undercapitalized institutions. The federal statutes also place limitations
on golden parachute agreements, which generally, provide executives with
significant benefits in the event that the executives' employment is
terminated. The federal banking regulators routinely collect information
about salaries and wages at depository institutions, but the information
is not specific to the institution's executives.

Agency Comments

We provided a draft of this report to OCC and FDIC for comment. We also
provided selected portions of a draft of this report to officials at IRS,
the Federal Reserve, OTS, NCUA, the Federal Housing Finance Board, and
Ex-Im for their technical comments. All of the agencies except the Federal
Reserve provided technical comments, which we incorporated where
appropriate.

^6BB & T Corp. v. United States, 2007 WL 37798, slip opinion, No.
1:04CV00941 (M.D. N.C. Jan. 4, 2007). A notice of appeal was filed by BB &
T on March 1, 2007.

                                   - - - - -

As agreed with your office, we plan no further distribution of this report
until 30 days from its issue date unless you publicly release its contents
sooner. We will then send copies of this report to interested
congressional committees, the Commissioner of IRS, the Chairman of FDIC,
the Comptroller of the Currency, the Chairman of the Board of Governors of
the Federal Reserve System, the Director of OTS, the Chairman of NCUA, the
Chairman of the Federal Housing Finance Board, and the Chairman of Ex-Im.
We will also make copies available to others on request. In addition, the
report will be available at no charge on GAO's Web site at
http://www.gao.gov .

If you or your staff have any questions on matters discussed in this
report or need additional information, please contact me at (202) 512-8678
or [email protected] . Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff who made major contributions to this report are listed in
enclosure VII.

Sincerely yours,

David G. Wood
Director, Financial Markets and Community Investment

Enclosure I

Scope and Methodology

To provide information on the estimated total cost of resolving the
savings and loan industry crisis and estimated future tax benefits, we
followed the approach for updating the cost estimates presented in our
audit of the Resolution Trust Corporation's 1995 and 1994 financial
statements.^7 We reviewed our annual audits of the Federal Deposit
Insurance Corporation's (FDIC) financial statements from 1995 through 2006
to identify information on litigation against the government for breaches
of contract regarding (1) the use of supervisory goodwill in calculating
regulatory capital and (2) tax benefits associated with Federal Savings
and Loan Insurance Corporation (FSLIC) agreements. We also analyzed data
from FDIC on expenses associated with this litigation, including expense
payments made to the Department of Justice (DOJ), and adjusted these data
for inflation using a gross domestic product price index.^8 In addition,
we interviewed FDIC officials about litigation expenses and tax benefits
and analyzed information from FDIC on tax benefits received and estimated
future benefits stemming from FSLIC agreements. We also examined relevant
banking statutes and court rulings. Finally, we reviewed our past work to
identify information on the interest expense of bonds issued to finance
the resolution of failed savings and loan institutions. We reviewed
relevant legislative amendments since 1996 to identify changes affecting
the interest obligation of those bonds. We also obtained information from
the Federal Housing Finance Board on the interest obligation.

To determine the extent to which U.S. banks use the Export-Import Bank of
the United States (Ex-Im) products, we obtained and analyzed information
from Ex-Im regarding its products used by U.S. lenders. Specifically, we
analyzed Ex-Im's data on loan guarantees and insurance products for fiscal
years 2000 through 2005 and reviewed Ex-Im annual reports from the same
time period. We obtained available information from Ex-Im on claim
payments to guaranteed lenders and insured parties, as well as recoveries,
for fiscal years 2002 through 2006, and determined the amount of payments
made to U.S. lenders. In addition, we interviewed officials at the federal
banking regulatory agencies, Ex-Im officials, and trade finance industry
representatives and participants about U.S. banks' participation in trade
finance, use of Ex-Im products, and participation in the secondary market
for certain Ex-Im products. We also attended Ex-Im's trade financing
seminar. To determine the reliability of data provided by Ex-Im's data
systems, we reviewed the reliability assessment of the same Ex-Im systems
performed for one of our recent reports and confirmed with Ex-Im officials
that the information obtained remained valid.^9 We are confident that for
purposes of describing Ex-Im product authorization levels and the
proportion attributable to U.S. lenders in this report, these data are
similarly reliable.

^7 GAO, Financial Audit: Resolution Trust Corporation's 1995 and 1994
Financial Statements, GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996).

^8 We used a calendar year, chain-weighted GDP price index. Values through
2006 are averages of quarterly indexes from U.S. Department of Commerce,
Bureau of Economic Analysis, Survey of Current Business, and National
Income and Product Accounts, as of Jan. 31, 2007. Projections for 2007
values are from Congressional Budget Office, The Budget and Economic
Outlook, (Washington, D.C., 2007).

^9 GAO, Export-Import Bank: Changes Would Improve the Reliability of
Reporting on Small Business Financing, GAO-06-351 (Washington, D.C.: March
3, 2006). This report found weaknesses in Ex-Im's data systems and data
for calculating its small business support but concluded that the overall
data were reliable.

To identify tax expenditures available exclusively to depository
institutions, we reviewed Treasury's list of tax expenditures and revenue
loss estimates from the President's fiscal year 2008 annual budget.^10 The
Congressional Budget and Impoundment Control Act of 1974 defines tax
expenditures as revenue losses due to provisions of the tax law that allow
special exclusions, exemptions, and deductions from income or provide
special credits, preferential tax rates, or deferral of tax liability.^11
Tax expenditures are revenue losses resulting from tax provisions granting
special relief for certain kinds of taxpayer behavior or for taxpayers in
special circumstances. These provisions could, in effect, be viewed as
spending programs channeled through the tax system and are classified in
the U.S. budget by budget function. We consulted an official in Treasury's
Office of Tax Analysis to ensure that we included all of the tax
expenditures provided exclusively to depository institutions. Also, we
drew on our past work on economic development tax expenditures to provide
perspective on banks' use of these provisions.^12 To identify tax
deductions and credits claimed by depository institutions, we analyzed
publicly available tax data from the IRS Corporation Source Book of
Statistics of Income.^13 We used data from tax year 2004, the most current
year for which the data were available. We compared deduction and tax
credit amounts and ratios for the industry classifications "All
Corporations" and "Depository Credit Intermediation." To identify
Subchapter S-corporation banks and thrifts, we analyzed data from the
FDIC's Statistics on Depository Institutions. We calculated the number and
assets of S-corporation banks and thrifts for the years 1997 through 2006.
We reviewed relevant public laws related to changes in S-corporation
eligibility. We interviewed Internal Revenue Service (IRS) officials to
identify (1) common tax provisions and strategies used by depository
institutions and (2) any instances for which depository institutions used
tax provisions that IRS considered abusive. We also reviewed relevant IRS
documents and notices as well as a recently decided court case involving
an abusive tax shelter.

To evaluate the profits and noninterest income of depository institutions,
we analyzed aggregate annual call report (banks and credit unions) and
thrift financial report data provided by FDIC and National Credit Union
Administration (NCUA) for 1990 through 2006. We identified potential
causes for trends in the data by interviewing bank regulators and
reviewing their documents and reports.

To identify trends in executive compensation in the banking industry, we
reviewed publicly available research papers from academic researchers and
various Federal Reserve Banks. We reviewed relevant banking regulations
that included limits or controls on certain executive compensation in the
banking industry as well as sections of the Internal Revenue Code and
Securities and Exchange Commission (SEC) regulations regarding limits on
the deductibility of and disclosure requirements for executive
compensation. We also interviewed officials at the federal banking
regulatory agencies and banking industry representatives about executive
compensation issues. We did not review annual proxy statements of 10-K
annual reports or other filings that may contain information on executive
compensation made by companies with securities registered with SEC,
because they do not necessarily distinguish the salary information of
executives associated with a company's depository institution from that of
executives associated with other parts of the organization.

^10 Office of Management and Budget, Analytical Perspectives, Budget of
the United States Government, Fiscal Year 2008 (Washington, D.C., 2007).

^11 Pub. L. No. 93-334 S 3, 88 Stat. 297, 299 (July 12, 1974), codified at
2 U.S.C.  S 622(3).

^12 See GAO, Tax Policy: New Markets Tax Credit Appears to Increase
Investment by Investors in Low-Income Communities, but Opportunities Exist
to Better Monitor Compliance, GAO-07-296 (Washington, D.C.: Jan.31, 2007)
and Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program Is Unclear,
GAO-06-727 (Washington D.C.: Sept. 22, 2006).

