Minority Banks: Regulators' Assessments of the Effectiveness of
Their Support Efforts Have Been Limited (30-OCT-07, GAO-08-233T).
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). While not required to do so by FIRREA, the
Board of Governors of the Federal Reserve System (Federal
Reserve) and Office of the Comptroller of the Currency (OCC) have
established some minority bank support efforts. This testimony,
based on a 2006 General Accountability Office (GAO) report,
discusses the profitability of minority banks, regulators'
support and assessment efforts, and the views of minority banks
on the regulators' efforts as identified through responses from a
survey of 149 such institutions.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-233T
ACCNO: A77789
TITLE: Minority Banks: Regulators' Assessments of the
Effectiveness of Their Support Efforts Have Been Limited
DATE: 10/30/2007
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-08-233T
* [1]In Brief
* [2]Background
* [3]Large Minority Banks Showed Profitability Close to That of T
* [4]Regulators Adopted Differing Approaches to Supporting Minori
* [5]At the Time of our Report, Regulators Did Not Assess Their S
* [6]Survey of Minority Banks Identified Potential Limitations in
* [7]Survey Respondents Expressed Concerns about the Examination
* [8]Regulators Recently Have Taken Steps to Assess and Enhance T
* [9]GAO Contacts
* [10]Staff Acknowledgments
* [11]Order by Mail or Phone
* [12]PDF6-Ordering Information-Young-10-25-07.pdf
* [13]GAO's Mission
* [14]Obtaining Copies of GAO Reports and Testimony
* [15]Order by Mail or Phone
* [16]To Report Fraud, Waste, and Abuse in Federal Programs
* [17]Congressional Relations
* [18]Public Affairs
Testimony
Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, U.S. House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery
Expected at 10:00 a.m. EDT
October 30, 2007
MINORITY BANKS
Regulators' Assessments of the Effectiveness of Their Support Efforts Have
Been Limited
Statement of George A. Scott, Director
Financial Markets and Community Investment
GAO-08-233T
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here to discuss the findings of a report that we issued
last year on the efforts of federal bank regulators to support minority
banks.^1 As described in our report, minority banks are a small community
within the banking industry, accounting for 2 percent of all financial
institutions and total industry assets. 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 toward
which federal regulators must work 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 work toward preserving the character of minority banks in
cases involving mergers or acquisitions of these institutions (I will
refer to such activities as minority bank support efforts in my testimony
today).^3 While the other bank regulators--the Board of Governors of the
Federal Reserve System (Federal Reserve) and the Office of the Comptroller
of the Currency (OCC)--are not subject to Section 308 of FIRREA, they also
have engaged in efforts to support minority banks over the years.
You and other members of the House Financial Services Committee, including
the Chairman, requested in 2005 that we review the efforts of all of the
regulators to support minority banks out of concerns about the
effectiveness of those efforts. We had previously reported in 1993 that
while FDIC and OTS had taken steps to comply with Section 308, minority
banks had mixed views on the effectiveness of the agencies' efforts.^4 In
particular, minority banks were concerned that the regulators did not
provide adequate technical assistance, and, more generally, that agency
safety and soundness examiners did not understand the unique challenges
that their institutions faced. We recommended in the 1993 report that FDIC
and OTS periodically survey minority banks to assess the effectiveness of
their support efforts. Given the passage of time between 1993 and 2005,
you requested that we follow up on minority bank issues and the efforts of
all bank regulators to support such institutions.
^1GAO, Minority Banks: Regulators Need to Better Assess Effectiveness of
Support Efforts, [19]GAO-07-6 (Washington, D.C.: Oct. 4, 2006). The term
"minority banks" refers to all depository institutions--including
thrifts--that are considered minority- or women-owned by the Department of
the Treasury and the federal banking regulators--the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, and the Office of
Thrift Supervision.
^2FIRREA, Pub. L. No. 101-73, S 308, 103 Stat. 183, 353 (1989).
^3While Treasury convened interagency panels on minority bank issues in
the early 1990s, department officials said it no longer does so. According
to Treasury officials, the FIRREA consulting requirement is open to some
interpretation and the general view within the department was that ongoing
consultations were not required. However, Treasury officials said that
they do discuss minority bank issues with the regulators as the need
arises.
