Minority Banks: Regulators Need to Better Assess Effectiveness of
Support Efforts (04-OCT-06, GAO-07-6).				 
                                                                 
Minority banks can play an important role in serving the	 
financial needs of historically underserved communities and	 
growing populations of minorities. For this reason, the Financial
Institutions, Reform, Recovery, and Enforcement Act of 1989	 
(FIRREA) established goals that the Federal Deposit Insurance	 
Corporation (FDIC) and the Office of Thrift Supervision (OTS)	 
must work toward to preserve and promote such institutions	 
(support efforts). To evaluate their efforts, as well as those of
the Office of the Comptroller of the Currency (OCC) and the	 
Federal Reserve, GAO (1) reviewed the profitability of minority  
banks, (2) identified the regulators' support and assessment	 
efforts, and (3) obtained the views of minority banks on the	 
regulators' efforts. GAO reviewed financial data from FDIC,	 
interviewed regulators, and surveyed all minority banks.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-6						        
    ACCNO:   A61804						        
  TITLE:     Minority Banks: Regulators Need to Better Assess	      
Effectiveness of Support Efforts				 
     DATE:   10/04/2006 
  SUBJECT:   Bank examination					 
	     Bank management					 
	     Banking law					 
	     Banking regulation 				 
	     Federal regulations				 
	     Lending institutions				 
	     Minorities 					 
	     Performance measures				 
	     Policy evaluation					 
	     Program evaluation 				 
	     Regulatory agencies				 
	     Surveys						 
	     Technical assistance				 
	     Community and supportive services			 
	     programs						 
                                                                 

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GAO-07-6

     

     * GAO-07-6
          * Highlights
          * Table of Contents
               * Letter
               * Results in Brief
               * Background
               * Larger Minority Banks Showed Profitability Close to That of
                 Their Peers and Historical Benchmarks, but Many Small and
                 African-American Banks Have Been Less Profitable
                    * Small and African-American Banks' Profitability Was
                      Lower than That of Peers
                    * Higher Loan Loss Reserves, Operating Costs, and
                      Increased Competition May Help Explain Lower
                      Profitability of Certain Minority Banks
               * Regulators Adopted Differing Approaches to Supporting
                 Minority Banks, but Assessment Efforts Were Limited
                    * FDIC Has the Most Comprehensive Minority Banking
                      Support Efforts
                         * Policy Statements
                         * Staffing Structure
                         * Web Pages
                         * Minority Bank Events and Training
                         * Technical Assistance and Other Outreach Procedures
                         * Policies to Preserve the Minority Character of
                           Troubled Banks
                    * Treasury No Longer Regularly Consults with Regulators
                      on Minority Bank Issues but Does Consult on an
                      As-Needed Basis
                    * Regulators Do Not Assess Efforts through Comprehensive
                      Surveys or Outcome-Oriented Performance Measures
               * Survey of Minority Banks Identified Potential Limitations in
                 Regulators' Support Efforts and Other Regulatory Issues
                    * About a Third of Survey Respondents Viewed Regulators'
                      Minority Bank Support Efforts as Very Good or Good, and
                      Technical Assistance Usage Appeared Low
                    * Survey Respondents Expressed Concerns about the
                      Examination Process and a Provision of CRA Designed to
                      Assist Minority Banks
               * Conclusions
               * Recommendation for Executive Action
               * Agency Comments and Our Evaluation
          * Appendix I: Objectives, Scope, and Methodology
          * Appendix II: Minority Bank Eligibility Criteria
          * Appendix III: Selected Survey Results
          * Appendix IV: Comments from the Federal Deposit Insurance
            Corporation
          * Appendix V: Comments from the Office of Thrift Supervision
          * Appendix VI: Comments from the Comptroller of the Currency
          * Appendix VII: Comments from the Board of Governors of the Federal
            Reserve System
          * Appendix VIII: GAO Contact and Staff Acknowledgments
               * Acknowledgments
     * Ordering GAO Products

Report to Congressional Requesters

United States Government Accountability Office

GAO

October 2006

MINORITY BANKS

Regulators Need to Better Assess Effectiveness of Support Efforts

GAO-07-6

Contents

Letter 1

Results in Brief 4
Background 7
Larger Minority Banks Showed Profitability Close to That of Their Peers
and Historical Benchmarks, but Many Small and African-American Banks Have
Been Less Profitable 11
Regulators Adopted Differing Approaches to Supporting Minority Banks, but
Assessment Efforts Were Limited 20
Survey of Minority Banks Identified Potential Limitations in Regulators'
Support Efforts and Other Regulatory Issues 31
Conclusions 39
Recommendation for Executive Action 40
Agency Comments and Our Evaluation 41
Appendix I Objectives, Scope, and Methodology 45
Appendix II Minority Bank Eligibility Criteria 51
Appendix III Selected Survey Results 54
Appendix IV Comments from the Federal Deposit Insurance Corporation 59
Appendix V Comments from the Office of Thrift Supervision 61
Appendix VI Comments from the Comptroller of the Currency 63
Appendix VII Comments from the Board of Governors of the Federal Reserve
System 65
Appendix VIII GAO Contact and Staff Acknowledgments 68

Tables

Table 1: Number and Percentage of Minority Banks, by Type, 2005 7
Table 2: Percentage of Minority Banks and Total Banking Industry, by Asset
Size, 2005 8
Table 3: Federal Bank Regulator Bank Supervisory Responsibilities, by Bank
Charter 8
Table 4: Number of Minority Banks, by Regulator, 2005/2006 9

Figures

Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005 13
Figure 2: Average ROA of Small Minority Banks, 2005 14
Figure 3: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005 15
Figure 4: Average Loan Loss Reserves as a Percentage of Assets for
African-American and Peer Banks, 2005 17
Figure 5: Average Operating Expenses Relative to Earning Assets of Banks
with Assets Less than $100 million, 2005 18
Figure 6: Banking Regulators' Efforts to Support Minority Banks 21
Figure 7: Minority Banks' Ratings of Support Efforts, by Regulator 33
Figure 8: Usefulness of FDIC's Roundtables and Conferences, by Regulator
34
Figure 9: Minority Banks' Use of Technical Assistance, by Regulator 36
Figure 10: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions 38
Figure 11: Regulators' Eligibility Criteria for Minority Bank Efforts 52

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separately.

Abbreviations

CRA Community Reinvestment Act FDIC Federal Deposit Insurance Corporation
FIRREA Financial Institutions, Reform, Recovery, and Enforcement Act MBDP
Minority Bank Deposit Program MBR Minority Bankers Roundtable NBA National
Bankers Association OCC Office of the Comptroller of the Currency OTS
Office of Thrift Supervision ROA return on assets

United States Government Accountability Office

Washington, DC 20548

October 4, 2006

Congressional Requesters

Minority banks are a small community within the banking industry,
accounting for about 2 percent of all financial institutions and total
industry assets. 1 Despite their small numbers, minority banks can play an
important role in serving the financial needs of historically underserved
communities, such as African-Americans, and growing populations of
minorities, such as Hispanic-Americans and Asian-Americans. For this
reason, Section 308 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) established goals that federal regulators
must work toward to preserve and promote such institutions. 2 For example,
the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision (OTS), in consultation with the Department of the Treasury
(Treasury), are required to provide minority banks with technical
assistance and training and educational programs and to work toward
preserving the character of minority banks in cases involving mergers or
acquisitions of these institutions (we refer to these activities as
efforts to support minority banks in our report). 3

1For purposes of this report, the term "minority banks" refers to all
depository institutions-including thrifts-that are considered minority- or
women-owned by the Department of the Treasury (Treasury) and the federal
banking regulators-the Federal Deposit Insurance Corporation (FDIC), the
Board of Governors of the Federal Reserve System (Federal Reserve), the
Office of the Comptroller of the Currency (OCC), and the Office of Thrift
Supervision (OTS). As discussed in appendix II, FDIC and OTS are subject
to the "minority depository institution definition" set forth in Section
308 of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA). Treasury uses different criteria as set forth for
eligibility in its Minority Bank Deposit Program (MBDP). OCC and the
Federal Reserve employ Treasury's criteria for minority- and women-owned
banks (although the Federal Reserve uses both the FIRREA definition and
Treasury's for different purposes). Treasury and each of the banking
regulators compile lists of institutions that they consider to be eligible
to participate in their minority banking efforts. As Section 308 of FIRREA
is not aimed at preserving and promoting the minority ownership status of
credit unions, we did not include the National Credit Union Administration
in our review.

2FIRREA, Pub. L. No. 101-73, S: 308, 103 Stat. 183, 353 (1989).

3"Technical assistance" is typically defined as one-on-one assistance that
a regulator may provide to a bank. For example, a regulator may advise a
bank on compliance with a particular statute or regulation. Regulators may
also provide technical assistance to banks that is related to deficiencies
identified in safety and soundness or compliance examinations. In
contrast, education programs are typically open to all banks regulated by
a particular agency or to all banks located within a regulator's regional
office. For example, regulators may offer training for banks to review
compliance with laws and regulations.

4GAO, Minority-Owned Financial Institutions: Status of Federal Efforts to
Preserve Minority Ownership, GAO/GGD-94-1 (Washington, D.C.: Nov. 3,
1993).

5Federal banking regulators conduct periodic examinations of banks to
assess their financial condition and compliance with laws and regulations,
among other activities.

6Unless otherwise specified, we use the term "Federal Reserve" throughout
this report to refer to the Federal Reserve System. The Federal Reserve
System includes the Federal Reserve's Board of Governors and the 12
Federal Reserve Banks.

7Because information on minority banks was not available for both 2000 and
1995 from all federal banking regulators, for these periods we analyzed
only those minority banks that were still operating as minority
institutions in 2005. As a result, minority banks that failed or merged
with other institutions between 1995 and 2005 are not included in the
analysis for those years. In addition, we were unable to confirm that all
2005 minority banks were operating as minority banks in 1995 and 2000,
although the rate of change in ownership among minority banks is low.

8Peer groups include all institutions of a similar asset size, including
minority and nonminority institutions. Peer groups were defined by FDIC.

9Examples of assets include loans and securities.

10Outcome-oriented performance measures assess the results of a program
against its intended purposes.

11When asked for suggestions about how regulators could improve their
efforts to support minority banks, 21 percent of survey responses
mentioned this issue. In addition, several minority banks we spoke with in
interviews voiced similar opinions.

12Throughout the report, we refer to thrifts as banks.

13In our 1993 report, we reported that FDIC supervised 52 minority banks
and OTS supervised 41 minority banks as of March 1993. OCC officials told
us that their agency regulated 42 minority banks in 1993, and the Federal
Reserve reported that it regulated 16 in 1993.

14The Deposit Insurance Fund is the fund that provides deposit insurance
for banks and thrifts and is administered by FDIC.

15For most of FDIC's history, purchase and assumption agreements-during
which a healthy bank purchases some or all of the assets of a failed bank,
as well as some or all of its liabilities-have been the preferred
resolution method for troubled and failed banks. Under this method, FDIC
values and markets the institutions and closes the institutions. The other
two resolution methods FDIC has employed are (1) a deposit payoff, in
which FDIC is the appointed receiver and all depositors with insured funds
are paid the full amount of their deposits (depositors with uninsured
funds and other general creditors of the failed bank are given
receivership, entitling them to a share of the net proceeds from the sale
of the bank's assets); and (2) an open bank assistance agreement under
which FDIC provides financial assistance to an operating insured bank that
is in danger of closing by making loans to the bank, purchasing assets, or
placing deposits in the troubled bank.

16Some minority banks were established relatively recently (between 2002
and 2006). Although newer banks tend to be less profitable than older
banks, we found that, in 2005, generally both older and newer small banks
had significantly lower ROAs than their peers.

17The banking industry as a whole has an asset size distribution similar
to that of minority banks (table 2).

18A weighted average is a variation on a simple average. Weighted averages
take into account banks' asset size instead of counting each bank as an
equal unit.