^13 IRS, Statistics of Income Division, Corporation Source Book of
Statistics of Income, Publication 1053 (Washington, D.C.: 2004).

We conducted this work from August 2006 to April 2007 in Washington, D.C.,
in accordance with generally accepted government auditing standards.

Enclosure II

Developments in Costs Associated with Resolving the Savings and Loan
Crisis Represent Limited Changes to Estimated Total Cost

Developments in litigation associated with resolving the savings and loan
industry crisis resulted in limited changes to the $160.1 billion ($198
billion in 2006 dollars) total cost we estimated in 1996.^14 In 1996, we
determined that these costs, which were associated with litigation against
the government (called supervisory goodwill litigation) regarding
contracts with institutions that acquired failing thrifts, were uncertain.
FDIC data indicate that since 1997, $1.34 billion ($1.39 billion in 2006
dollars) has been paid for judgments and settlements in these cases. FDIC
reports that an additional $274 million ($276 million in 2006 dollars),
has been paid in judgments and settlements in separate litigation (called
Guarini litigation) against the government for breaches of contract
regarding benefits associated with acquiring institutions' tax benefits.
In contrast to this change, FDIC's estimates of tax benefits related to
FSLIC agreements generally correspond with estimates we made in 1996.
Similarly, while the Gramm-Leach-Bliley Act of 1999 changed the method of
determining the annual interest amounts the Federal Home Loan Banks (FHL
Banks) pay on certain bonds issued to provide financing to FSLIC, the
total annual interest payments made by the FHL Banks and other sources
correspond with the $2.6 billion in annual expense that we reported in
1996.

Costs Associated with Supervisory Goodwill and Guarini Litigation
Represent Slight Increases to Total Estimated Costs

FDIC data on judgments and settlements associated with litigation that
arose from cases against the government regarding the use of accounting
practices by institutions that acquired failing thrifts and tax benefits
associated with certain FSLIC-assisted acquisitions, represent a limited
increase to the $160.1 billion ($198 billion in 2006) total cost that we
estimated in 1996. FDIC data indicate that from 1997 through January 2007,
institutions that acquired failed thrifts were paid $1.34 billion ($1.39
billion in 2006 dollars) in judgments and settlements have been paid in
litigation against the government involving the use of favorable
accounting treatment for intangibles, such as goodwill, in calculating
regulatory
capital.^15 Supervisory goodwill is an accounting measure that refers to
the excess of a purchase price over the fair value of all identifiable
assets acquired. Upon FSLIC's insolvency, the Federal Home Loan Bank Board
(FHLBB), the former thrift industry regulator, embarked on a forbearance
program to induce new investors to purchase or merge with failed thrifts.
The program not only permitted the acquiring institutions to count
supervisory goodwill toward their reserve requirement, it also allowed
acquiring institutions to amortize goodwill over many years, up to a
40-year maximum.^16 The net effect of including supervisory goodwill was
avoiding the need for the regulator or the failed institution to transfer
tangible assets or cash to cover the deposit accounts transferred in the
transaction.

^14 GAO/AIMD-96-123. We determined that in 1996, approximately $132.1
billion was provided from taxpayer funding sources and the remaining $28.0
billion was provided from industry assessments and other private sources.

Several institutions that had entered into agreements with the government
that allowed the use of goodwill, which came to be called supervisory
goodwill, brought suit against the government after legislative changes
eliminated the use of supervisory goodwill in calculating the amounts of
capital that regulators require the institutions to maintain (referred to
as regulatory capital standards or requirements). Specifically, in 1989,
Congress enacted FIRREA, which, among other changes, mandated new
regulatory capital accounting for depository institutions and provided for
the elimination or rapid phase-out of the use of supervisory goodwill in
calculating the regulatory capital of depository institutions.^17 FIRREA
also provided the director of the new thrift industry supervisor, the
Office of Thrift Supervision (OTS), with the authority to take certain
actions against institutions not in compliance with the new capital
standards.^18 In 1990, OTS issued guidance indicating that it
was applying the new capital standards to all savings associations,
including those that had been operating under previously granted capital
and accounting forbearances, including supervisory goodwill.^19 As a
result, acquiring institutions that had agreements with the government
became subject to OTS-imposed sanctions under FIRREA for failing to meet
the minimum capital requirements. Plaintiffs subsequently brought suit
against the government alleging breach of contract. In United States v.
Winstar Corp., the Supreme Court held that the government was liable for
damages to the acquiring institutions for breach of contract.^20 In the
damages phase of the case, over 120 other claimants who had entered into
similar accounting method agreements with the government, had joined the
original three plaintiffs as of January 7, 1997, in seeking recovery for
contract damages.^21 According to FDIC, as of December 31, 2006, there
were approximately 26 cases pending against the government based on
alleged breaches of such agreements.

^15 The FSLIC Resolution Fund (FRF) is the primary source of payments for
judgments and settlements in Goodwill litigation. The Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA) abolished
FSLIC after it became insolvent, created the FRF, and transferred the
assets and liabilities of FSLIC to the FRF on August 8, 1989. Today, the
FRF consists of two distinct pools of assets and liabilities: one composed
of the assets and liabilities of FSLIC transferred to the FRF upon the
dissolution of the FSLIC and the other composed of the Resolution Trust
Corporation (RTC) assets and liabilities transferred upon the dissolution
of the RTC. See 12 U.S.C. S 1441a(m)(2). The assets of one pool are not
available to satisfy the obligations of the other. On July 22 1998, the
DOJ concluded that the FRF is legally available to satisfy all judgments
and settlements of the supervisory goodwill litigation involving
supervisory action or assistance agreements. The FRF is also authorized to
draw from an appropriation provided by the Department of Justice
Appropriations Act, 2000, Pub. L. No. 106-113 S 110, 113 Stat. 1501,
1501A-20 (Nov. 29, 1999), the funds necessary for the payment of judgments
and settlements in the Goodwill litigation. This appropriation is to
remain available until expended. DOJ determined that nonperformance of
these agreements was a contingent liability that was transferred to the
FRF on August 9, 1989, upon FSLIC's dissolution and advised that the FRF
was the appropriate source of funds for payment of judgments in the
Winstar-related cases. See 22 Op. Off. Legal Counsel 141, 1998 WL 1180050
(1998). On July 23, 1998, the U.S. Department of the Treasury determined,
based on DOJ's opinion, that the FRF is the appropriate source of funds
for payments of any such judgments and settlements.

^16 The financial benefits provided to acquiring institutions associated
with supervisory goodwill are described in United States v. Winstar Corp.,
518 U.S. 839, 848-854 (1996).

^17 Pub. L. No. 101-73 S 301, 12 U.S.C. SS 1464(t)(3)(A).

^18 Although FIRREA significantly altered many aspects of the thrift
industry, the provision most relevant to this litigation was the
requirement that OTS "prescribe and maintain uniformly applicable capital
standards for savings associations" and the phase-out and elimination of
supervisory goodwill in calculating core capital. 12 U.S.C. S 1464(t).
Section 301 of FIRREA provided that failure to maintain capital at or
above the minimum level could be treated as an unsafe or unsound practice
and that substantially insufficient capital was grounds for appointment of
a conservator or receiver. 12 U.S.C. SS 1464(d)(2) and (s)(3) (1990).

In addition, FDIC data indicate that from 2002 through April 11, 2007,
approximately $274 million ($276 million in 2006 dollars) had been paid 
in judgments and settlements in separate litigation regarding tax benefits
that parallels the supervisory goodwill cases. Like the goodwill cases,
the tax benefits involve agreements between investors and thrift
regulators in the context of acquiring failing thrifts. In the tax benefit
litigation--called Guarini cases, after the legislation that established
the relevant tax provisions--the plaintiffs entered into agreements with
FSLIC, providing that the regulators would reimburse them for the losses
that they sustained when disposing of certain assets that they acquired in
the transaction. Under provisions of the tax law then in existence that
were specifically applicable to FSLIC, the acquirers could take advantage
of the losses and were not required to include the FSLIC reimbursement in
calculating their income.^22 A provision of the Omnibus Budget
Reconciliation Act of 1993--popularly referred to as the "Guarini
legislation"--eliminated the tax deductions for these covered losses.^23
According to FDIC, as of April 2007, all of the Guarini cases have been
adjudicated and associated payments made; however, additional claims for
attorney costs are still pending.