In my testimony today, I will discuss the key findings of our 2006 report,
which included steps to (1) review the profitability of minority banks
over time; (2) identify the regulators' minority bank support efforts and
determine whether the regulators were evaluating the effectiveness of
those efforts; and (3) obtain the views of minority banks on the support
efforts and related regulatory issues. Additionally, in the last section
of this testimony, I will provide a brief update on some of the steps the
regulators have taken in response to recommendations in our 2006 report.
To address the first objective, we obtained and analyzed financial data
for minority banks from FDIC for 1995, 2000, and 2005. 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 Treasury, FDIC, the
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.^5 To address
the third objective, we surveyed all institutions identified by the
banking regulators as minority institutions. The Web-based 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. Finally, in preparation for this testimony, we
contacted the regulators in order to obtain information on any efforts
they may have undertaken in response to the recommendations in our 2006
report.
^4GAO, Minority-Owned Financial Institutions: Status of Federal Efforts to
Preserve Minority Ownership, [20]GAO/GGD-94-1 (Washington, D.C.: Nov. 3,
1993).
^5Government Performance and Results Act of 1993, Pub. L. No. 103-62, S7,
107 Stat. 285, 292, (codified at 39 U.S.C. S 2801(1)).
We conducted our work in Washington, D.C., and New York in accordance with
generally accepted government auditing standards.
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.^6
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.^7 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, such as relatively higher reserves for
potential loan losses and administrative expenses and 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, at the time of our review, no agency had assessed the
effectiveness of its efforts through regular and comprehensive surveys of
minority banks or outcome-oriented performance measures.^8 FDIC--which
supervises more than half of all minority banks--had the most
comprehensive program to support minority banks and led an interagency
group that coordinates such efforts. Among other things, FDIC has
designated officials in the agency's headquarters and regional offices to
be responsible for minority bank efforts, held periodic conferences for
minority banks, and established formal policies for annual outreach to the
banks it regulates to make them aware of available technical assistance.
OTS also designated staff to be responsible for the agency's efforts to
support minority banks, developed outreach procedures, and focused its
efforts on providing technical assistance. OCC and the Federal Reserve,
while not required to do so by Section 308 of FIRREA, undertook some
efforts to support minority banks, such as holding occasional conferences
for Native American banks, and were planning additional efforts. FDIC
proactively sought to assess the effectiveness of its support efforts; for
example, it surveyed minority banks. However, these surveys did not
address key activities, such as the provision of technical assistance, and
the agency had not established outcome-oriented performance measures for
its support efforts. Furthermore, none of the other regulators
comprehensively surveyed minority banks on the effectiveness of their
support efforts or established outcome-oriented performance measures.
Consequently, the regulators were not well positioned to assess the
results of their support efforts or identify areas for improvement.
^6The FDIC definition for peer groups includes all institutions of a
similar asset size, including minority and nonminority institutions.
^7Examples of assets include loans and securities.
Our survey of minority banks identified potential limitations in the
regulators' support efforts that likely would be of significance to agency
managers and warrant follow-up analysis. About one-third 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 "do not know." FDIC-regulated
banks were more positive about their agency's efforts than banks that
other agencies regulated. 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. Although regulators may
emphasize the provision of technical assistance to minority banks, less
than 30 percent of such institutions said they had used such agency
services within the last 3 years. Therefore, the banks may have been
missing opportunities to address problems that limited their operations or
financial performance. As we found in our 1993 report, some minority bank
officials also said that examiners did not always understand the
challenges that the banks may face in providing services in their
communities or operating environments. 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.
^8Outcome-oriented performance measures assess the results of a program
against its intended purposes.
To allow the regulators to better understand the effectiveness of their
support efforts, our October 2006 report recommended that the regulators
review such efforts 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; or (2) establishing outcome-oriented performance measures to
evaluate the extent to which their efforts are achieving their objectives.
Subsequent to the report's issuance, the regulators have reported taking
steps to better assess or enhance their minority bank support efforts. For
example, all of the regulators have developed surveys or are in the
process of consulting with minority banks to obtain feedback on their
support efforts. I also note that some regulators plan to provide
additional training to their examiners on minority bank issues. These
initiatives are positive developments, but it is too soon to evaluate
their effectiveness. We encourage agency officials to ensure that they
collect and analyze relevant data and take steps to enhance their minority
bank support efforts as may be warranted.