19Donna Tanoue, "Remarks By Donna Tanoue, Chairman Federal Deposit
Insurance Corporation before The National Bankers Association, Chicago,
Illinois October 4, 2000," FDIC. Available at
http://www.fdic.gov/news/news/speeches/archives/2000/sp04Oct00.html.

20The findings from our analysis of ROAs were consistent with our analysis
of another measure of profitability-return on equity (ROE). ROE represents
the bank's net income divided by shareholders' equity. As with ROA
comparisons, small minority banks had on average lower ROEs than their
peers (3.83 versus 8.09). And consistent with our ROA analysis, among
small minority banks, African-American (ROE of 1.54), Asian-American
(0.72), and Hispanic-American banks (6.11) had lower ROEs than Native
American (8.69) and women-owned institutions (8.39). Further,
African-American banks with assets of between $100 million and $300
million had ROEs that were significantly lower, on average (3.45), than
those of their peers (11.03).

21In 2005, African-American banks did not occupy all asset size
categories. The largest African-American banks had less than $1 billion in
assets, and these banks were not found in the largest size categories: $1
billion to $10 billion and greater than $10 billion.

22While our review offers possible explanations for lower levels of
profitability among some minority banks, it does not attempt to fully
explain the differences among various minority groups or sizes of minority
banks.

23The term "loan loss reserves" refers to the allowance each bank must
maintain to absorb estimated credit losses associated with its loan and
lease portfolio.

24Zahid Iqbal, Kizhanathan V. Ramaswamy, and Aigbe Akhigbe, "The Output
Efficiency of Minority-Owned Banks in the United States," International
Review of Economics and Finance, vol. 8 (1999) p. 113; Iftekhar Hasan and
William C. Hunter, "Management Efficiency in Minority- and Women-owned
banks," Economic Perspectives, vol. 20 (1996). Edward C. Lawrence, "The
Viability of Minority-Owned Banks," The Quarterly Review of Economics and
Finance, vol. 37, no. 1 (1997).

25Section 807 of the Community Reinvestment Act of 1977 requires the
federal banking regulators in connection with their examination of each
institution they supervise to assess the institution's record of meeting
the credit needs of the entire community it serves, including moderate-
and low-income neighborhoods. Pub. L. No. 95-128, S: 807, 91 Stat. 1147
(codified as amended at 12 U.S.C. S: 2906).

26Section 13(c) of the Federal Deposit Insurance Act [12 U.S.C. S:
1823(c)], as amended in 1991, prohibits FDIC from engaging in the assisted
resolution of any failed depository institution unless FDIC determines
that the total amount of expenditures and obligations it will incur is the
least costly alternative.

2712 U.S.C. S: 1462a(b)(3) and 12 U.S.C. S: 1.

28GAO, Managing for Results: Enhancing Agency Use Performance Information
for Management Decision Making, GAO-05-927 (Washington, D.C.: Sept. 9,
2005); and GAO, The Results Act: An Evaluator's Guide to Assessing Agency
Annual Performance Plan, GAO/GGD-10.1.20 (Washington, D.C.: April 1998).

29GAO, Performance Measurement and Evaluation: Definition and
Relationship, GAO-05-739SP (Washington, D.C.: May 2005).

30Government Performance and Results Act of 1993 S: 7, 39 U.S.C. 2801(1).

31This project was to develop a museum exhibition that would trace the
history of minority banks in the United States. However, after conducting
additional research on this proposal, FDIC is currently not pursuing the
project, in part because of limited interest from some minority banks.

32We were requested to report on all the banking regulators' minority bank
efforts and to obtain minority banks' views on these efforts. However, the
banking regulators have different definitions for banks they consider to
be minority and eligible to participate in their minority bank efforts
(see app. II). In our population of minority banks we included any bank
considered by at least one regulator to be eligible to participate in its
efforts. In some cases, we surveyed minority banks that were not
considered by their primary regulator to be minority institutions but were
considered to have minority status or be eligible for participation in
another regulator's efforts. Nine of the 80 FDIC minority banks responding
were such cases, as were 4 of the 18 Federal Reserve minority banks, 1 of
the 18 OTS banks, and 2 of the 33 OCC banks. We reviewed these banks'
responses to key survey questions in total and by each regulator and found
that they did not have a material negative or positive impact on the
survey results, and would generally have changed results by 1 or 2
percentage points. For example, if these banks were removed from the
survey results, the percentage of minority banks who responded that their
regulator's overall efforts to support minority banks were very good or
good would be 1 percentage point higher. In a few cases, the inclusion of
banks not viewed by their regulators as minority institutions changed the
survey results by regulator by 4 or 5 percentage points in a manner
favorable to the regulator. However, the inclusion of such banks did not
have a material effect on the overall results. For example, if banks not
viewed by FDIC as minority banks were removed from the survey results, the
percentage of institutions rating the agencies' overall support efforts as
very good or good would increase from 45 percent to 49 percent.

33See appendix III for the survey responses in this report discussed as
the number of minority bank responses.

34The survey did find that minority banks regulated by FDIC and OTS were
more aware of the agencies' technical assistance outreach efforts than
institutions regulated by OCC and the Federal Reserve. This finding is
consistent with the fact that FDIC and OTS have formalized technical
assistance outreach efforts, while the other regulators do not.

35The body of law commonly referred to as the Bank Secrecy Act (BSA) is
codified at 31 U.S.C. S:S: 5311-5322 and 12 U.S.C. S:S: 1829b and
1951-1959. The purpose of BSA is to prevent financial institutions from
being used as intermediaries for the transfer or deposit of money derived
from criminal activity and to provide a paper trail for law enforcement
agencies in their investigations of possible money laundering. The federal
banking regulators review institutions for compliance with the BSA as part
of their safety and soundness examinations or in targeted examinations
focused on BSA compliance.

1For example, GAO, Industrial Loan Corporations: Recent Asset Growth and
Commercial Interest Highlight Differences in Regulatory Authority,
GAO-05-621 (Washington, D.C.: Sept. 2005), 87.

2Iqbal, Ramaswamy, Akhigbe, "The Output Efficiency of Minority-Owned Banks
in the United States," 113; Hasan and Hunter, "Management Efficiency in
Minority- and Women-owned banks"; Lawrence, "The Viability of
Minority-Owned Banks."

3GAO-05-739SP, GAO-05-927, and GAO/GGD-10.1.20.

In 1993, we reported on efforts by Treasury, FDIC, and OTS to support
minority banks in accordance with Section 308 of FIRREA. 4 At that time,
we found that these agencies had taken steps to respond to Section 308,
but minority banks we interviewed gave FDIC and OTS mixed reviews on their
efforts. In particular, minority banks were concerned that the regulators
did not provide adequate technical assistance. Further, minority banks
expressed concerns about related regulatory issues, including their view
that agency safety and soundness examiners did not fully understand the
unique challenges their institutions faced. 5 We recommended that FDIC and
OTS periodically survey minority banks to assess the effectiveness of
their efforts to support such institutions.

You requested that we follow up on our 1993 report and review all of the
federal banking regulators' efforts to support minority banks, including
the activities of the Office of the Comptroller of the Currency (OCC) and
the Board of Governors of the Federal Reserve System (Federal Reserve),
which are not subject to Section 308 of FIRREA. 6 Accordingly, our
reporting objectives were to (1) review the profitability of minority
banks over time, (2) identify the federal banking regulators' efforts to
support minority banks and determine whether the regulators were
evaluating the effectiveness of these efforts, and (3) obtain the views of
minority banks on the federal regulators' minority banking support efforts
and related regulatory issues.

To address the first objective, we obtained and analyzed financial data
for minority banks from FDIC for 2005, 2000, and 1995. 7 We also reviewed
background literature and conducted interviews with minority banks to
discuss the business environment in which these banks operate. For the
second objective, we interviewed officials from the Department of the
Treasury, FDIC, Federal Reserve, OCC, and OTS and reviewed regulators'
documentation addressing their efforts to support minority banks and
assess the effectiveness of these efforts. We also compared the
regulators' efforts to our standards for program assessment and
performance measures and those established in the Government Performance
and Results Act. To address the third objective, we conducted a Web-based
survey of all institutions identified by the banking regulators as
minority institutions. The survey, which was conducted from March through
April 2006, asked about the banks' awareness and use of the regulators'
minority bank support efforts and also asked the banks to rate these
efforts. We received 149 survey responses out of a total population of 195
minority banks, for a response rate of 76 percent. We also interviewed
relevant trade associations and a sample of 19 minority banks throughout
the United States that we selected based on type of minority ownership and
primary regulator. Appendix I explains our scope and methodology in
greater detail. Appendix II describes each regulator's definition of
minority-owned and women-owned banks for purposes of eligibility for
participation in the regulator's particular minority banking support
efforts. Appendix III provides the number of minority banks that responded
to each survey question discussed in the report and thereby supplements
the use of percentages to summarize these results. All survey questions
and the frequencies of responses to each question are presented in a
supplemental product that can be found on our Web site at
www.gao.gov/cgi-bin/getrpt?GAO-07-7SP.

We conducted our work in Washington, D.C., and New York from December 2005
to September 2006 in accordance with generally accepted government
auditing standards.

Results in Brief

Our analysis of FDIC data showed that while the profitability of most
minority banks with assets greater than $100 million nearly equaled the
profitability of all similarly sized banks (peers), the profitability of
smaller minority banks and African-American banks of all sizes did not. 8
Profitability is commonly measured by return on assets (ROA), or the ratio
of profits to assets, and ROAs are typically compared across peer groups
to assess performance. 9 Many small minority banks (those with less than
$100 million in assets) had ROAs that were substantially lower than those
of their peer groups in 2005 as well as in 1995 and 2000. Moreover,
African-American banks of all sizes had ROAs that were significantly below
those of their peers in 2005 as well as in 1995 and 2000 (African-American
banks of all sizes and other small minority banks account for about half
of all minority banks). Our analysis of FDIC data identified some possible
explanations for the relatively low profitability of some small minority
banks and African-American banks. In particular, some of these banks
maintain relatively high reserves for potential loan losses or may have
higher operating expenses, such as administrative expenses or salaries,
than other banks. The results of other studies we reviewed were consistent
with these findings, and minority banks that we spoke with offered
additional explanations, such as the effects of increased competition from
larger banks. Nevertheless, the majority of officials from banks across
all minority groups were positive about their banks' financial outlook,
and many saw their minority status as an advantage in serving their
communities (for example, in providing services in the language
predominantly used by the minority community).

The bank regulators have adopted differing approaches to supporting
minority banks, and no agency assessed the results of its efforts through
regular and comprehensive surveys of minority banks or outcome-oriented
performance measures. 10 FDIC-which supervises more than half of all
minority banks-currently has the most comprehensive program to support
minority banks and leads an interagency group that coordinates such
efforts. Among other things, FDIC has designated officials in the agency's
headquarters and regional offices who are responsible for minority bank
efforts, holds periodic conferences for minority banks, and has
established formal policies for annual outreach to the banks it regulates
to make them aware of available technical assistance. OTS also has staff
who are responsible for the agency's efforts to support minority banks,
has developed outreach procedures, and focuses its efforts on providing
technical assistance. OCC and the Federal Reserve, while not required to
do so by Section 308 of FIRREA, have undertaken some efforts to support
minority banks, such as holding occasional conferences for Native American
banks, and are planning additional efforts. FDIC has proactively sought to
assess the effectiveness of its support efforts through, for example,
surveying minority banks. However, these surveys have not addressed key
activities, such as the provision of technical assistance, and the agency
has not established outcome-oriented performance measures for its support
efforts. None of the other regulators comprehensively surveys minority
banks on their support efforts or has established outcome-oriented
performance measures. Consequently, the regulators are not well positioned
to assess the results of their minority bank support efforts or identify
potential areas for improvement.