Costs associated with supervisory goodwill and Guarini litigation also
involve expenses incurred by DOJ. Because the supervisory goodwill and
Guarini lawsuits are against the United States, DOJ defends the
government. According to FDIC data, since 1998,
approximately $374 million ($427 million in 2006 dollars) has been paid to
DOJ in litigation expenses.^24

^19 OTS, Capital Adequacy: Guidance on the Status of Capital and
Accounting Forbearances and Capital Instruments Held by a Deposit
Insurance Fund, Thrift Bulletin No. 38-2 (Jan. 9, 1990). This guidance
followed an OTS interim final rule establishing uniformly applicable
capital regulations for savings associations, as required by FIRREA. 54
Fed. Reg. 46,854 (Nov. 8,1989).

^20 518 U.S. 839 (1996).

^21 Plaintiffs in Winstar-Related Cases v. United States, 37 Fed. Cl. 174
(1997).

^22 These agreements allegedly contained the promise of tax deductions for
losses incurred on the sale of certain thrift assets purchased by
plaintiffs from FSLIC, although FSLIC provided the plaintiffs with
tax-exempt reimbursement.

^23 Pub. L. No. 103-66 S 13224, 107 Stat. 312 (Aug. 10, 1993).

Estimated Cost of Tax Benefits and Interest Expense on REFCORP Bonds
Remain Unchanged

FDIC's estimates of the tax benefits received by institutions that
acquired failing thrifts under certain FSLIC assistance agreements
generally correspond with the $7.5 billion ($9.3 billion in 2006 dollars)
we estimated in 1996 (including $3.1 billion that had already been
realized through December 31, 1995). According to FDIC, through tax year
2005, institutions that acquired failed thrifts received approximately
$6.51 billion  in tax benefits associated with FSLIC assistance
agreements, and approximately $609.24 million remain in tax year 2006 and
future benefits. Tax benefits included treating assistance paid to an
acquiring institution as nontaxable and, in some cases, reducing the tax
liability of the acquiring institution by carrying over certain tax losses
and tax attributes of the troubled institutions.^25 The effect of these
special tax benefits was to reduce the amount of FSLIC assistance
payments.

Similarly, our estimates of the interest expense associated with certain
bonds used to help finance resolution of the savings and loan crisis have
not changed.^26 These bonds were issued by the Resolution Financing
Corporation (REFCORP) and the Financing Corporation (FICO). Congress
established REFCORP by the enactment of FIRREA in 1989 primarily to
provide funds for RTC, which was created during the savings and loan
crisis as a means of liquidating insolvent institutions. Beginning in
1989, REFCORP issued six series of 30- and 40- year bonds with fixed
coupon rates. From the proceeds of these bonds, REFCORP purchased a
special domestic series of long-term, zero-coupon bonds issued by Treasury
that are pledged to pay the principal amount of the REFCORP bonds. The
zero-coupon bonds are the primary source for repaying of the principal of
the obligations at maturity. FIRREA also provided that if REFCORP income
from other sources was insufficient to pay the interest due on the bonds,
the FHL Banks would be required to annually contribute up to $300 million.
FIRREA further provided that the U.S. Treasury would cover any interest
shortfall between the total interest on REFCORP bonds and the FHL Banks
contribution.  In 1987, Congress also created the FICO as a financing
mechanism for FSLIC. FICO provided funding for FSLIC-related costs by
issuing bonds to the public.^27

24 The FRF pays the goodwill litigation expenses incurred by DOJ based on
a memorandum of understanding, dated October 2, 1998, between FDIC and
DOJ. DOJ returns any unused fiscal year funding to the FRF unless special
circumstances warrant that these funds be carried over and applied against
current fiscal year charges.

^25 The tax benefit agreements are described in Local America Bank of
Tulsa, v. United States, 52 Fed. Cl. 184, 185 (2002); First Nationwide
Bank v. United States, 49 Fed. Cl. 750, 751 (2001); and Centex Corp. v.
United States, 49 Fed Cl. 691, 693 (2001).

^26 In 1996, we determined that the known interest expense on bonds issued
to finance FSLIC's costs for savings and loans resolutions totaled $111.8
billion ($138.2 billion in 2006 dollars). Specifically, we determined that
$76.2 billion of the $111.8 billion in total known interest expense was
paid by the taxpayers. We also estimated that Treasury would incur $209
billion in interest expense associated with appropriations resulting from
legislation enacted to specifically address the savings and loan industry
crisis. This legislation was enacted during a period in which the federal
government was financing--via deficit spending--a sizable portion of its
regular, ongoing program activities and operations. We based our estimate
of Treasury interest expense on various simplifying assumptions, including
(1) the entire amount of appropriations used to pay direct costs was
borrowed and (2) appropriations for the FRF and RTC would be financed for
30 years at 7 percent interest, with no future refinancing. For further
information, refer to GAO/AIMD-96-123.

Section 607 of the Gramm-Leach-Bliley Act of 1999 (GLBA) revised the
obligations of the FHL Banks to pay annual interest payments on REFCORP
bonds, from approximately $300 million annually to 20 percent of the FHL
Banks' annual net earnings, after deducting certain expenses.^28 To ensure
that the FHL Banks pay their entire obligation, GLBA requires the Federal
Housing Finance Board, which oversees the FHL Banks, to determine annually
the extent to which the value of their aggregate payments under the 20
percent regime exceeds or falls short of an annuity of $300 million per
year, commencing on the issuance date of the REFCORP bonds and ending on
the final scheduled maturity date of those bonds.^29 According to the
Federal Housing Finance Board, as of March 2007, the FHL Banks had paid
approximately $6.2 billion in interest payments on REFCORP bonds.

REFCORP's 2006 financial statements and reports indicated that $2.6
billion was paid in interest on REFCORP's long term obligations in 2005
and 2006. Annual interest expenses will continue through maturity of the
REFCORP bonds in the years 2019, 2020, 2021, and 2030.

^27FICO was established by the Federal Savings and Loan Insurance
Corporation Recapitalization Act of 1987, Pub. L. No. 100-86, tit. III, S
302, 101 Stat. 552 (Aug. 10, 1987). FICO is a mixed-ownership government
corporation whose main purpose is to function as a financing vehicle for
FSLIC. FICO provided funding for FSLIC-related costs by issuing $8.2
billion of noncallable, 30-year bonds to the public. The annual interest
obligation on the FICO bonds will continue through the maturity of the
bonds in the years 2017 through 2019. We determined that the total nominal
interest expense over the life of the FICO bonds will be $23.8 billion.
FDIC acts as collection agent for FICO. The Deposit Insurance Funds Act
1996 (DIFA), Pub. L. No. 104-208, div. A, tit.II, subtit.G, 110 Stat.
3009-479 (Sept. 30, 1996), authorized FICO to assess both Bank Insurance
Fund (BIF)- and Savings Association Insurance Fund (SAIF)-insured
deposits, and require the BIF rate to equal one-fifth the SAIF rate
through year-end 1999, or until the insurance funds are merged, whichever
occurs first. Since the first quarter of 2000, all FDIC-insured deposits
have been assessed at the same rate by FICO. Effective March 31, 2006, BIF
and SAIF were merged into the newly created Deposit Insurance Fund (DIF).

^28 Pub. L. No. 106-102 S 607(a), 113 Stat. 1338, (Nov. 12, 1999),
codified at 12 U.S.C. S 1441b(f)(2)(C).  In past work, we noted that this
change minimized the financial obligation on the Federal Home Loan Bank
System during periods of relatively low profitability but increased the
total payment when profits increased. See Federal Home Loan Bank System:
An Overview of Changes and Current Issues Affecting the System,
GAO/05-489T (Washington, D.C.: April 13, 2005).

^29According to REFCORP's December 31, 2006, Report of Independent
Auditors, interest on REFCORP's long-term obligations is funded in the
following order, to the maximum extent each is available: (1) interest on
earnings on REFCORP investments; (2) annually, 20 percent of the FHL
Banks' net earnings after the deduction for the Affordable Housing
Program; (3) FRF proceeds from the sale of assets transferred by RTC; and
(4) Treasury.

Enclosure III

Relatively Few U.S. Commercial Banks Appear to Use Ex-Im Products or
Participate in Trade Finance for Various Reasons

Because Ex-Im records do not specifically differentiate banks from nonbank
lenders, we could not determine precisely the extent of bank participation
in Ex-Im's programs. In fiscal year 2005 (the most recent year for which
Ex-Im could provide data), U.S. lenders--including both banks and nonbank
lenders--accounted for about $1.8 billion in loan guarantees, $2.4 billion
in insurance products, and $1.1 billion in working capital guarantees.
However, U.S. lender participation in trade finance has generally declined
in recent years, and some evidence suggests that Ex-Im programs are used
by relatively few banks. Trade finance industry participants noted that
most U.S. banks involved in trade finance are large, money-center banks,
along with a limited number of regional and small banks. Ex-Im officials
and industry participants noted that transactions involving Ex-Im products
generally result in high internal administrative costs and low profit
margins for banks compared with other bank product lines. Nevertheless,
officials and participants identified a number of other factors that might
prompt banks to use Ex-Im products, including risk mitigation through
Ex-Im's loan guarantees and insurance, and increased liquidity through the
sale of certain Ex-Im products in the secondary market. Furthermore, Ex-Im
officials and industry participants said that using Ex-Im products offers
U.S. banks the opportunity to develop broader relationships with their
customers and, in turn, offer them other services.

Ex-Im's mission is to help U.S. companies create and maintain American
jobs by financing exports of goods and services and filling gaps in the
availability of commercial financing for creditworthy export
transactions.^30 Ex-Im also helps American exporters meet
government-supported financing competition from other countries so that
American exports can compete for overseas business on the basis of price,
performance, and service. To accomplish its mission, Ex-Im offers a
variety of financing instruments, including the following:

           o Loan guarantees and direct loans for buyer financing. Under its
           loan guarantee program, Ex-Im agrees to guarantee loans made by
           other lenders to help buyers in other countries obtain financing
           to purchase U.S. exports. Guarantees are offered to qualified
           lenders, primarily commercial banks.
           o Export credit insurance. This product protects U.S. exporters
           against nonpayment by their customers. Ex-Im provides this
           insurance either directly to exporters, or to banks that in turn,
           finance U.S. exporters.
           o Working capital guarantees for pre-export financing. Ex-Im
           guarantees to working capital lenders making loans to U.S.
           companies who would like to export but need funds to produce or
           market their goods or services for export.

These guarantees and insurance programs reduce some of the risks involved
in exporting by insuring against commercial or political uncertainty.
Given Ex-Im's mission of encouraging U.S. exports, Ex-Im officials and
trade finance industry representatives and participants commented that the
role of lenders--including U.S. banks--in transactions involving Ex-Im
products is that of an intermediary.

^30 First established in 1934, Ex-Im is the official export credit agency
of the United States under the authority of the Export-Import Bank Act of
1945, as amended, and operates as an independent agency of the U.S.
government. Ch. 341, 59 Stat. 526 (July 31, 1945) (codified at 12 U.S.C.
SS 635, 635a, 635b, 635d to 635h, 635i-3, 635i-5 to 535i-9).

Data Indicate That a Small Number of U.S. Lenders Participate in Ex-Im
Programs

Ex-Im data that we obtained on lenders participating in Ex-Im transactions
did not specifically differentiate banks from nonbank lenders. Further,
the data did not consistently provide lender domicile information
(indicating whether or not the lender was a U.S.-headquartered lender)
until fiscal year 2000; accordingly, we confined our analysis to data for
fiscal years 2000 through 2005. ^31 As shown in figure 1, Ex-Im data
indicate that a fairly small number of U.S. lenders--generally around 100
annually representing both banks and nonbank lenders--participated in its
programs. Nevertheless, this small number of U.S. lenders constituted a
majority of Ex-Im's top lenders since fiscal year 2000.

Figure 1: U.S. Percentage of Total Ex-Im Lenders, Fiscal Years 2000-2005

Ex-Im officials attributed the problems in identifying lenders within
Ex-Im data primarily to consolidation within the banking industry. They
noted that in Ex-Im's software systems a lender and its subsidiaries could
each be coded as individual lenders, making comparisons over time
difficult. However, according to the officials, Ex-Im is undertaking a
multiyear program to reengineer and automate its primary business
processes--including short- and medium-term export insurance and loan
guarantees--through an online computer system.^32

^31Ex-Im defines a U.S.-domiciled bank or nonbank as one in which the
global parent is headquartered in the United States. According to Ex-Im,
in general, a nonbank lender is a financial institution that provides
banking services without meeting the legal definition of a bank (i.e., one
that does not hold a banking license). Ex-Im also indicated that nonbank
institutions frequently act as suppliers of loans and credit facilities;
however, they are typically not allowed to take deposits from the general
public and have to find other means of funding their operations, such as
issuing debt instruments (e.g., Sears and American Express).

^32 Ex-Im officials said that the program includes an interface with a
commercial provider of business credit information that would help resolve
problems in identifying lenders that have merged or been acquired and
noted that in June 2006, Ex-Im had implemented the first phase of the new
online system for insurance products.

Ex-Im data show that while U.S. bank and nonbank lenders represented the
largest percentage of Ex-Im's top lenders, their participation level in
terms of lenders and authorizations varied among the products.
Specifically, participation in the loan guarantee and insurance programs
significantly declined while the working capital guarantee program saw
increased participation. Figure 2 provides authorization levels for Ex-Im
products from fiscal years 2000 through 2005.

Figure 2: U.S. Participation in Ex-Im's Products, Fiscal Years 2000-2005

It is important to note that these loan guarantee and insurance programs
are credit programs, and the amounts shown in the figure do not
necessarily represent costs to Ex-Im or the U.S. government. Ex-Im's loan
guarantee and insurance programs essentially reimburse guaranteed lenders
and insureds in the event of an eligible default.^33 According to Ex-Im
officials, low rates of default on its loan guarantees and insurance
claims, and a high rate of recovery on assets involved in these products,
have resulted in generally low costs in Ex-Im programs. Figures 3 and 4
illustrate claims paid to guaranteed lenders and insureds and recoveries
from fiscal year 2002 through 2006, respectively.^34

^33 According to Ex-Im, the agency reimburses after default, subject to the
insured's or guaranteed lender's compliance with terms and conditions of
the policy or guarantee (e.g., timely filing, proof of export) that make
the claim eligible for reimbursement.

^34 These recoveries do not necessarily relate to the claims paid in the
same year.

Figure 3: Ex-Im Claims Paid to Guaranteed Lenders and Insureds, Fiscal
Years 2002-2006

Figure 4: Ex-Im Recoveries, Fiscal Years 2002-2006

Note: According to Ex-Im officials, the recovery figures include
repayments of claims that were rescheduled under the Paris Club, an
informal group of creditors that meets, as needed, to negotiate debt
rescheduling and relief efforts for public or publicly guaranteed loans,
The large amount in fiscal year 2006 was the result of one country
prepaying its Paris Club debt, which was $592 million of the total.

In 2006, Ex-Im's chairman testified before the U.S. Senate Committee on
Banking, Housing, and Urban Affairs that the overall loss rate throughout
Ex-Im's history has been less than 2 percent. Further, information that we
reviewed on Ex-Im's program subsidy rate from fiscal year 2001 to fiscal
year 2007 indicated a general downward trend.

Although U.S. Banks' Involvement in Trade Finance Appears Limited, Banks
May Use Ex-Im Products for a Variety of Reasons

According to Ex-Im and Office of the Comptroller of the Currency (OCC)
officials and trade finance industry representatives, U.S. bank
involvement in trade finance is limited and has generally declined in
recent years. Nevertheless, they noted several factors that prompt
continuing bank involvement in trade finance transactions and in Ex-Im
programs. Ex-Im officials and trade finance industry representatives noted
that most U.S. banks involved in trade finance are large, money center
banks, along with a limited number of regional and small banks. OCC
officials said that only a small group of OCC-supervised banks participate
in international lending, comprising large banks and some institutions
located along the U.S. border. According to FDIC officials, FDIC
supervises fewer than 10 institutions that hold more than 25 percent of
their capital in trade finance activities.