In our survey, minority banks identified potential limitations in the
regulators' support efforts and related regulatory issues that would
likely be of significance to agency managers and may warrant follow-up
analysis. Specifically, our survey showed that (1) only about one-third of
minority banks view the regulators' support efforts as very good or good;
(2) minority banks' usage of the agencies' technical assistance appears to
be low; and (3) some minority banks have concerns about related regulatory
activities, such as examiners' knowledge of issues that affect their
institutions. About 36 percent of survey respondents rated their
regulators' efforts for minority banks as very good or good, while 26
percent rated the efforts as fair, 13 percent as poor or very poor, and 25
percent responded "don't know." Banks regulated by FDIC, which had the
most extensive program and outreach efforts, were more positive about
their agency's efforts than banks regulated by other agencies. However,
only about half of the FDIC-regulated banks and about a quarter of the
banks regulated by other agencies rated their agency's efforts as very
good or good. While FDIC and OTS both emphasize the provision of technical
assistance as part of their minority bank efforts, our survey showed that
less than 30 percent of institutions regulated by these agencies took
advantage of such assistance within the last 3 years. The majority of
those banks that used technical assistance, however, found it to be
useful. Minority banks regulated by OCC and the Federal Reserve reported
similarly low usage of the agencies' technical assistance services. While
it is not clear from our survey why relatively few minority banks use the
agencies' technical assistance services and regulators cannot compel banks
to use such assistance, the potential exists for many such institutions,
particularly small and African-American banks, to benefit from assistance
that might help improve their operations and financial performance. As
with our findings in our 1993 report, some minority bank officials said
that examiners do not always understand the challenges that the banks may
face in providing services in their communities or operating environments.
11 Although the bank officials said they did not expect special treatment
in the examination process, they suggested that examiners needed to
undergo more training to improve their understanding of minority banks and
the customer base they serve.

This report makes a recommendation designed to help ensure that the bank
regulators are better able to understand the reasons behind potential
limitations in their support efforts and related activities-particularly
the limited use of technical assistance and concerns about examiners'
knowledge of minority bank issues-within the minority bank community and
to take corrective actions as necessary. Specifically, the report
recommends that the federal banking regulators review the effectiveness of
their efforts to support minority banks and, in so doing, consider
employing the following methods: (1) regularly surveying the minority
banks under their supervision on all efforts and regulatory areas
affecting these institutions and/or (2) establishing outcome-oriented
performance measures to evaluate the extent to which their efforts are
achieving their objectives. Regulators may also wish to focus their
efforts on obtaining feedback from small minority banks and
African-American banks in order to identify and address, if possible, any
issues that may be causing the relatively low profitability of some of
these institutions.

We provided a draft of this report to FDIC, OTS, OCC, and the Federal
Reserve for comment, and they provided written comments that are reprinted
in appendixes IV-VII. In their responses, the agencies further elaborated
on their existing minority bank efforts and described planned initiatives.
Further, FDIC, OTS, and OCC agreed to implement our recommendation, while
the Federal Reserve said it would consider implementing it. The agencies
also provided technical comments, which were incorporated as appropriate.
We also requested comments from the Department of the Treasury on the
section of the draft report relevant to its activities under Section 308
of FIRREA. Treasury provided us with technical comments, which we have
incorporated as appropriate.

Background

Many minority banks are located in urban areas and seek to serve
distressed communities and populations that have traditionally been
undeserved by financial institutions. For example, after the Civil War
banks were established to provide financial services to African-Americans.
More recently, Asian-American and Hispanic-American banks have been
established to serve the rapidly growing Asian and Hispanic communities in
the United States. In our review of regulators' lists of minority banks,
we identified a total minority bank population of 195 for 2005 (table 1).

Table 1: Number and Percentage of Minority Banks, by Type, 2005

Type of minority bank Number of banks Percentage of all minority banks 
Asian-Americana                    73                               37 
African-American                   46                               24 
Hispanic-American                  38                               19 
Native American                    20                               10 
Women-owned                        13                                7 
Otherb                              5                                3 
Total                             195                              100 

Source: GAO analysis of Treasury and federal banking regulators' data.

Note: We identified the total minority bank population by obtaining and
reviewing the most current lists (available at the time the population was
compiled) from the federal banking regulators and Treasury. We reviewed
FDIC and the Federal Reserve's publicly available lists, which were
current as of September 30, 2005. We also reviewed OCC's list from
December 31, 2005, Treasury's most recent list from 2004, and OTS's from
January 2006.

aAsian-American includes individuals of Pacific Island descent.

bThe "other" category includes banks considered to have minority status
that are not covered by the listed minority categories. "Other" also
includes banks that are owned or managed by more than one minority group
in accordance with a banking regulator's definition.

Table 2 shows that the distribution of minority banks by size is similar
to the distribution of all banks by size. More than 40 percent of all
minority banks had assets of less than $100 million.

Table 2: Percentage of Minority Banks and Total Banking Industry, by Asset
Size, 2005

Asset size           Percentage of minority    Percentage of total banking 
                                         banks                       industry 
< $100 million                           42                             44 
$100 million to $300                     32                             33 
million                                     
$300 million to $500                      9                              9 
million                                     
$500 million to $1                        7                              7 
billion                                     
$1 billion to $10                         7                              6 
billion                                     
> $10 billion                             3                              1 
Total                                   100                            100 

Source: GAO analysis of FDIC data.

Each federally insured depository institution, including each minority
bank, has a primary federal regulator: FDIC, OTS, OCC, or the Federal
Reserve. The primary regulator for each bank is determined by the
institution's charter (table 3). 12

Table 3: Federal Bank Regulator Bank Supervisory Responsibilities, by Bank
Charter

Regulator       Type of bank                                               
FDIC            State-chartered banks that are not members of the Federal  
                   Reserve System                                             
OTS             Federally chartered and state-chartered savings            
                   associations and registered savings and loan holding       
                   companies                                                  
OCC             Nationally chartered banks and federal branches of foreign 
                   banks                                                      
Federal Reserve State-chartered banks in the Federal Reserve System, bank  
                   holding companies, and international banking facilities    
                   within the United States                                   

Source: FDIC, OTS, OCC, and the Federal Reserve.

As shown in table 4, FDIC serves as the federal regulator for over half of
minority banks-109 out of 195 banks, or 56 percent-and the Federal Reserve
regulates the fewest. 13

Table 4: Number of Minority Banks, by Regulator, 2005/2006

Regulator       Number of minority banks Percentage 
FDIC                                 109         56 
OCC                                   43         22 
OTS                                   22         11 
Federal Reserve                       21         11 
Total                                195        100 

Source: GAO analysis of Treasury and the federal banking regulators' data.

Note: Treasury and the banking regulators have different criteria for the
banks they consider to be eligible to participate in their minority bank
efforts (see app. II). In accordance with our request, in our population
of minority banks we included any bank considered by at least one
regulator to be eligible to participate in its efforts. There are cases
where minority banks not considered by their primary regulator to be
minority institutions were considered to be eligible for participation in
another regulator's efforts. Ten minority banks regulated by FDIC were
such cases, as were 4 Federal Reserve banks, 1 OTS bank, and 3 OCC banks.

The primary responsibilities of federal banking regulators include helping
to ensure the safe and sound practices and operations of the institutions
they oversee, the stability of financial markets, and compliance with laws
and regulations. To achieve these goals, among other activities, the
regulators conduct on-site examinations, issue regulations, conduct
investigations, and take enforcement actions. Regulators may also close
banks that are deemed to be insolvent and pose risks to the Deposit
Insurance Fund. 14 FDIC is responsible for ensuring that deposits in
failed banks are protected up to established federal deposit insurance
limits. 15

Banking regulators primarily focus on ensuring the safety and soundness of
banks, but laws and regulatory policies can identify additional goals and
objectives. Recognizing the importance of minority banks, under Section
308 of FIRREA, Congress outlined five broad goals that FDIC and OTS, in
consultation with Treasury, are to work toward to preserve and promote
minority banks. These goals are

           o  preserving the present number of minority banks;

           o  preserving their minority character in cases involving mergers
           or acquisitions of minority banks;

           o  providing technical assistance to prevent the insolvency of
           institutions that are not currently insolvent;

           o  promoting and encouraging the creation of new minority banks;
           and

           o  providing for training, technical assistance, and educational
           programs.

           Technical assistance is typically defined as one-on-one assistance
           that a regulator may provide to a bank in response to a request.
           For example, a regulator may advise a bank on compliance with a
           particular statute or regulation. Regulators may also provide
           technical assistance to banks that is related to deficiencies
           identified in safety and soundness or compliance examinations. In
           contrast, educational programs are typically open to all banks
           regulated by a particular agency or to all banks located within a
           regulator's regional office. For example, regulators may offer
           training for banks to review compliance with laws and regulations.

Larger Minority Banks Showed Profitability Close to That of Their Peers
and Historical Benchmarks, but Many Small and African-American Banks Have
Been Less Profitable

Most minority banks with assets exceeding $100 million were nearly as
profitable-measured by ROA-as their peers in 2005 as well as in earlier
years, or had levels of profitability that have historically been
considered adequate, according to our analysis of FDIC data. However,
small minority and African-American banks of all sizes (which together
account for about half of all minority institutions) have been
significantly less profitable than their industry peers. Our analysis and
other research has suggested some possible reasons for lower profitability
among some small minority banks and African-American banks, such as higher
reserves for potential loan losses and higher operating expenses. The
results of other studies we reviewed were consistent with these findings,
and minority banks that we spoke with offered additional explanations,
such as the effects of increased competition from larger banks. However,
overall officials from banks across all minority groups were positive
about the financial outlook of their institutions. Many found their
minority status to be an advantage in serving their communities-for
example, in communicating with customers in their primary languages.

Small and African-American Banks' Profitability Was Lower than That of
Peers

As shown in figure 1, most minority banks with assets exceeding $100
million had ROAs in 2005 that were close to those of their peer groups,
while many smaller banks had ROAs that were significantly lower than that
of their peers. 16 Minority banks with more than $100 million in assets
accounted for 58 percent of all minority banks, while those with less than
$100 million accounted for 42 percent. 17 Each size category of minority
banks with more than $100 million in assets had a weighted average ROA
that was slightly lower than that of its peers, but in each case their
ROAs exceeded 1 percent. 18 By historical banking industry standards, an
ROA of 1 percent or more has generally been considered an adequate level
of profitability. We found that of these larger minority banks,
Hispanic-American, Asian-American, Native American, and women-owned banks
were close to, and in some cases exceeded, the profitability of their
peers in 2005.

Overall, small minority banks (those with assets of less than $100
million) had an average ROA of 0.4 percent, and their peers had an average
ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000 also
indicated some similar patterns, with minority banks with assets greater
than $100 million showing levels of profitability that were generally
close to those of their peers, or ROAs of about 1 percent, while minority
banks with assets of less than $100 million showed greater differences
with their peers. Further, in 2000 the Chairman of FDIC discussed the
agency's finding that many small minority banks lagged in profitability.
According to FDIC's analysis, nearly 70 percent of small minority banks
reported an ROA in 1999 of under 1 percent, and nearly 40 percent reported
an ROA of less than half the industry average. 19

Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005

Among small minority banks, African-American, Asian-American, and
Hispanic-American banks had ROAs that were significantly lower than those
of their peers, while the ROAs of small Native American and women-owned
banks were closer to those of their peers (fig. 2). For example, the ROA
for small Asian-American banks in 2005 was 0.10 percent and
Hispanic-American banks' ROA was 0.65 percent, compared with their peers'
ROA of 1 percent. Our analysis of FDIC data for 1995 and 2000 showed
similar results, with small African-American, Asian-American, and
Hispanic-American banks in particular having significantly lower ROAs than
their peers. 20

Figure 2: Average ROA of Small Minority Banks, 2005

The profitability of African-American banks has generally been below that
of their peers in all size categories (fig. 3). 21 African-American banks
with less than $100 million in assets-which constitute 61 percent of all
African-American banks-had an average ROA of 0.16 percent, while their
peers averaged 1.0 percent. Similarly, African-American banks with assets
of between $100 million and $300 million-which constituted 26 percent of
all African-American banks-had ROAs that were 75 percent lower than those
of their peers. While profitability improved among larger categories, the
profitability of African-American banks with assets of $300 million or
more was lower than that of their peers. Our analysis of FDIC data for
2000 and 1995 also found that African-American banks of all sizes had
lower ROAs than their peers. For example, in 2000 African-American banks
with assets of between $100 million and $300 million had an average ROA
that was about half of their peers' average of 1.2 percent.