Ex-Im officials and trade finance industry representatives and
participants described several factors that had contributed to a decline
in U.S. bank participation in trade finance, including the industry's
continuing consolidation activity and increased competition from nonbank
lenders and foreign banks. According to Ex-Im officials, U.S. bank
participation in trade finance has declined over the past 25 years.
Additionally, an OCC official noted that lending survey data indicate that
the trade finance activities of U.S. banks remained relatively stable over
the past decade, decreased during the late 1990s, and increased near the
end of 2005.^35 A representative of a U.S. trade finance industry
association said that the association membership had decreased by
one-half. Ex-Im officials and industry experts noted that competition from
nonbank entities and foreign banks was also a contributing factor to the
decline in U.S. bank participation in trade finance. Other factors cited
included capital requirements and competition from foreign banks. One
Ex-Im official posited that under the Basel Capital Accord, the capital
requirements for assets involved in emerging markets could have caused
U.S. banks to move out of medium- and long-term trade financing activities
into lines of business requiring lower capital. ^36 Furthermore, according
to the official, European banks are subject to the same requirements but
achieve greater operational efficiency in trade finance transactions
because of the borders of European countries are closer and the countries
have a much larger volume of trade financing. The Ex-Im official also
noted that foreign bank participation in trade finance also increased as
they began providing services to corporate customers in the United States
through their U.S. correspondents.

Ex-Im officials and industry participants noted that although trade
finance transactions are associated with relatively high administrative
costs and low returns, they can also foster relationship banking, help
mitigate risk, increase liquidity, and thus prompt U.S. bank involvement.
Ex-Im officials and a trade finance participant characterized bank returns
on transactions involving Ex-Im products as low relative to other business
lines and noted that these transactions typically involved high labor and
administrative costs. Ex-Im officials explained that trade finance
generally is not the key profit-making business line for banks relative to
other business lines and, as a result, banks approach it as a vehicle for
relationship banking--that is, as a way to offer additional services to
customers.

Banks also use Ex-Im products to reduce risk associated with uncertainty
about overseas buyers and increase liquidity through a secondary market,
according to Ex-Im and trade finance industry participants. Ex-Im
officials indicated that Ex-Im's guarantees of commercial loans to
international buyers of U.S. capital goods and services protect lenders
against nonpayment due to commercial and political events. Through these
medium- and long-term guarantees, Ex-Im covers 100 percent of the loan
principal and interest.^37 Ex-Im officials also indicated that their
export credit insurance policies limit lenders' exposure to country and
credit risks. A trade industry participant explained that if a country's
creditworthiness is a concern or the country has not provided for defaults
and other contractual disagreements in law, the use of an Ex-Im product
can be the deciding factor in a bank's willingness to help a new or
existing customer.

^35 The Country Exposure Report collects information on the distribution,
by country, of claims on foreigners held by U.S. banks and bank holding
companies. The Federal Reserve, FDIC, and OCC use the data to determine
the degree of risk in bank portfolios and the effect of adverse
developments in particular countries may have on banks or the U.S. banking
system.

^36 The Basel Capital Accord (Basel Accord) is an international framework
for risk-based capital. These risk-based capital requirements, which were
fully implemented by U.S. regulators by 1992, focused on limiting credit
risk by requiring certain firms to hold capital equal to at least 8
percent of the total value of their risk-weighted on-balance sheet assets
and off-balance sheet items, after adjusting the value of the assets
according to certain rules intended to reflect their relative risk.

^37 Repayment terms for Ex-Im's medium-term loan guarantees extend up to 5
years and repayment terms for long-term loan guarantees extend over 10
years.

Enclosure IV

Banks and Thrifts Lower Their Federal Taxes Primarily by Using Tax
Deductions, Credits, and Other Provisions that Are Generally Available to
All Corporations

According to IRS data and officials, banks and thrifts use tax deductions,
credits, and other provisions that are generally available to all
corporations. Treasury considers only one tax provision--the deduction of
excess bad debt reserves--to be a tax expenditure available exclusively to
banks and thrifts and estimates revenue losses from this tax expenditure
at $10 million in 2007. IRS data from 2004--the most recent year with
available data--indicate that the largest deductions that banks and
thrifts took were for business expenses, such as interest paid and
salaries and wages, while the largest tax credits they claimed were the
general business credit and foreign tax credit. To bypass federal
corporate income taxation, some eligible banks and thrifts have also taken
advantage of the option to become S-corporations, which pass their income
through to shareholders, who are then taxed as individuals on that income.
As of December 2006, 2,356 depository institutions, including 31 percent
of banks, had elected Subchapter S status, according to FDIC data. IRS
officials also noted that some banks have participated in tax shelters and
transactions the IRS considers to be abusive.

Banks and Thrifts Receive Few Industry Specific Tax Expenditures

Like other corporations, banks and thrifts use general corporate tax
deductions, credits, and other tax provisions to lower their federal
income taxes. Some of these tax provisions are considered tax
expenditures. Tax expenditures result in forgone revenue for the federal
government due to preferential provisions in the tax code, such as
deductions, credits, and deferral of tax liability. These provisions grant
special tax relief for certain kinds of taxpayer behavior or for taxpayers
in special circumstances.^38 Both the congressional Joint Committee on
Taxation and Treasury annually compile lists of tax expenditures and
estimate their cost. Treasury's estimates are included as an informational
supplement to the annual federal budget.^39 Tax expenditures are
considered exceptions to the normal structure of the individual and
corporate tax base. Determining whether an individual provision should be
characterized as a tax expenditure is a matter of judgment about what
should be included in the income tax base. The income tax base includes
most corporate deductions for general business expenses which reflect
costs of earning income.

In the President's fiscal year 2008 annual budget, Treasury lists only one
tax expenditure that is available exclusively to banks and thrifts--the
deduction of excess bad debt reserves.^40 Commercial banks, mutual savings
banks, and savings and loan associations with less than $500 million in
assets may generally deduct additions to bad debt reserves in excess of
actually experienced losses. This tax expenditure will cost $10 million in
revenue losses in 2007, according to Treasury's estimates.^41

38 Treasury estimates the one tax expenditure available to credit
unions--tax exempt status--to cost $1.4 billion in revenue losses in 2007.

^39 31 U.S.C. S 1105(a) (16) requires that a list of tax expenditures be
included in the budget.

^40 26 U.S.C. SS 585 and 593. Bad debt reserves are an account maintained
by financial institutions and used to offset losses from foreclosed or
uncollectible loans.

In addition to the one tax expenditure available exclusively to banks and
thrifts, other tax expenditures result when banks invest in certain
specific activities, including certain school improvements and the
economic development of low-income communities and economically depressed
areas. The tax credit for qualified zone academy bonds--whose proceeds are
used to renovate or improve schools in low-income school districts--is
available only for banks, insurers, and other corporations in the business
of lending money.^42 Banks also use economic development tax expenditures
such as the new markets tax credit (NMTC) and the empowerment zones and
renewal communities (EZ/RC) tax benefits.^43 As investors in these
community development projects, banks can claim the tax credits and lower
their tax liability.^44 The communities benefit from the increased
investment. Banks and other regulated financial institutions made up 38
percent of total NMTC claimants through 2006 and also accounted for the
majority of the investment funds.

Banks and Thrifts Use Tax Deductions and Credits That Are Available to All
Corporations

Like other corporations, banks and thrifts lower their tax liability by
claiming tax deductions and credits. IRS categorizes banks, thrifts, and
similar institutions as depository credit intermediation corporations. As
shown in table 1, IRS data indicate that depository credit intermediation
corporations represent 0.55 percent of total receipts for all corporations
and 2.67 percent of total income taxes paid by all corporations. These
calculations are based on IRS data for the 2004 tax year, the most recent
year for which data are publicly available.

^41 Office of Management and Budget, Analytical Perspectives, Budget of
the United States Government, Fiscal Year 2008 (Washington, D.C.: 2007).

^42 See 26 U.S. C. S 1397E(d)(6). Treasury estimates that the 2007 revenue
losses from the qualified zone academy bond tax credit are $140 million in
aggregate; the share by industry is not available.

^43 See Tax Policy: New Markets Tax Credit Appears to Increase Investment
by Investors in Low-Income Communities, but Opportunities Exist to Better
Monitor Compliance, GAO-07-296 (Washington, D.C.: Jan. 31, 2007) and
Empowerment Zone and Enterprise Community Program: Improvements Occurred
in Communities, but the Effect of the Program Is Unclear, GAO-06-727
(Washington D.C.: Sept. 22, 2006).

^44 Treasury estimates that 2007 tax revenue losses from the NMTC are $210
million from corporate income taxes, with a total revenue loss of $810
million (corporate and individual income taxes). The estimated 2007
revenue losses from the EZ/RC tax benefit are $340 million from corporate
income taxes, with a total revenue loss of $1.34 billion (corporate and
individual income taxes). The share by industry is not available.

Table 1: Tax Deductions, Credits, and Payments for Depository Credit
Intermediation Corporations Compared with All Corporations, 2004
All tax returns (with and without net                                      
income)                                                                    
                                          Depository credit Depository credit 
                                      All    intermediation intermediation as 
                  corporations(Dollars in       (Dollars in   a percentage of 
                                millions)         millions)  all corporations 
Total receipts                                                             
^a                         $22,711,864          $125,388              0.55 
Deductions                 -21,636,156          -108,474              0.50 
Adjustments ^b                -218,316              +684               N/A 
Taxable income                 857,392            17,598              2.05 
Tax rate                         ~=35%             ~=35%                   
Income tax                                                                 
before credits                 299,555             6,197              2.07 
Tax credits                    -75,120              -200              0.27 
Total income                                                               
tax                           $224,435            $5,997              2.67 
Source: IRS, Statistics of Income Division, Corporation                    
Source Book of Statistics of Income, Publication 1053                      
(Washington, D.C.: 2004).                                                  
^a  Total receipts equal the amount of gross receipts and other forms of
positive income before deductions.
                  
^b Includes constructive taxable income from related foreign corporations,
statutory special deductions; excludes Interest on government obligations:
state and local, applicable S-corporations, regulated investment
companies, and real estate investment trusts.

Deductions claimed by depository credit intermediation corporations
consist largely of deductions for business expenses.^45 As shown in table
2, IRS data indicate that in 2004, these corporations claimed deductions
totaling about $108 billion. The largest deductions claimed were for
interest paid and salaries and wages.

^45 Deductions for expenses incurred in earning income are considered part
of the normal tax structure and not tax expenditures.

Table 2: Depository Credit Intermediation Corporations Deductions , 2004

2004 total receipts and deductions
Depository credit intermediation                Dollars in thousands       
Total receipts                                                $125,387,897 
Deductions                                                                 
          Cost of goods                                              $198,898 
          Compensation of officers                                  2,522,529 
          Salaries and wages                                       19,400,167 
          Repairs                                                   1,289,065 
          Bad debts                                                 3,163,894 
          Rent paid on business property                            2,116,502 
          Taxes paid                                                3,117,885 
          Interest paid                                            45,422,737 
          Charitable contributions                                    222,564 
          Amortization                                              1,133,415 
          Depreciation                                              4,314,159 
          Depletion                                                     2,427 
          Advertising                                               1,316,714 
          Pension, profit sharing, stock, annuity                   1,080,607 
          Employee benefit programs                                 2,406,261 
          Net loss, noncapital assets                               1,437,786 
          Other deductions                                         19,328,600 
Total deductions                                              $108,474,210 
Source: IRS, Statistics of Income Division, Corporation Source Book of
Statistics of Income, Publication 1053 (Washington, D.C.: 2004).

As shown in table 3, in 2004, depository credit intermediation
corporations claimed about $199 million in tax credits, the largest being
the general business credit (1.5 percent of total income taxes) and
foreign tax credit (1.1 percent of total income taxes).^46

46 The general business credit consists of a combination of 27 individual
credits for such things as research, low-income housing, employer-provided
child care, and community development. Of these, 26 are considered tax
expenditures. The foreign tax credit provides credit against U.S. income
tax for income taxes paid to foreign countries or U.S. possessions, and
this credit is not a tax expenditure.

Table 3: Depository Credit Intermediation Corporations Tax Credits, 2004

2004 income tax and credits                                                
depository credit intermediation                      Dollars in thousands 
Total income tax before credits                                 $6,196,984 
Tax credits                                                                
         Foreign tax credit                                           $65,267 
         Nonconventional source fuel credit                            20,718 
         General business credit                                       95,180 
         Prior year minimum tax credit                                 17,248 
         Other tax credits*                                             1,300 
Total Tax Credits                                                 $199,713 
Total income tax after credits                                  $5,997,271 
Source: IRS, Statistics of Income Division, Corporation Source Book of
Statistics of Income, Publication 1053 (Washington, D.C.: 2004).
         
* Includes qualified zone academy bond credit

Some Banks and Thrifts Bypass Corporate Income Tax by Electing
S-corporation Status

FDIC data indicate that in recent years, an increasing number of banks and
thrifts have taken advantage of the option to elect Subchapter S tax
status and therefore bypass federal corporate income tax. ^47 Subchapter S
tax status, which is available to corporations with less than 100
shareholders, is a common corporate tax structure appearing in every
industrial sector.^48 In contrast to Subchapter C corporations, which pay
taxes as a corporate entity, an S-corporation elects to pass through its
income to shareholders. Corporations that elect Subchapter S status
generally are not subject to federal corporate-level income tax, as
Subchapter C corporations are. S-corporation shareholders are taxed at
their individual income tax rates on their portion of the corporation's
taxable income, regardless of whether they receive a cash distribution.
The net effect of electing subchapter S status is to lower the total
amount of tax assessed on corporate income by avoiding the double taxation
of corporate dividends, as shown in figure 5.

^47 Special tax rules for S-corporations are not considered tax
expenditures by the Joint Committee on Taxation or Treasury because they
are generally available to any entity that chooses to organize and operate
in the required manner.

^48 GAO, Banking Taxation: Implications of Proposed Revisions Governing
S-Corporations on Community Banks, GAO/GGD-00-159 (Washington D.C.: June
23, 2000).

Figure 5: Federal Tax Rates of C- and S-Corporations

^a Corporate income tax rate on earnings over $18,333,333.

^b Maximum tax rate on qualified dividends. Dividends are taxed in the
year they are distributed. Capital gains are taxed when an individual
realizes gains from the sale of an asset, such as a corporate stock.

^c Maximum individual income tax rate.

As of December 31, 2006, FDIC and IRS data indicate that there were 2,356
S-corporation banks and thrifts, accounting for less than 1 percent of the
total U.S. S-corporation population (based on 2003 data).^49 As shown in
figure 6, the number of S-corporation banks and thrifts has grown steadily
since 1997, the first year financial institutions were allowed to elect
Subchapter S status.^50

Figure 6: Number and Assets of Subchapter S Corporations (1996-2006)
Compared to All FDIC-insured Institutions (Banks and Thrifts)

^49 The most recently available IRS data on the total number of U.S.
S-corporations is for 2003.

^50 Until 1997, financial institutions were not allowed to elect
Subchapter S status because of the special methods of accounting for bad
debts that were available to them for tax purposes.

Banks comprise the majority of Subchapter S depository corporations. As of
2006, approximately 31 percent of banks have elected S-corporation status,
compared to 7 percent of thrifts. S-corporation banks and thrifts are
generally smaller institutions with average assets of $175 million, but a
couple of the largest S-corporation thrifts have over $10 billion in
assets.

Some Banks Have Participated in Tax Shelters IRS Views as Abusive

According to IRS officials, they have found a number of instances in which
some banks have participated in tax shelters and transactions that they
view as abusive.^51 Abusive tax shelters are generally characterized as
transactions that exploit tax code provisions and reap unintended tax
benefits rather than engage in any meaningful economic activity. By their
nature, abusive tax shelters are varied, complex, and difficult to detect
and measure.^52

IRS officials said that some banks have participated in abusive
lease-in/lease-out (LILO) transactions along with other tax shelters.^53
Unlike the traditional lease transactions that banks and other companies
commonly engage in, a LILO is merely a transfer of tax benefits.  Figure 7
illustrates a simplified structure of a LILO tax shelter. In a LILO
transaction, a U.S. taxpayer (i.e., a corporation) purportedly leases an
asset (such as subway trains, power plants, or sewer systems) from a
tax-exempt entity, such as a municipality or tax exempt organization
(shown as A in figure 7). Because the taxpayer then leases the asset back
to the same entity, the use and possession of the asset is, in substance,
unaltered by the transaction (shown as B in figure 7). The transaction is
structured to eliminate any risk to the U.S taxpayer or the tax-exempt
entity. The U.S. taxpayer benefits from the transaction by claiming tax
deductions for rental payments, transaction costs, and interest income.