Figure 3: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005

Higher Loan Loss Reserves, Operating Costs, and Increased Competition May
Help Explain Lower Profitability of Certain Minority Banks

Our analysis of 2005 FDIC data suggests some possible reasons for the
differences in profitability between some minority banks and their peers.
22 For example, our analysis of 2005 FDIC data showed that
African-American banks with assets of less than $300 million-which
constitute 87 percent of all African-American banks-had significantly
higher loan loss reserves as a percentage of their total assets than the
average for their peers (fig. 4). 23 Although having higher loan loss
reserves may be necessary for the safe and sound operation of any
particular bank, because loan loss reserves are counted as expenses,
higher reserves lower bank profits. Most Asian-American,
Hispanic-American, Native American, and women-owned banks had loan loss
reserves that were closer to the average for their peer group in 2005.

Figure 4: Average Loan Loss Reserves as a Percentage of Assets for
African-American and Peer Banks, 2005

We also found some evidence that higher operating expenses may affect the
profitability of some minority banks. Operating expenses-expenditures for
items such as administrative expenses and salaries-are typically compared
to an institution's total earning assets, such as loans and investments,
to indicate the proportion of earning assets banks spend on operating
expenses. As figure 5 indicates, many minority banks with less than $100
million in assets had higher operating expenses than their peers in 2005.
Specifically, the average ratio of minority banks' operating expenses to
earning assets was 4.88 percent, compared with an average 3.86 percent for
the peer group, or a difference of 21 percent.

Figure 5: Average Operating Expenses Relative to Earning Assets of Banks
with Assets Less than $100 million, 2005

Small African-American and Asian-American banks had higher operating
expenses than their peers (41 and 20 percent higher, respectively), while
operating expenses for small Hispanic-American banks were closer to their
peers (7 percent higher). Data on the operating expenses of small
women-owned banks were lower than their peers, while Native American banks
had higher operating expenses, although, as we have seen, both Native
American and women-owed banks were the most profitable of small minority
banks. Because larger African-American banks were relatively less
profitable than their peers, we also reviewed FDIC data on their operating
expenses in 2005. The FDIC data indicate that African-American banks with
assets of between $100 million and $500 million had operating expense
ratios that exceeded those of their respective peer groups by 20 percent
or more. Other studies corroborated our findings that some minority banks
operate in more challenging markets and may face higher operating costs.
24

Officials from several minority banks we contacted also described aspects
of their operating environments and business practices, including a focus
on customer service that could result in higher operating costs. In
particular, the officials cited the costs associated with providing
banking services in low-income urban areas or in communities with high
immigrant populations. Bank officials also told us that they focus on
fostering strong customer relationships, sometimes providing financial
literacy services. Consequently, these banks spend more time and resources
on their customers per transaction than other banks as part of their
mission. Other minority bank officials said that their customers made
relatively small deposits and preferred to do business in person at bank
branch locations rather than through potentially lower-cost alternatives,
such as over the phone or the Internet.

Along with these factors, minority bank officials we contacted cited other
factors that could limit their profitability. First, many minority banks
indicated competition from larger banks, credit unions, and nonbanks as
their institution's greatest challenge. In particular, minority bank
officials said that larger banks, in response to Community Reinvestment
Act (CRA) incentives, were increasingly posing competitive challenges
among the banks' traditional customer base. 25 The bank officials said
that larger banks could offer loans and other financial products at more
competitive prices because these banks could raise funds at lower rates
and had advantageous operational efficiencies. Second, some
African-American, Asian-American, and Hispanic-American banks cited
attracting and retaining quality staff as a challenge to profitability.
Officials from one Hispanic-American bank said that the difficulty of
attracting qualified new staff restricted the bank's growth. An
Asian-American banker said that many Asian-American banks tended to focus
on the Asian-American market, potentially limiting the pool of qualified
applicants.

Despite these challenges, officials from banks across minority groups were
optimistic about the financial outlook for their institutions. When asked
in our survey to rate their financial outlook compared to those of the
past 3 to 5 years, 65 percent said it would be much or slightly better; 21
percent thought it would be about the same, and 11 percent thought it
would be slightly or much worse, while 3 percent did not know. Officials
from minority banks said that their institutions had advantages in serving
minority communities. For example, officials from an Asian-American bank
said that the staff's ability to communicate in customers' primary
language provided a competitive advantage.

Regulators Adopted Differing Approaches to Supporting Minority Banks, but
Assessment Efforts Were Limited

FDIC has established the most comprehensive efforts among the bank
regulators to support minority banks and also leads interagency efforts to
coordinate agencies' activities. OTS also has developed several specific
initiatives to support minority banks. While not required to do so by
Section 308 of FIRREA, OCC and the Federal Reserve have taken some steps
to support minority banks, such as holding occasional conferences for
Native American banks, and are planning additional efforts. Treasury,
which FIRREA stipulates is to consult with FDIC and OTS on preserving
minority banks, no longer does so on a routine basis, but Treasury
officials told us that the agency does confer with the banking agencies on
an as-needed basis. Although recently FDIC has proactively sought to
assess the effectiveness of its efforts to support minority banks, none of
the regulators routinely survey institutions they regulate to obtain
comprehensive performance information on their minority bank efforts, nor
have they established outcome-oriented performance measures to gauge
results in relation to pre-established targets. As a result, the
regulators are not well positioned to assess the results of their efforts
to support minority banks or identify potential areas for improvement.

FDIC Has the Most Comprehensive Minority Banking Support Efforts

Of the four banking regulators, FDIC-which supervises 109 of 195 minority
banks-has developed the most extensive efforts to support such
institutions (fig. 6). FDIC also has taken the lead in coordinating
regulators' efforts in support of minority banks, including leading a
group of all the banking regulators that meets semiannually to discuss
individual agency initiatives, training and outreach events, and each
agency's list of minority banks. FDIC and OTS have established national
and regional coordinators to implement their policies to support minority
banks and provide routine technical and other outreach procedures for the
institutions that they regulate. OCC officials we contacted said that they
believed that minority banks could play an important role in providing
financial services to minorities and other groups, and Federal Reserve
officials told us that they adhered to the spirit of Section 308 of
FIRREA. While neither agency has developed support efforts designed
specifically for all the minority institutions that they regulate, both
agencies provide technical assistance and educational services to minority
banks upon request, as they do for all of their supervised banks, and have
undertaken efforts in support of some types of minority banks. Both
agencies also told us that they were planning additional efforts to
support minority institutions.

Figure 6: Banking Regulators' Efforts to Support Minority Banks

aFDIC holds conferences for all minority banks on a regular basis. OTS,
OCC, and the Federal Reserve have hosted occasional events for some groups
of minority banks.

The following briefly describes the regulators' minority bank support
programs, as listed in figure 6.

Policy Statements

FDIC, OTS, and OCC all have policy statements that outline the agencies'
efforts with respect to minority banks. The policy statements discuss how
the regulators identify minority banks, participate in minority bank
events, provide technical assistance, and work toward preserving the
character of minority banks during the resolution process. OCC officials
told us that they developed their policy statement in 2001 after an
interagency meeting of the federal banking regulators on minority bank
issues. Both FDIC and OTS issued policy statements in 2002.

Staffing Structure

FDIC has a national coordinator in Washington, D.C., and coordinators in
each regional office from its Division of Supervision and Consumer
Protection to implement the agency's minority bank program. Among other
responsibilities, the national coordinator regularly contacts minority
bank trade associations about participation in events and other issues,
coordinates with other agencies, maintains FDIC's list of all insured
banks that are considered to be minority under the agency's definition,
and compiles quarterly reports for the FDIC chairman based on regional
coordinators' reports on their minority bank activities. Similarly, OTS
has a national coordinator in its headquarters and supervisory and
community affairs staff in each region who maintain contact with the
minority banks that OTS regulates. The national coordinator participates
in the interagency coordination meetings with the other banking regulators
and works with the regional community affairs staff to compile the
agency's annual report to Congress on minority bank issues. OCC and the
Federal Reserve do not have similar structures in place. However, OCC does
have an agency ombudsman who maintains contact with minority banks and a
senior adviser for external outreach and minority affairs who participates
in the interagency coordination meetings. Officials from the Federal
Reserve-which directly supervises the fewest number of minority banks-told
us that Federal Reserve staff at the district level maintain frequent
contact with minority banks under their purview and Federal Reserve staff
participate in interagency coordination meetings.

Web Pages

FDIC has a public Web page dedicated specifically to minority banking
issues that includes FDIC's list of all minority banks, staff contacts,
links to trade associations and other relevant sites, and a link to
provide feedback on FDIC's minority banking efforts. FDIC officials told
us that the feedback link has been on their Web page since 2002 but that
the agency rarely receives feedback from minority banks. FDIC is planning
to improve its Web page by adding a link to FDIC's home page and
additional resources, including research highlighting issues relevant to
minority banks.

OCC also has a Web page that contains some information on minority bank
issues. The Web site containing this page, BankNet, is available to
registered national banks. OCC's Web site is not as extensive as FDIC's
but does contain a list of minority banks that OCC regulates, links to
OCC's minority bank policy statement, and a comparative analysis tool to
compare the financial performance of minority banks with that of their
peers.

Minority Bank Events and Training

FDIC has taken the lead role in sponsoring, hosting, and coordinating with
the other regulators events in support of minority banks. These events
have included

           o  A national conference in 2001, which was attended by about 70
           minority banks supervised by different banking regulators and in
           which all four banking regulators participated. Participants
           discussed challenges, shared best practices, and evaluated
           possible actions regulators could take to preserve minority banks.

           o  In August 2006, FDIC sponsored a national conference for
           minority banks in which representatives from OTS, OCC, and the
           Federal Reserve participated.

           o  Regional forums and conferences, which were organized after
           2002 to follow up on the national conference and implement
           initiatives set forth in FDIC's 2002 policy statement. FDIC
           officials told us that these events are held annually by each of
           their regional offices. The content of these events has varied
           among regions, but has included issues relating to safety and
           soundness and compliance examinations, community affairs, deposit
           insurance, and FDIC's minority banking program. Representatives
           from other banking agencies have participated in these events.

           o  The Minority Bankers Roundtable (MBR) series, which FDIC
           officials told us was designed to provide insight into the
           regulatory relationship between minority banks and FDIC and
           explore opportunities for partnerships between FDIC and these
           banks. In 2005, FDIC held six roundtables around the country for
           minority banks supervised by all of the regulators.

           Other regulators have also held events in support of minority
           banks. For example:

           o  In May 2006, the Director, Deputy Director, and the Northeast
           Regional Director of OTS held a meeting in New York in which all
           of the OTS-regulated minority banks in the region participated.
           The issues discussed included ways to strengthen community
           development and investment activities and partnerships with
           community-based organizations, and other issues of concern.

           o  In 2002, OCC held a forum with the North American Native
           Bankers Associations and a Native American bank and have created
           publications on banking in Native American communities. In
           February 2006, OCC held an event for several chief executive
           officers from African-American national banks to meet with OCC's
           Executive Committee and the Comptroller of the Currency to discuss
           the challenges these banks faced.

           o  Federal Reserve banks have hosted workshops and other events
           for Native American banks, as well as produced publications on
           Native American banking.