^51 IRS issues formal guidance on certain potential tax avoidance
transactions that are referred to as listed transactions. See 26 U.S.C. S
6011, 26 C.F.R. S 1.6011-4(b)(2). Taxpayers are required to disclose their
participation in listed transactions. As of March 2007, 31 listed
transactions have been identified and addressed in formal guidance.

^52 GAO, Internal Revenue Service: Challenges Remain in Combating Abusive
Tax Shelters, GAO-04-104T (Washington, D.C.: Oct. 21, 2003).

^53 IRS describes LILO transactions in Revenue Ruling 2002-69, 2002-2 C.B.
760, and a related transaction, known as sale-in/lease-out (SILO), in IRS
Notice 2005-13, 2005-1 C.B. 630. SILO transactions are structurally
similar to LILO transactions, except that in SILO transactions, the U.S.
taxpayer purportedly buys the asset from the tax-exempt entity. Also, in
SILO transactions, the taxpayer claims depreciation deductions rather than
rent expense deductions. According to IRS officials, many of the banks
that participated in LILO tax shelters also participated in SILO
transactions.

Figure 7: Simplified Structure of a LILO Tax Shelter

One bank's participation in a LILO tax shelter was the subject of a
recently decided court case. The court granted the government's motion for
a summary judgment, upholding IRS's disallowance of over $9 million in tax
deductions in one taxable year resulting from one bank's LILO transaction.
The bank had entered into an $86 million LILO transaction with a Swedish
pulp mill in 1997 involving the lease and sublease of the pulp
manufacturing equipment. As a result of the disallowance, the bank paid a
tax deficiency (including interest) for 1997 in the amount of $4.6
million.^54 The bank filed a notice of appeal on March 1, 2007. 

^54 BB & T Corp. v. United States, 2007 WL 37798, slip opinion, No.
1:04CV00941 (M.D. N.C. Jan. 4, 2007).

Enclosure V

Recent Growth in Depository Institution Profits Has Been Accompanied by
Changes in Source of Income

Depository institutions have enjoyed strong profits in recent years. In
2006, banks and thrifts reported a total of $146 billion in net income.
Credit unions, which are not-for-profit organizations, reported $5.7
billion in net income in 2006. As shown in figure 8, the profits of
depository institutions have increased since 1990. Over the past 10 years,
net income has increased by an average annual inflation-adjusted growth
rate of 7 percent for banks, 8 percent for thrifts, and 3 percent for
credit unions.

Figure 8: Profits of Depository Institutions: Net Income for Calendar
Years, 1990-2006

One measure of profitability is returns on assets--net income divided by
assets. Using this measure, banks are generally more profitable than
thrifts or credit unions. Figure 9 shows how the profitability of these
institutions has changed since 1990. In 2006, returns on assets were 1.27
percent for banks, 0.96 percent for thrifts, and 0.81 percent for credit
unions.

Figure 9: Profitability of Depository Institutions: Return on Assets for
Calendar Years 1990-2006

According to a Federal Reserve official, the early 1990s (1990-1992) were
a period of relatively low profitability for the banking industry, in part
because the industry was adjusting to new regulatory capital standards
resulting from the Basel Accord. Banks reduced their lending activities to
meet Basel's new capital requirements. In addition, according to OTS,
thrifts were starting to recover from the savings and loan crisis of the
1980s during the same time period. After 4 straight years of losses, the
thrift industry posted positive net income in 1991, and credit unions were
largely able to avoid the financial turbulence of the early 1990s due to
strong growth over the previous decade.^55

Since 1992, depository institutions have enjoyed steady growth in net
income. Over the past 10 years, average inflation-adjusted annual growth
rates in net income have been 7 percent for banks, 8 percent for thrifts,
and 3 percent for credit unions. According to Federal Reserve reports,
recent profitability is largely attributable to the favorable financial
and economic conditions of the U.S. economy.

Noninterest Income Is a Growing Source of Revenue for Depository
Institutions

Depository institutions have gradually shifted toward greater reliance on
noninterest income, such as service charges and fees. As illustrated in
figure 10, FDIC and NCUA data indicate that since 1990, banks, thrifts,
and credit unions have all experienced an increase in noninterest income
relative to net operating revenue. For banks, noninterest income in 2006
accounted for 43 percent of net operating revenues, up from 32 percent in
1990. At thrifts and credit unions, noninterest income in 2006 accounted
for 34 and 31 percent, respectively, of net operating revenues, up from
about 22 and 15 percent, respectively, in 1990.

^55 GAO, Credit Unions: Reforms for Ensuring Future Soundness,
GAO/GGD-91-85 (Washington, D.C.: July 10, 1991).

Figure 10: Noninterest Income as a Percentage of Net Operating Revenue

Note: Net operating revenue equals net interest income plus total
noninterest income.

According to federal banking regulators, the increase in noninterest
income is the result of growth in fee-producing banking services and a
relative decline in net interest income. Net interest margins (the
difference between what banks incur to obtain funds and what they earn
through lending) have narrowed over the past decade because of falling
interest rates on bank loans and rising interest rates on bank deposits.
Banks collect noninterest income from the sale of investments, fees,
service charges, and other sources. FDIC reports that the largest sources
of noninterest income for banks are service charges on deposit accounts
and other noninterest income (see figure 11). We were not able to obtain
comparable data for thrifts and credit unions because they categorize
noninterest income sources differently.

Figure 11: Commercial Banks Noninterest Income

Enclosure VI

Limited Information Suggests that Executive Compensation in the Banking
Industry Has Increased

Publicly available information on executive compensation in the banking
industry is limited. Depository institutions are not required to report
compensation for chief executive officers (CEO) separately from overall
compensation for the institution.  Banks, thrifts, and credit unions are
required to provide aggregate information on salaries and employee
benefits in quarterly filings of call reports (and thrift financial
reports in the case of thrift institutions).^56 However, this information
is not specific to executives and includes all of an institution's
officers and employees--for example, temporary help, dining room and
cafeteria employees, and guards, among others, including employees of
consolidated subsidiaries.  One banking industry association, America's
Community Bankers (ACB), conducts annual surveys of its membership on
compensation issues and survey results are available for purchase.^57

Although publicly available data are limited, over the past decade, a
number of studies that focused on or included information on executive
compensation in the banking industry noted that compensation at this level
had increased and that its composition had changed over the past decade,
especially for CEOs.^58 For example, one study showed, in part, that  from
1992 to 2000 total direct compensation for bank CEOs steadily increased
and average direct compensation for bank CEOs more than doubled.^59 A
separate study found that prior to the enactment of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal),
many bank CEOs had limited investment opportunities and, thus,
equity-based compensation was not typically used to motivate bank CEOs to
take on risks that could increase shareholders' value.^60 However, after
the act was passed, the equity-based component of CEO compensation
increased significantly on average for the industry.^61

^56 FDIC-insured commercial banks, FDIC-supervised savings banks, and
OCC-supervised noninsured trust companies file consolidated Reports of
Condition and Income (call reports) as of the close of business on the
last day of each calendar quarter. Similarly, every federally insured
savings and loan institution regulated by OTS files a thrift financial
report on a quarterly basis. The specific reporting requirements depend on
the size of the institution and whether or not it has any foreign offices.
The information is extensively used by the banking regulatory agencies in
their daily offsite bank monitoring activities. Reports of Condition and
Income data are also used by the public, Congress, state banking
authorities, researchers, bank rating agencies, and the academic
community.

^57 ACB Compensation and Benefits Survey, America's Community Bankers
(2006). For information on executive compensation issues in the credit
union industry, including results from an industry survey on staff
salaries and a pilot program from NCUA that, among other things, collected
data on credit union executive compensation, see our recent report, Credit
Unions: Greater Transparency Needed on Who Credit Unions Serve and on
Senior Executive Compensation Arrangements,  GAO-07-29 (Washington, D.C.:
Nov. 30, 2006).

^58 Our review cites a number of professional studies that date back to
the1990s.

^59 Kose John and Yiming Qian, "Incentive Features in CEO Compensation in
the Banking Industry," FRBNY Economic Policy Review, vol. 9, no. 1 (2003).
The authors measured direct compensation as the sum of salary, bonuses,
other cash compensation, option grants, and grants of restricted stock.
Overall findings and conclusions included lower pay-performance
sensitivity in the banking industry than in the manufacturing industry and
pay-performance sensitivity of top-management compensation in banks might
be useful input in pricing FDIC insurance premiums and establishing
regulatory procedures in the banking industry.