           Outside of the customary training and educational programs that
           regulators make available to all banks, FDIC is the only regulator
           to convene training sessions only for minority banks (including
           minority banks not regulated by FDIC) that the banks may attend
           free of charge. FDIC officials told us that the agency's regional
           offices have held several such training sessions on an as-needed
           basis or when suggested at minority bank events. For example,
           FDIC's Dallas regional office has conducted 1-day seminars in 2004
           and 2005 specifically for minority banks that included
           presentations on compliance, the Bank Secrecy Act and
           anti-money-laundering issues, and economic and banking conditions.

Technical Assistance and Other Outreach Procedures

All of the federal banking regulators told us that they provided their
minority banks with technical assistance if requested, but only FDIC and
OTS have specific procedures for offering this assistance. More
specifically, FDIC and OTS officials told us that they proactively seek to
make minority banks aware of such assistance through established outreach
procedures outside of their customary examination and supervision
processes. FDIC also has a policy that requires its regional coordinators
to ensure that examination case managers contact minority banks 90 to 120
days after an examination to offer technical assistance in any problem
areas that were identified during the examination. This policy is unique
to minority banks. As part of their quarterly reports to headquarters,
FDIC regional coordinators report on how many offers of technical
assistance they have made to minority banks and how many banks requested
the assistance. More generally, FDIC staff contact the minority banks they
supervise at least once a year to offer to have a member of regional
management meet with banks' board of directors and to familiarize the
institutions with FDIC's initiatives.

OTS officials told us that technical assistance is the focus of their
minority banks efforts. According to the agency's policy statement, OTS
monitors the financial condition of minority banks to identify those that
might benefit from a program of increased support and technical
assistance. OTS regional staff contact minority banks they supervise
annually to make them aware of their minority bank efforts and to offer to
meet with the banks' boards of directors to discuss issues of interest and
types of assistance OTS can provide.

Additionally, FDIC and OTS officials told us that they have taken
proactive steps to assist individuals or groups that have filed
applications for deposit insurance or to acquire a national thrift
charter. FDIC officials said that they had developed a package of
assistance to help smaller institutions, including many minority banks,
overcome challenges associated with the FDIC insurance application
process. OTS officials said that they had provided substantial assistance
to a minority group that filed to acquire a national thrift charter and
had extended established application deadlines to assist the group. FDIC
officials said that the agency interprets FIRREA's general goal to
"promote and preserve" minority banks as a charge to support those
minority banks already in existence or those that have filed deposit
insurance applications rather than as a charge to actively seek out
minority groups or individuals to form new banks. FDIC officials explained
that the agency was an insurer, not a chartering authority, and that it
would probably be inappropriate to encourage potential applicants to
choose one banking charter over another. OTS officials told us that the
agency currently does not promote the thrift charter to any groups but is
considering the extent to which it might do so in the future.

OCC and the Federal Reserve provide technical assistance to all of their
banks, but they currently have not established outreach procedures for all
their minority banks outside of the customary examination and supervision
processes. However, OCC officials told us that the agency would be
designing an outreach plan for all of OCC's minority banks this fiscal
year. Federal Reserve officials told us that Federal Reserve districts
conduct informal outreach to their minority banks and consult with other
districts on minority bank issues as needed. The officials said that four
reserve banks had begun a pilot outreach program specifically tailored to
minority banks that would include technical assistance, training, advisory
visits, and ongoing analysis. Staff are in the process of conducting
interviews with minority banks to obtain input on their draft program.

OCC and Federal Reserve officials told us that, like FDIC and OTS, their
agencies also provided assistance to minority groups during the
application process and that they put forth extra effort in certain cases.
For example, Federal Reserve officials told us that they had recently
assisted 15 sovereign tribal nations in establishing a Native American
bank. And like FDIC and OTS, neither OCC nor the Federal Reserve seeks out
individuals to form either minority or nonminority banks. OCC agency
officials said it would not be appropriate for their agency to do so, and
Federal Reserve officials told us that it was not within their
jurisdiction to do so, as they did not have authority to charter banks.
The Federal Reserve, however, has conducted activities such as providing
information to Native American, Muslim, and Asian-American communities on
entering the banking business.

Policies to Preserve the Minority Character of Troubled Banks

FDIC has developed policies for failing banks that are consistent with
FIRREA's requirement that the agency work to preserve the minority
character of minority banks in cases of mergers and acquisitions. For
example, FDIC maintains a list of qualified minority banks or minority
investors that may be invited to bid on the assets of troubled minority
banks that are expected to fail. Officials from several minority banks we
contacted said that FDIC had invited them to bid on failing minority
banks. However, as we pointed out in our 1993 report, FDIC is required to
accept the bids on failing banks that pose the lowest expected cost to the
Deposit Insurance Fund. 26 As a result, all bidders, including minorities,
are subject to competition. FDIC provided us with a list of minority banks
that had failed from 1990 to 2005. Of the 20 minority banks that failed
during this period, 12 were acquired by nonminority banks and 5 by
minority banks, while 3 were resolved through deposit payoffs. According
to FDIC, the most recent failures of minority banks were two institutions
in 2002, neither of which retained its minority status.

OTS and OCC's policy statements on minority banks describe how the
agencies are to work with FDIC to identify qualified minority banks or
minority investors to acquire minority banks that are failing. Federal
Reserve officials told us that they do not have a similar written policy,
given the small number of minority banks the agency supervises. However,
agency officials said that they work with FDIC to identify qualified
minority banks or investors to acquire failing minority banks.

Officials from the four banking agencies said that they also tried to
assist troubled minority banks to help improve their financial condition
before a bank deteriorated to the point at which a resolution through FDIC
was necessary. For example, officials from OCC, Federal Reserve, and OTS
said that they provided technical assistance to such institutions or tried
to identify other minority banks or investors that might be willing to
acquire or merge with them.

Treasury No Longer Regularly Consults with Regulators on Minority Bank
Issues but Does Consult on an As-Needed Basis

Section 308 of FIRREA required the Secretary of the Treasury to consult
with FDIC and OTS to determine the best methods for meeting FIRREA's goals
in support of minority banks. In 1993, we reported that Treasury initially
convened interagency meetings to facilitate communication among the
federal banking regulators on minority banking issues. Treasury convened
four such meetings between 1990 and 1993 at which regulators exchanged
ideas, discussed policies regarding minority banks, and worked to
coordinate their efforts. However, during our work for this report,
Treasury officials said that the department no longer convened or
participated regularly in interagency discussions on minority banking
issues, although it still consulted with the federal banking regulators as
issues arose. Treasury officials explained that while the nature of the
FIRREA consulting requirement could be open to some interpretation, given
that Treasury had discontinued formal consultations in 1993, the general
view within the department is that ongoing consultations were not
required. Further, Treasury officials said the department's authority to
assist the banking regulators in preserving the minority character of
failing minority banks was limited by federal legislation that prohibits
the Secretary of the Treasury from intervening in matters or proceedings
that are before the Director of OTS or the Comptroller of the Currency,
unless otherwise specifically provided by law. 27 According to these
officials, Section 308 of FIRREA does not override this prohibition, which
is also consistent with Treasury's policy not to intervene in
case-specific matters before the banking agencies.

Regulators Do Not Assess Efforts through Comprehensive Surveys or
Outcome-Oriented Performance Measures

While FDIC has recently been proactive in assessing its support efforts
for minority banks, none of the regulators have routinely and
comprehensively surveyed their minority banks on all issues affecting the
institutions, nor have the regulators established outcome-oriented
performance measures. Evaluating the effectiveness of federal programs is
vitally important in order to manage programs successfully and improve
program results. To this end, in 1993 Congress enacted the Government
Performance and Results Act, which instituted a governmentwide requirement
that agencies report on their results in achieving their agency and
program goals. 28 Agencies can evaluate the effectiveness of their efforts
by establishing performance measures or through program evaluation. 29
Performance measures are established in order to assess whether a program
has achieved its objectives and are expressed as measurable, quantifiable
indicators. Outcome-oriented performance measures assess a program
activity by comparing it to its intended purpose or targets. 30 Program
evaluations are systematic studies that are conducted periodically to
assess how well a program is working. In our 1993 report, we recommended
that FDIC and OTS periodically survey minority banks that they regulate to
help assess their support efforts. Surveys are an instrument by which
agencies may assess their efforts and obtain feedback from the recipients
of their efforts on areas for improvement.

As part of its assessment methods, FDIC has recently conducted roundtables
and surveyed minority banks on aspects of its minority bank efforts, as
follows:

           o  In 2004, in response to an FDIC Corporate Performance Objective
           to enhance minority bank outreach efforts, FDIC completed a review
           of its minority bank outreach program that included a survey of 20
           minority banks from different regulators. Seven banks responded.
           On the basis of the 2004 review, FDIC established the MBR program
           to gain insights into issues affecting minority banks and obtain
           feedback on its efforts.

           o  In 2005, FDIC requested feedback on its minority bank efforts
           from institutions that attended the agency's six MBRs (which
           approximately one-third of minority banks attended). The agency
           also sent a survey letter to all minority banks to seek their
           feedback on several proposals to better serve such institutions,
           but only 24 minority banks responded. The proposals included
           holding another national minority bank conference, instituting a
           partnership program with universities, and developing a minority
           bank museum exhibition. 31 FDIC officials said that they used the
           information gathered from the MBRs and the survey to develop
           recommendations for improving programs and developing new
           initiatives.

           According to FDIC officials, these recommendations, which have
           been approved and are expected to be implemented by the end of
           2006, include

                        o  enhancing the agency's minority bank Web page by
                        (1) adding a link to FDIC's home page, (2) including
                        a calendar of minority bank events, and (3) adding
                        more resource links, such as links to research
                        highlighting issues relevant to minority banks;

                        o  hosting another national conference for minority
                        banks-the conference was held in August 2006;

                        o  continuing the MBR series and hosting six more
                        roundtables in 2006; and

                        o  instituting the University Partnership Program,
                        through which FDIC and minority bank staff would
                        advise and lecture at universities that have an
                        emphasis on minority student enrollment. The goals of
                        the program include enhancing recruiting efforts for
                        minority banks and FDIC and increasing students'
                        knowledge base of banking in general and minority
                        banks in particular.

           While recently FDIC has taken steps to assess the effectiveness of
           its minority bank support efforts, we identified some limitations
           in the agency's approach. For example, in its surveys of minority
           banks, the agency did not solicit feedback on key aspects of its
           support efforts, such as the provision of technical assistance.
           Moreover, FDIC has not established outcome-oriented performance
           measures to gauge the effectiveness of its various support
           efforts. As discussed previously, in its quarterly reports FDIC
           has provided output measures that track the number of technical
           assistance offers it makes to minority banks and the number of
           banks making use of the assistance. FDIC also requires regional
           case managers to follow up with minority banks 90 to 120 days
           after examinations to offer technical assistance to address
           deficiencies that have been identified in examinations. However,
           FDIC does not report agencywide on the extent to which minority
           banks are able to resolve any deficiencies found during the
           examination process.

           FDIC officials told us while the agency has not conducted surveys
           regarding technical assistance or developed related performance
           measures, technical issues may be resolved during the course of
           the examination process. Further, FDIC officials said that
           throughout the examination process and through other agency
           contacts, minority banks may informally provide feedback on the
           effectiveness of any assistance provided. However, without surveys
           or agencywide outcome-oriented performance measures, FDIC
           management may lack comprehensive and reliable information
           necessary to help ensure that agency staff provide effective
           technical assistance to minority banks to help them resolve
           problems identified in examinations or through other means.
           Further, the public and stakeholders, such as Congress, may not be
           informed as to the effectiveness of the agency's technical
           assistance, as well as other efforts in support of minority banks.

           In 1994-1995, OTS interviewed the 40 minority banks that it
           regulated to obtain their views on the agency's support efforts.
           The interviews covered topics such as the banks' overall
           impressions of the agency's efforts, technical assistance, and
           application issues and asked for suggestions for improving OTS's
           efforts to support minority banks. However, OTS has not conducted
           a similar effort since that time. OTS officials told us that in
           2003 and 2004 the agency conducted surveys of all OTS-regulated
           institutions and that a 2006 survey is in process. Because of
           restrictions imposed by the Office of Management and Budget on the
           amount of information that can be collected from institutions, OTS
           officials told us that they surveyed all of their banks at the
           same time. The surveys solicited feedback on OTS's examination
           process and provided opportunities for banks to make suggestions
           for improving OTS's operations. While OTS officials stated that
           the results from these surveys could be sorted by minority status,
           and has plans to do so and use the information for program
           enhancement, such analysis has not been conducted.

           As required under Section 3 of FIRREA, OTS provides annual reports
           to Congress that, among other things, track technical assistance
           offers made to minority banks. But OTS has also not established
           quantifiable outcome-oriented measures to gauge the quality and
           effectiveness of technical assistance.

           OCC and Federal Reserve officials told us that they had not
           surveyed the minority banks that they regulated to assess the
           effectiveness of their support efforts, and neither agency has
           established performance measures related to minority banking
           efforts. OCC officials explained that the agency did not survey
           minority banks because it did not treat these banks any
           differently from other banks. However, as described earlier, OCC
           has a written policy statement for minority banks, information on
           a Web page for such institutions, and has held events on Native
           American banking. OCC officials also told us that they recently
           convened a forum for African-American bankers and were in the
           process of developing an outreach program specifically for its
           minority banks.

           By not periodically surveying and obtaining comprehensive feedback
           from a substantial number of minority banks or through developing
           outcome-oriented performance measures for various support efforts
           (such as technical assistance), the regulators are not well
           positioned to assess their support efforts or identify areas for
           improvement. Further, the regulators cannot take corrective action
           as necessary to provide better support efforts to minority banks.

Survey of Minority Banks Identified Potential Limitations in Regulators'
Support Efforts and Other Regulatory Issues

Minority bank survey respondents identified potential limitations in the
regulators' efforts to support them and related regulatory issues, such as
examiners' understanding of issues affecting minority banks, which would
likely be of significance to agency managers and warrant follow-up
analysis. Minority banks regulated by FDIC were generally more positive
about the agency's efforts than other banks were about their regulators'
efforts. Still, only about half of FDIC-regulated banks gave their
regulator very good or good marks, whereas about a quarter of banks
regulated by other agencies gave the same ratings. Although some
regulators emphasized technical assistance as a key component of their
efforts to support minority banks, relatively few institutions used such
assistance. Further, in our interviews and open-ended survey responses,
banks reported some specific concerns about regulatory issues related to
their minority status. In particular, survey respondents were concerned
that (1) examiners, as was also noted in our 1993 report, did not always
understand their operating environment or the challenges that minority
banks faced in their communities and might need more training on the
topic, and (2) a provision of CRA designed to facilitate relationships
between minority banks and other banks has not produced the desired
results.

About a Third of Survey Respondents Viewed Regulators' Minority Bank
Support Efforts as Very Good or Good, and Technical Assistance Usage
Appeared Low

When minority bankers were asked to rate regulators' overall efforts to
support minority banks, responses varied. Some 36 percent of survey
respondents described the efforts as very good or good, 26 percent
described them as fair, and 13 percent described the efforts as poor or
very poor (fig. 7). A relatively large percentage-25 percent-responded
"don't know" to this question. Banks' responses varied by regulator, with
45 percent of banks regulated by FDIC giving very good or good responses,
compared with about a quarter of banks regulated by other agencies. 32
However, more than half of FDIC-regulated banks and about three-quarters
of the other minority banks responded that their regulator's efforts were
fair, poor, or very poor or responded with a "don't know." In particular,
banks regulated by OTS gave the highest percentage of poor or very poor
marks, while banks regulated by the Federal Reserve most often provided
fair marks. 33

Figure 7: Minority Banks' Ratings of Support Efforts, by Regulator

Nearly half of minority banks reported that they attended FDIC roundtables
and conferences designed for minority banks, and about half of the 65
respondents that attended these events found them to be extremely or very
useful (fig. 8). Almost a third found them to be moderately useful, and 17
percent found them to be slightly or not at all useful. One participant
commented, "The information provided was useful, as was the opportunity to
meet the regulators." Many banks also commented that the events provided a
good opportunity to network and share ideas with other minority banks.

Figure 8: Usefulness of FDIC's Roundtables and Conferences, by Regulator

We noted that minority banks frequently reported participating in training
and education events and that they found these events extremely or very
useful, even though most of these programs were not designed specifically
for minority banks. About 58 percent reported participating in their
regulator's training and education activities-a higher percentage than had
participated in FDIC roundtables and conferences. Of this group, 76
percent found training and education to be extremely or very useful, 15
found it to be moderately useful, 6 percent found it to be slightly
useful, and 3 percent did not know.

While FDIC and OTS emphasized technical services as key components of
their efforts to support minority banks, less than 30 percent of the
institutions they regulate reported using such assistance within the last
3 years in our survey (fig. 9). Minority banks regulated by OCC and the
Federal Reserve reported similarly low usage of the agencies' technical
assistance services. However, of the few banks that used technical
assistance-41-the majority rated the assistance provided as extremely or
very useful. 34 Further, although small minority banks and
African-American banks of all sizes have consistently faced financial
challenges and may benefit from certain types of assistance, these banks
also reported low rates of usage of the agencies' technical assistance. In
addition, both regulators and minority banks explained that minority banks
often have difficulty attracting and retaining qualified staff, and given
this fact, technical assistance could be particularly important in
providing these banks with guidance tailored to their staff's specific
needs. While our survey did not address the reasons that relatively few
minority banks appear to use the agencies' technical assistance and
banking regulators cannot compel banks under their supervision to make use
of offered technical assistance, the potential exists that many such
institutions may be missing opportunities to learn how to correct problems
that limit their operational and financial performance.

Figure 9: Minority Banks' Use of Technical Assistance, by Regulator

Survey Respondents Expressed Concerns about the Examination Process and a
Provision of CRA Designed to Assist Minority Banks

Over 80 percent of the minority banks we surveyed responded that their
regulators did a very good or good job of administering examinations, and
almost 90 percent felt that they had very good or good relationships with
their regulator. However, as in our 1993 report, some minority bank
officials said in both survey responses and interviews that examiners did
not always understand the challenges the banks faced in providing services
in their particular communities. Twenty-one percent of survey responses
mentioned this issue when asked for suggestions about how regulators could
improve their efforts to support minority banks, and several minority
banks we spoke with in interviews elaborated on this topic.

The bank officials said that examiners tended to treat minority banks like
any other bank when they conducted examinations and thought such
comparisons were not appropriate. For example, some bank officials whose
institutions serve immigrant communities said that their customers tended
to do business in cash and carried a significant amount of cash because
banking services were not widely available or trusted in the customers'
home countries. Bank officials said that examiners sometimes commented
negatively on the practice of customers doing business in cash or placed
the bank under increased scrutiny with respect to the Bank Secrecy Act's
requirements for cash transactions. 35 While the bank officials said that
they did not expect preferential treatment in the examination process,
several suggested that examiners undergo additional training so that they
could better understand minority banks and the communities that these
institutions served. FDIC has conducted such training for its examiners.
In 2004, FDIC invited the president of a minority bank to speak to about
500 FDIC examiners on the uniqueness of minority banks and the examination
process. FDIC officials later reported that the examiners found the
discussion helpful. According to a Federal Reserve official, the
organization is developing guidance to better educate examination staff
about the various types of minority institutions and minority communities.
Also, according to an OCC official, OCC has an initiative under
consideration to provide training for its examiners on minority bank
issues.

Many survey respondents also said that a provision in the Community
Reinvestment Act (CRA) that was designed to assist their institutions was
not effectively achieving this goal. CRA requires bank regulators to
encourage institutions to help meet credit needs in all areas of the
communities they served. The act includes a provision allowing regulators
conducting a CRA examination to give consideration to banks that assist
minority banks through capital investment, loan participations, and other
ventures that help meet the credit needs of local communities. Despite
this provision, only about 18 percent of survey respondents said that CRA
had-to a very great or great extent-encouraged other institutions to
invest in or form partnerships with their institutions, while more than
half said that CRA encouraged such activities to some, little, or no
extent (fig. 10). Some minority bank officials said that current
interagency guidance on the provision granting consideration for
investments in minority banks should be clarified to assure banks that
they will receive CRA consideration for such investments. Some minority
banks believe that CRA does not provide incentives for nonminority banks
to make investments in minority banks that operate in other parts of the
country. A minority bank official said that the CRA provision does not
clearly state that a bank making an investment in a minority bank that is
outside of its CRA assessment area will receive consideration for such
investments in its CRA compliance examinations. However, officials from
each of the four regulators said that they had interpreted the provision
in CRA as allowing consideration for such out-of-area investments in
minority banks. OCC recently published guidance clarifying this issue, and
FDIC officials said that the agencies would clarify the guidance provided
to all CRA examiners across agencies on such investments.

Figure 10: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions

This report does not contain all results from the survey. The survey and a
more complete tabulation of the results can be viewed at GAO-07-7SP.

Conclusions

Federal banking regulators have adopted differing approaches to support
minority banks but generally have not assessed their efforts using regular
and comprehensive surveys of minority banks or outcome-oriented
performance measures. FDIC, which along with OTS is required by FIRREA to
help preserve and promote minority banks, has established the most
comprehensive support efforts and has taken the lead on interagency
initiatives. In this regard, FDIC appears to be serving a coordination and
facilitation role for the banking agencies' efforts. OTS has also taken
several steps to support minority banks, while OCC and the Federal
Reserve, which are not subject to Section 308 of FIRREA, have, on their
own initiative, taken some steps to support such institutions. Further,
officials from OCC and the Federal Reserve, which collectively supervise
about one-third of minority banks, stated that they recognize the
importance of minority banks and are planning additional efforts to
support them. While these efforts may help ensure that more minority banks
receive support, it is important that when managing both existing and new
programs, regulators assess their effectiveness. While FDIC has recently
sought to evaluate its efforts through conducting surveys, these surveys
have not addressed all key activities (including the provision of
technical assistance), and the agency has not established outcome-oriented
performance measures. None of the other agencies regularly or
comprehensively surveys minority banks regarding its support efforts or
has developed outcome-oriented performance measures. Consequently, the
regulators are not well positioned to identify issues of concern to
minority banks or to take corrective actions to improve their support
efforts.

Our work identified potential limitations in the regulators' support
efforts and related activities that would likely be of significance to
agency managers and potentially warrant follow-up analysis and the
initiation of corrective actions as necessary. For example, only about
half of minority banks regulated by FDIC and only about a quarter
regulated by the other agencies view their regulator's support efforts as
very good or good. We also found that some issues identified in our 1993
report may still be potential limitations to the regulators' efforts.
First, although regulators emphasize the provision of technical assistance
services to minority banks, less than 30 percent of such banks have
recently used such services. Small banks and African-American banks, which
have struggled financially over the years and potentially stand to benefit
most from additional technical assistance, are no more likely than other
minority banks to use such assistance. While there may be a variety of
reasons that minority banks do not take advantage of the regulators'
technical assistance services and regulators cannot compel banks to use
this assistance, without soliciting further feedback from these banks, the
regulators cannot identify these reasons, determine whether more banks
would benefit from such assistance, or obtain suggestions for improvement.
Second, both our 1993 report and our current analysis found that some
minority banks believe that regulators have not ensured that examiners
fully understand the challenges that such institutions often face in, for
example, providing financial services in areas with high concentrations of
poverty or to immigrant communities. Again, without further analysis and
soliciting feedback from banks, regulators cannot identify possible areas
where they can provide additional assistance or take corrective action. By
establishing outcome-oriented performance measures to determine the extent
to which they are achieving program goals, regulators could then measure
the progress of their efforts and any results. Using existing interagency
forums for coordination to assess minority bank support efforts and
related regulatory activities could help ensure that all minority banks
have access to the same opportunities while minimizing burdens on the
regulators themselves.