Another paper focused on banks that reported compensation data for CEOs
and at least one additional executive in 1996. This study analyzed the
components of compensation (base pay, annual bonus, deferred compensation,
and the value of options granted) at approximately 300 publicly traded
banks. The study found that the structure of compensation varied
significantly across firms, with firm size being the most important
explanatory characteristic, and that larger firms relied more heavily on
annual bonuses, deferred compensation, and option-adjusted compensation
and less heavily on base pay.^62

Another study synthesized various research on CEO compensation. For
example, the study discussed how various papers measured incentives and
how incentives were determined. ^63 Another study described research that
noted that bank CEOs, on average, received less cash compensation, were
less likely to participate in stock option plans, and received a smaller
percentage of their compensation in the form of options than CEOs in other
industries.^64 Finally, one paper attributed the disparity in compensation
to differences between the banking industry and other industries, rather
than to such factors as banks being subject to more stringent regulation
and have significantly higher leverage. ^65

Two researchers attributed the increase in CEO compensation to the
elimination of interstate banking barriers and increasingly competitive
pressures that ultimately affected executive compensation. Before the
enactment of Riegle-Neal, most banks generally could only branch out
across state lines if the host state permitted this practice.^66
Additionally, most banks that wanted to branch across state lines had to
establish a bank holding company and, with certain restrictions, acquire
or charter a bank in each state in which they wanted to operate. One
researcher suggested that efforts to hire managerial talent after some
interstate barriers were removed prior to the enactment of Riegle-Neal led
to increases
in compensation during the 1980s.^67 According to ACB, its 2006 survey of
compensation and benefits indicated that salary increases at community
banks continued to be linked to individual performance, with bonuses tied
to bank performance.

^60 Pub. L. No. 103-328, 108 Stat. 2338 (Sept. 29, 1994) (amended the Bank
Holding Company Act of 1956, Revised Statues of the United States, and the
Federal Deposit Insurance Act to permit interstate banking and branching).

^61 Elijah Brewer III, William Curt Hunter and William Jackson III,
"Deregulation and the Relationship Between Bank CEO Compensation and
Risk-Taking," Federal Reserve Bank of Chicago  Working Paper, WP 2003-32,
(2003).

^62 Rebecca S. Demsetz and Marc R. Saidenberg, "Looking Beyond the CEO:
Executive Compensation at Banks," Federal Reserve Bank of New York Staff
Report , no. 68, (1999).

^63 John E. Core, Wayne R. Guay, and David F. Larcker, "Executive Equity
Compensation And Incentives: A Survey," FRBNY Policy Review, vol. 9, no. 1
( 2003).

^64 Joel F. Houston and Christopher James, "CEO Compensation and Bank
Risk: Is Compensation in Banking Structured to Promote Risk Taking?,"
Journal of Monetary Economics vol. 36, no. 2 (1995).

^65 John and Qian, "Incentive Features."

^66 Riegle-Neal authorized interstate mergers between affiliated banks
beginning June 1, 1997, generally without regard to state law unless both
states had opted out before that date.

Federal Banking Statutes Establish Limits on Compensation as Part of
Safety and Soundness

Federal banking statutes limit the compensation of financial institution
executives in certain circumstances.^68 For example, Section 2523 of the
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act
of 1990 provides FDIC with the authority to prohibit or limit, by
regulation or order, golden parachute payments.^69 In general, an
executive's employment contract may include a clause allowing significant
compensation if employment is terminated, and the benefits can include
severance pay, a bonus, or stock options. In addition, the Federal Deposit
Insurance Corporation Improvement Act of 1991 requires the federal banking
regulatory agencies, among other things, to issue standards prohibiting
excessive compensation, fees, and benefits as an unsafe and unsound
practice.^70 Furthermore, Prompt Corrective Action (PCA) authority
provides limitations on executive compensation at certain undercapitalized
institutions.^71

Officials of the federal banking regulatory agencies said that the
agencies had addressed compensation issues indirectly through broader
informal and formal enforcement actions that included other safety or
soundness issues. The officials noted that routine bank examinations
generally do not include a review of executive compensation levels.
However, they described other ways of addressing compensation issues:

           o OCC officials said that, within the enforcement context, OCC has
           issued formal orders addressing excessive compensation concerns.
           OCC officials said that they had ordered institutions to develop
           and implement appropriate policies to reduce excessive
           compensation to directors and officers and notified institutions,
           in some instances, that paying compensation or fees to some
           individuals was an unsafe and unsound practice and a breach of the
           individuals' fiduciary duties to the bank.

^67 R. Glenn Hubbard and Darius Palia, "Executive Pay and Performance:
Evidence from the U.S. Banking Industry," Working Paper Number 4704,
National Bureau of Economic Research, (1994).

^68 The Internal Revenue Code also establishes limitations on the
deductibility of executives' compensation at publicly held companies,
including banking organizations. 26 U.S.C. S 162(m). In addition, section
403 of the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745
(July 30, 2002)) requires insiders (defined as officers, directors, and 10
percent shareholders) to file with SEC reports of their trades before the
end of the second business day on which the trade occurred. This provision
applies to grants of stock options, a key form of executive compensation.
Before the enactment of Sarbanes-Oxley, disclosure of option grants was
not required until 45 days after the end of the fiscal year. SEC
rulemaking and a Financial Accounting Standards Board directive contain
certain disclosure and accounting requirements for executive compensation.

^69 Pub. L. No. 101-647, tit. XXV, S 2523, 104 Stat. 4859, 4868-4870 (Nov.
29, 1990), 12 U.S.C. S 1828(k).

^70 Pub. L. No. 102-242 S 132(a), 105 Stat. 2236, 2267-2270 (Dec. 19,
1991), 12 U.S.C. S 1831p-1(c). Among other things, Prompt Corrective
Action (PCA) requires regulators to prescribe safety and soundness
standards related to noncapital criteria. According to OCC officials, PCA
directives are not formal enforcement actions, and most include a
provision regarding restrictions on future salaries, fees, and dividends
to prevent a future drain on capital.

^71 12 U.S.C. S 1831o.

           o Similarly, FDIC officials said that they had addressed
           compensation through informal and formal actions that primarily
           focused on capitalization issues at undercapitalized institutions
           and placed restrictions on future salaries.
           o An OTS official reported that between January 1996 and October
           2006, the regulator issued at least 65 directives (e.g., cease and
           desist, supervisory agreements, and PCA directives) regarding the
           executive compensation regulations and laws. The official reported
           that the compilation of these directives noted no violations of
           the directives.
           o A Federal Reserve official said that the Federal Reserve had not
           taken any formal action pursuant to these statutes. Similarly, an
           NCUA official reported that the administration had not taken any
           formal action (e.g., cease and desist order or civil money
           penalty) against an institution based on a violation of laws and
           regulations regarding employees benefits, including executive
           compensation.

Enclosure VII

GAO Contact and Staff Acknowledgments

GAO Contact

David G. Wood, (202) 512-8678 or [email protected].

Acknowledgments

In addition to the contact named above, Phillip R. Herr, Acting Director;
Barbara I. Keller, Assistant Director; Emily R. Chalmers; Gary Chupka;
William W. Colvin; Tonita W. Gillich; Alexandra Martin-Arseneau; Linda
Rego; MaryLynn Sergent; and Anne O. Stevens made key contributions to this
report.

Related GAO Products

Tax Compliance: Challenges to Corporate Tax Enforcement and Options to
Improve Securities Basis Reporting, GAO-06-851T (Washington, D.C.: June
13, 2006).

Financial Audit: FDIC Funds' 2005 and 2004 Financial Statements,
GAO-06-146, (Washington, D.C.: March 2, 2006).

Export-Import Bank: Changes Would Improve the Reliability of Reporting on
Small Business Financing, GAO-06-351 (Washington, D.C.: March 3, 2006).

Financial Audit: Resolution Trust Corporation's 1995 and 1994 Financial
Statements, GAO/AIMD-96-123 (Washington, D.C.: July 2, 1996).

Overseas Investment: The Overseas Private Investment Corporation's
Investment Funds Program, [5]NSIAD-00-159BR (Washington, D.C.: May 9,
2000).

Banking Taxation: Implications of Proposed Revisions Governing
S-Corporations on Community Banks, GAO/GGD-00-159 (Washington, D.C.: June
23, 2000).

(250311)

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