Recommendation for Executive Action

We recommend that the Chairman of the FDIC, the Director of OTS, the
Comptroller of the Currency, and the Chairman of the Federal Reserve
regularly review the effectiveness of their minority bank support efforts
and related regulatory activities and, as appropriate, assess the need to
make changes necessary to better serve such institutions. In conducting
such reviews, the regulators should consider

           o  conducting periodic surveys of such institutions to determine
           how they view regulators' minority support efforts and related
           activities, and/or

           o  developing outcome-oriented performance measures to assess the
           progress of their efforts in relation to program goals.

           As part of these regular program assessments, the regulators may
           wish to focus on such areas as minority banks' overall views on
           support efforts, the usage and effectiveness of technical
           assistance services (particularly technical assistance provided to
           small minority banks and African-American banks), and the level of
           training provided to agency examiners regarding minority banks and
           their operating environments. Regulators may also wish to utilize
           existing interagency coordination processes in implementing this
           recommendation to help ensure consistent efforts and minimize
           burdens on agency staff.

Agency Comments and Our Evaluation

We provided a draft of this report to FDIC, OTS, OCC, and the Federal
Reserve for comment, and they provided written comments that are reprinted
in appendixes IV-VII. In their responses, the agencies further elaborated
on their efforts to support minority banks and described planned
initiatives. Further, FDIC, OTS, and OCC agreed to implement our
recommendation, while the Federal Reserve commented that it would consider
implementing the recommendation. The agencies also provided technical
comments, which we have incorporated as appropriate. We also requested
comments from the Department of the Treasury on the section of the draft
report relevant to their activities under Section 308 of FIRREA. Treasury
provided us with technical comments, which we have incorporated as
appropriate.

We will provide copies to Chairman of the FDIC, the Director of OTS, the
Comptroller of the Currency, the Chairman of the Federal Reserve, and the
Secretary of the Department of the Treasury, and other interested
congressional committees. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 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 at
listed in appendix VIII.

George A. Scott Acting Director, Financial Markets and Community
Investment

List of Requesters

The Honorable Barney Frank Ranking Minority Member Committee on Financial
Services House of Representatives

The Honorable Gary Ackerman House of Representatives

The Honorable Joe Baca House of Representatives

The Honorable Michael E. Capuano House of Representatives

The Honorable Julia Carson House of Representatives

The Honorable Wm. Lacy Clay House of Representatives

The Honorable Emanuel Cleaver House of Representatives

The Honorable Joseph Crowley House of Representatives

The Honorable Artur Davis House of Representatives

The Honorable Harold E. Ford, Jr. House of Representatives

The Honorable Al Green House of Representatives

The Honorable Luis V. Gutierrez House of Representatives

The Honorable Ruben Hinojosa House of Representatives

The Honorable Darlene Hooley House of Representatives

The Honorable Steve Israel House of Representatives

The Honorable Paul E. Kanjorski House of Representatives

The Honorable Barbara Lee House of Representatives

The Honorable Stephen F. Lynch House of Representatives

The Honorable Carolyn B. Maloney House of Representatives

The Honorable Carolyn McCarthy House of Representatives

The Honorable Gregory W. Meeks House of Representatives

The Honorable Brad Miller House of Representatives

The Honorable Dennis Moore House of Representatives

The Honorable Gwen Moore House of Representatives

The Honorable Bernard Sanders House of Representatives

The Honorable Debbie Wasserman Schultz House of Representatives

The Honorable David Scott House of Representatives

The Honorable Melvin L. Watt House of Representatives

The Honorable Maxine Waters House of Representatives

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) review the profitability of
minority banks over time, (2) identify the federal banking regulators'
efforts to support minority banks and determine whether the regulators
were evaluating the effectiveness of these efforts, and (3) obtain the
views of minority banks on the federal regulators' minority banking
support efforts and related regulatory issues.

To review the profitability of minority banks, in addition to undertaking
a literature review, we analyzed financial data provided by the Federal
Deposit Insurance Corporation (FDIC) for year end 2005, 2000, and 1995.
Each bank is required to file consolidated Reports of Condition and Income
(Call Report) data, and each thrift institution is required to file Thrift
Financial Reports (Thrift Report) quarterly. We obtained Call and Thrift
Report data from FDIC listing each minority bank's financial
characteristics (such as return on assets, net income, and loan loss
provisions), along with summary statistics for peer groups. Peer groups
were formed by FDIC based on standard asset sizes used in FDIC reports
(less than $100 million, $100 million-$300 million, $300 million-$500
million, $500 million-$1 billion, $1billion-$10 billion, greater than $10
billion). The peer groups include minority and nonminority institutions.

Using these data, we classified the minority banks by asset size and
minority status. To classify the banks by minority status, we used the
regulators' designations and confirmed these classifications with a bank's
survey response (if the banks responded to our survey). FDIC provided
summary statistics for peer groups based on asset size. The peer groups
included all banks of a given asset size, including minority banks. We did
not attempt to remove minority banks from the peer group to simplify the
analysis because minority banks are so few, it is unlikely that their
inclusion in the peer group would change composite statistics for any peer
group. We analyzed the profitability characteristics of each group and
compared the summary statistics to the comparable statistics generated by
FDIC for relevant peer groups.

Because information on minority banks was not available for both 2000 and
1995 from all federal banking regulators, for these periods we analyzed
data only for those minority banks that were still operating as minority
banks in 2005. On the basis of the regulators' lists, we were aware that
not all of the banks were operating in 2005 were operating in previous
years. In 2000, 181 of these banks were operating, and 152 were operating
in 1995. Minority banks that failed or merged with other institutions
between 1995 and 2005 are not included in the analysis for those years. In
addition, we did not obtain data on the minority status of banks operating
in 1995 and 2000 and were unable to confirm that all 2005 minority banks
were operating as minority banks in 1995 and 2000, although the change of
ownership rate for minority banks is low.

We chose to use Call and Thrift Report data because it was designed to
provide information on all federally insured banks' financial condition
and has been collected and reported by FDIC in a standardized format. We
have tested the reliability of FDIC's Call and Thrift Report databases
during previous studies and found the data to be reliable. 1 As with any
self-reported financial information, however, the data are subject to
change for a variety of reasons. We corroborated our analysis of the Call
and Thrift Report data with other studies, which also found that minority
banks lag in profitability and have high operating expenses. 2

To address the second objective, we interviewed officials at the federal
banking agencies and the Department of the Treasury and reviewed
regulators' documentation addressing their efforts to support minority
banks and assess the effectiveness of these efforts. We also reviewed
publicly available documentation maintained by the regulators, such as
policy statements, lists of minority banks, Web sites, and public
statements. We reviewed the regulators' minority banking support efforts
across the different banking agencies and compared any program assessment
efforts with our standards for program assessment and performance
measures, and those established in the Government Performance and Results
Act. 3 We also interviewed 19 minority banks throughout the United States
that we selected based on type of minority ownership and primary
regulator, and relevant trade associations, to discuss the business
environment in which they operate, regulators' minority banking efforts,
any assessment efforts undertaken by the regulators, and their knowledge
and experience with their regulators' minority banking efforts.

To obtain the views of minority banks on the federal regulators' minority
banking support efforts and related regulatory issues, we surveyed banks
that were designated as minority institutions. We created a list of the
population of minority banks by asking FDIC, Office of the Comptroller of
the Currency (OCC), Federal Reserve, and Office of Thrift Supervision
(OTS) for the names of all such institutions. The objective was to survey
all minority banks that were officially recognized by regulators as such.
Of the 204 institutions in our original population, 14 represented
women-owned institutions. We identified the total minority bank population
by reviewing and compiling one list of these banks from FDIC and the
Federal Reserve's lists as of September 30, 2005; OCC's list from December
31, 2005; the most recent list from the Department of the Treasury
(December 2004); and OTS's list as of January 2006.

All institutions we originally identified as minority banks were asked to
complete a Web-based questionnaire in March of 2006. We determined that of
the original 204 minority banks we identified, 9 were actually ineligible,
either because the ownership was no longer minority or had insignificant
minority interest, and some had merged with other banks. Our final survey
population therefore consisted of 195 institutions. When the survey closed
in late April, 149 of the 195 banks ultimately determined to be eligible
minority banks had provided usable responses, for a response rate of 76
percent.

While developing our Web-based questionnaire, we asked all four banking
regulators and minority banking associations to review a draft of the
instrument and to offer comments. We also conducted four pretests of the
draft questionnaire, each one using the software environment that actual
respondents would experience. During the pretest, we observed respondents
filling out the questionnaire and asked follow-up questions to clarify the
respondents' understanding of the questions. On the basis of these
results, we made modifications as appropriate before finalizing the
questionnaire. The questionnaire also underwent a peer review by an
independent survey specialist in our organization. The survey, which was
implemented as an automated questionnaire on a secure Web site, was
accessible only to specifically contacted bank officials and could be
completed using a typical Web browser. However, the questionnaire, which
contained 51 questions, was also reproduced as an electronic
word-processing document that could be administered via e-mail, mail, or
fax, for those respondents who preferred those modes or who could not
access the Internet.

We began the survey in late February of 2006 by precontacting banks by
telephone to verify their status and to obtain the names, titles, and
e-mail addresses of the president or chief executive officer of the
institution, who were designated as respondents, or were responsible for
delegating the survey to another official. Prenotification e-mails were
sent in early March to verify that the e-mails were valid. The survey was
opened and respondents were given user names and passwords to their
institution's questionnaires on March 14.

In late March and early April 2006, we sent two reminder e-mails to banks
that had not yet responded, and began to call nonrespondents after that.
We also made appeals encouraging responses through the National Bankers
Association's (NBA) e-mailings and events. We also made a paper copy of
the questionnaire that respondents could receive and return via mail or
fax. In a final set of telephone follow-ups, we gave reluctant respondents
the opportunity to answer a reduced set of key questions to encourage
participation. A final reminder e-mail was sent in late April, and the
survey was closed on April 28.

Not all surveyed members of the population returned questionnaires or
answered every question. Two institutions explicitly refused to
participate, and we were not able to obtain answers from the other 44
nonrespondents by the close of this review. This resulted in a response
rate of 76 percent, calculated as the number of usable questionnaires
returned divided by the final eligible population. The response rate to
any one particular question varied, however, as some survey participants
declined to provide answers to individual questions, and those 4
institutions agreeing to respond only to the final telephone follow-up
attempt were asked only a limited number of key questions.

Results from this type of survey are subject to several types of errors:
failure to include all eligible members in the listing of the population,
measurement errors when administering the questions, nonresponse error
from failing to collect information on some or all questions from part of
the surveyed population, and data-processing error.

To limit the error from failing to list members of the population, we
compared the regulators' lists of minority banks and discussed any
discrepancies with each regulator. In accordance with our request, we
included any bank considered by at least one regulator to be eligible to
participate in its efforts. In some cases we surveyed minority banks that
were not considered by their primary regulator to be minority institutions
but were considered to have minority status or be eligible for
participation in another regulator's efforts. We compared the survey
results for questions reported on in the text of the report with and
without such banks to ascertain whether or not the results would have been
significantly different without including such banks. We found no
significant differences in the results when the banks not considered
minority banks by their regulator were included from when such banks were
excluded. Generally, removing the responses from such banks would have
changed the results of key questions by 1 or 2 percentage points. In a few
cases, the inclusion of banks not viewed by their regulators as minority
institutions changed the survey results by 4 or 5 percentage points in a
manner more favorable to the regulator. However, the inclusion of such
banks did not have a material effect on the overall results.

To limit measurement error, we obtained comments from experts and tested
the questionnaire with bank officials and attempted to improve the
questionnaire before finalizing it.

Although we chose to send our survey to all members of the population and
not a sample, and thus the survey results are not technically subject to
sampling error, because only 76 percent of the population provided usable
responses, bias from nonresponse may result. If the responses of those who
did not respond would have differed from the responses of those who did on
some survey questions, the estimates made solely from those who did
respond would be biased from excluding parts of the population with
different characteristics or views. To limit this kind of error, we made
multiple attempts to gain the participation of as many banks as possible.
To assess the likelihood of significant bias, we compared characteristics
such as asset size, regulator, and minority type-which may be related to
the substance of answers to our survey questions-of nonrespondents to
respondents. We did not detect a significant difference between those who
chose to respond and those who did not based on these characteristics. To
further assess the potential extent of nonresponse bias, we compared the
response rates of the subgroups of those characteristics in our
population, and determined that response rate did not differ markedly
between categories of these subgroups, suggesting that banks of certain
types were not materially more likely to participate or not participate
than others. Finally, we analyzed the patterns in response between those
who answered in the earlier part of the fieldwork period and those who
responded only after repeated follow-up attempts. It is possible that the
latter group resembles nonrespondents. No significant difference in the
answers between the groups was detected, which may suggest that actual
nonrespondents would not have answered in a substantially different way
from those who did. While the possibility exists that the true results for
the entire population might be different from those we estimated in our
report, we feel that on the basis of our analysis, nonresponse bias is
unlikely.

To limit data-processing error, a second data analyst independently
verified analysis programming. In addition, the coding process of
converting narrative answers into quantitative, categorical data was
independently assessed to be reliable, and diagnostic checks were
performed on the survey data to the extent possible. For example, one of
our checks identified inconsistencies for four questionnaires that
indicated a primary supervisor which did not match regulator records,
allowing us to make a correction to responses. We did not otherwise verify
the substance of respondents' answers to our questions.

We conducted our work in Washington, D.C., and New York from December 2005
to September 2006 in accordance with generally accepted government
auditing standards.

Appendix II: Minority Bank Eligibility Criteria

Banking regulators use different criteria for determining the types of
institutions that can participate in their respective minority bank
efforts, and all regulators maintain lists of minority banks based on
these different criteria (fig. 11). Some regulators base their definition
on Section 308 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), and others base their definition on the
criteria in a 1969 executive order that established the Department of the
Treasury's Minority Bank Deposit Program (MBDP). The MBDP is a voluntary
program that encourages federal agencies, state and local governments, and
the private sector to use MBDP participants as depositaries and financial
agents. Participants are certified by Treasury's Bureau of Financial
Management Service and included on an annual program roster.

           o  FDIC is subject to the "minority depository institution"
           definition set forth in Section 308 of FIRREA but has interpreted
           ownership by "socially and economically disadvantaged individuals"
           as requiring ownership by minorities as defined in Section 308.
           FDIC does not include women-owned banks in its minority bank
           definition. For stock institutions, FDIC determines minority
           ownership of stock institutions based on the proportion of the
           outstanding voting stock owned by minorities. In addition, FDIC
           has made its program available to public or privately held stock
           institutions and mutuals whose boards of directors and communities
           served are predominantly minority, without regard to the minority
           status of the institution's ownership or its account holders.

Figure 11: Regulators' Eligibility Criteria for Minority Bank Efforts

a"S&Ls" refers to savings and loans, a term synonymous with "thrift
institutions," which are a type of financial institution regulated by OTS.
In this report, we include S&Ls or thrifts under the term "banks." Also
under this definition, minorities must own or have voting control over
more than 50 percent of the outstanding stock.

bUnder FIRREA's definition, a privately or publicly owned institution is
considered minority-owned if more than 51 percent is owned by one or more
"socially disadvantaged individuals."

           o  OTS is also subject to the "minority depository institution"
           definition set forth in Section 308 of FIRREA. Like FDIC, OTS has
           interpreted ownership by "socially and economically disadvantaged
           individuals" as requiring ownership by minorities as defined in
           Section 308. OTS also determines minority ownership of stock
           institutions based on the proportion of the outstanding voting
           stock owned by minorities. OTS has also expanded the availability
           of its program to some constituencies that are not eligible for
           FDIC's program. For example, mutual institutions that have women
           CEOs and have a majority of women on their boards of directors are
           eligible to participate in OTS's minority bank efforts. In
           addition, public stock institutions and mutuals (but not private
           stock institutions) whose boards of directors, communities served,
           and account holders are predominantly minority, may participate in
           OTS's efforts regardless of the minority status of the
           institution's ownership.

           o  Treasury's criteria-on which OCC and the Federal Reserve base
           their criteria-differ from those of Section 308 of FIRREA, FDIC,
           and OTS in several ways. In the first instance, the MBDP program
           is available to both minority- and women-owned banks, stock
           savings and loans, and mutual savings and loans. In order to be
           included on Treasury's MBDP roster as a minority-owned bank or
           stock savings and loans, more than 50 percent of an institution's
           outstanding stock must be either owned or controlled for voting
           purposes by individuals of minority groups. A mutual savings and
           loan may qualify as minority-owned if a majority of the
           institution's board of directors are members of minority groups.
           To qualify as a women-owned bank or stock savings and loans, more
           than 50 percent of the institution's outstanding stock must be
           owned by women and a significant percentage of senior management
           positions must be held by women. A women-owned mutual savings and
           loan is eligible for the MBDP if a majority of its board of
           directors are women and a significant percentage of senior
           management positions are held by women.

           o  The OCC's definition is consistent with that established by
           Treasury's MBDP criteria. OCC is not covered by Section 308 of
           FIRREA.

           o  The Federal Reserve also bases its definition on Treasury's
           MBDP criteria. However, the Division of Supervision of the Federal
           Reserve also compiles an internal list of minority banks that is
           based on Section 308 FIRREA criteria.

           We identified several discrepancies in the regulators' lists of
           minority banks. These banks were all listed as minority banks by
           one regulator but not by another. When we spoke to officials from
           each of the agencies, they told us that these discrepancies were
           due to differences in criteria for minority banks. For example,
           five of these discrepancies were the result of FDIC's exclusion of
           women-owned banks-women-owned banks cannot participate in FDIC's
           programs, but they can participate in the MBDP program. Another
           discrepancy resulted from a bank's primary regulator excluding a
           certain ethnicity (not named in FIRREA), while another regulator
           included it.

Appendix III: Selected Survey Results

This appendix provides the number of minority banks that responded to each
survey question discussed in the report body by response category.

Table 5: How good or poor are these efforts for supporting minority-owned
financial institutions?

                  FDIC Federal Reserve OCC OTS Total 
Very good/good   35               5   8   4    52 
Fair             17               8   8   5    38 
Poor/very poor    6               2   6   5    19 
Don't know       19               2  11   4    36 
Total            77              17  33  18   145 

Source: GAO.

Table 6: Has your primary regulator made your institution aware of any of
the technical assistance it offers in the past 3 years?

                        FDIC Federal Reserve OCC OTS Total 
Yes                    50               6   9   8    73 
No                     20              10  15   8    53 
Don't know/No answer   10               1   8   1    20 
Total                  80              17  32  17   146 

Source: GAO.

Table 7: Has your institution used any technical assistance offered by
your primary regulator in the past 3 years?

              FDIC Federal Reserve OCC OTS Total 
Yes          23               4   9   5    41 
No           48              10  23  11    92 
Don't know    7               2   0   2    11 
Total        78              16  32  18   144 

Source: GAO.

Table 8: (If used) How useful or not useful do you think your primary
regulator's technical assistance is?

                              Total 
Extremely/very useful         33 
Moderately useful              5 
Slightly/not at all useful     3 
Total                         41 

Source: GAO.

Table 9: Are you aware or unaware whether FDIC or any other regulator has
held roundtables and/or conferences for minority-owned financial
institutions in the past 3 years, and if so, have you attended any? (Below
are responses concerning FDIC roundtables and/or conferences.)

                       FDIC Federal Reserve OCC OTS Total 
Unaware               14               3  15   1    33 
Aware, and attended   40               7   9   9    65 
Aware, NOT attended   24               8   7   7    46 
No answer              1               0   0   1     2 
Total                 79              18  31  18   146 

Source: GAO.

Table 10: (If attended) How useful or not useful do you think these
minority institution roundtables and conferences are? (Below are responses
for FDIC roundtables and/or conferences.)

                              FDIC Federal Reserve OCC OTS Total 
Extremely/very useful        20               4   6   3    33 
Moderately useful            10               3   3   4    20 
Slightly/not at all useful    9               0   0   2    11 
Don't know                    1               0   0   0     1 
Total                        40               7   9   9    65 

Source: GAO.

Table 11: Has your institution participated in training or education
programs offered by your primary regulator or other regulators in the past
3 years? (Below are responses for the bank's primary regulator's training
and educational programs.)

              Total 
Yes           83 
No            53 
Don't know     6 
Total        142 

Source: GAO.

Table 12: (If attended) How useful or not useful do you think these
training and educational programs are? (Below are responses for the bank's
primary regulator's training and educational programs.)

                         FDIC Federal Reserve OCC OTS Total 
Extremely/very useful   37               9  14   1    61 
Moderately useful        6               3   2   1    12 
Slightly useful          2               0   0   3     5 
Don't know               0               0   2   0     2 
Total                   45              12  18   5    80 

Source: GAO.

Table 13: How good or poor of a job do you think your regulator does in
administering examinations?

                  Total 
Very good/good   118 
Fair              18 
Poor/very poor     5 
Don't know         4 
Total            145 

Source: GAO.

Table 14: Overall, how good or poor is your relationship with your primary
regulator?

                  Total 
Very good/good   128 
Fair              11 
Poor/very poor     5 
Don't know         1 
Total            145 

Source: GAO.

Table 15: To what extent do you feel this provision of CRA has encouraged
other insured depository institutions to make investments in your
institution or undertake loan participations or other ventures with your
institution?

                            Total 
Very great/great extent     21 
Moderate extent             28 
Some/little or no extent    60 
Don't know                   5 
Total                      114 

Source: GAO.

Table 16: How would you rate your institution's current financial outlook
compared with the past 3 to 5 years?

                        Total 
Much/slightly better    94 
About the same          30 
Slightly/much worse     16 
Don't know               4 
Total                  144 

Source: GAO.

Table 17: What suggestions, if any, do you have for improving existing
federal banking regulators' efforts to support minority-owned financial
institutions, or suggestions for creating new programs or policies in that
area?

                                                                        Total 
More understanding of/sensitivity to minority banks' uniqueness         24 
Improved communication on issues/programs relevant to minority          16 
banks, provide financial data on minority banks                      
More guidance, specific technical assistance, training on minority      12 
banks issues                                                         
Other                                                                    8 
Reduce regulatory burden, examine well-performing minority banks         7 
less frequently                                                      
Facilitate, encourage Community Reinvestment Act (CRA) investments       5 
and partnerships between institutions and minority banks             
Continued training/providing updated general information                 4 
Uniformity/centralization of minority bank programs across               4 
regulators                                                           
More/improved deposit programs                                           4 
Increase accountability, oversight of regulators                         3 
Not applicable                                                          26 
Total number of comments                                               113 

Source: GAO.

Appendix IV: Comments from the Federal Deposit Insurance Corporation

Appendix V: Comments from the Office of Thrift Supervision

Appendix VI: Comments from the Comptroller of the Currency

Appendix VII: Comments from the Board of Governors of the Federal Reserve
System

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

George A. Scott (202) 512-7215 or [email protected]

Acknowledgments

In addition to the contact named above, Wesley M. Phillips, Assistant
Director; Allison Abrams; Anna Bonelli; Stefanie Bzdusek; Emily Chalmers;
Catherine Hurley; Marc Molino; Carl Ramirez; and Omyra Ramsingh made
significant contributions to this report.

(250269)

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