Background
Many minority banks are located in urban areas and seek to serve
distressed communities and populations that financial institutions
traditionally have underserved. 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 (see 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-American^a 73 37
African-American 46 24
Hispanic-American 38 19
Native American 20 10
Women-owned 13 7
Other^b 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
Percentage of minority Percentage of total banking
Asset size 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. As shown in table 3, FDIC serves as
the primary federal regulator for more than half of minority banks--109 of
the 195 banks, or 56 percent--and the Federal Reserve regulates the
fewest.
Table 3: Number of Minority Banks, by Regulator, 2005
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. 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. However, in some cases minority
banks not considered by their primary regulator to be minority
institutions were considered to be eligible for participation in another
regulator's efforts. We identified 10 FDIC-regulated banks, 4 Federal
Reserve-regulated banks, 3 OCC-regulated banks, and 1 OTS-regulated bank
fitting this description.
The federal regulators primarily focus on ensuring the safety and
soundness of banks and do so through on-site examinations and other means.
Regulators may also close banks that are deemed insolvent and posing a
risk to the Deposit Insurance Fund.^9 FDIC is responsible for ensuring
that the deposits in failed banks are protected up to established deposit
insurance limits.
While the regulators' primary focus is bank safety and soundness, laws and
regulations can identify additional goals and objectives. Recognizing the
importance of minority banks, Section 308 of FIRREA outlined five broad
goals toward which FDIC and OTS, in consultation with Treasury, are to
work 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 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 education
programs.
^9FDIC administers the fund, which provides deposit insurance for banks
and thrifts.
Technical assistance is typically defined as one-to-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 also may provide
technical assistance to banks that is related to deficiencies
identified in safety and soundness examinations. In contrast,
education programs typically are open to all banks regulated by a
particular agency or all banks located within a regulator's
regional office. For example, regulators may offer training for
banks to review compliance with laws and regulations.
Large Minority Banks Showed Profitability Close to That of Their
Peers, but Many Small and African-American Banks Have Been Less
Profitable
As shown in figure 1, our 2006 report found that, according to
FDIC data, 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 those of their peers. 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.
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.^10 By historical banking industry standards, an ROA of 1
percent or more generally has been considered to indicate an
adequate level of profitability. We found that profitability of
the larger minority, 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.
^10A 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.
Figure 1: Percentage of Minority Banks by Size and Average ROA for
Minority Banks and Peer Groups by Asset Size, 2005
In contrast, 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 generally were
close to those of their peers, or ROAs of about 1 percent, and minority
banks with assets of less than $100 million showing greater differences
with their peers.
The profitability of African-American banks generally has been below that
of their peers in all size categories (see fig. 2).^11 For example,
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. Our analysis of FDIC
data for 2000 and 1995 also found that African-American banks of all sizes
had lower ROAs than their peers.
Figure 2: Average ROA of African-American Banks and Peer Banks by Asset
Size, 2005
Our analysis of 2005 FDIC data also suggests some possible reasons for the
differences in profitability between some minority banks and their
peers.^12 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 (see fig. 3).^13 Although having higher loan loss
reserves may be necessary for the safe and sound operation of any
particular bank, they lower bank profits because loan loss reserves are
counted as expenses.
^11In 2005, African-American banks did not occupy all asset size
categories. The largest African-American banks had less than $1 billion in
assets; thus, they did not populate in the two largest size categories: $1
billion to $10 billion and greater than $10 billion.
^12While 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.
Figure 3: 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 might affect
the profitability of some minority banks. Operating expenses--expenditures
for items such as administrative expenses and salaries--typically are
compared to an institution's total earning assets, such as loans and
investments, to indicate the proportion of earning assets that banks spend
on operating expenses. As figure 4 indicates, many minority banks with
less than $100 million in assets had higher operating expenses than their
peers in 2005. Academic studies we reviewed generally reached similar
conclusions.
^13The term "loan loss reserves" refers to the allowance each bank must
maintain to absorb estimated credit losses associated with its loan and
lease portfolio.
Figure 4: Average Operating Expenses Relative to Earning Assets of Banks
with Assets Less Than $100 million, 2005
Officials from several minority banks we contacted also described aspects
of their operating environment, business practices, and 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, as part of their mission these banks spend more time and
resources on their customers per transaction than other banks. 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.
Minority bank officials also cited other factors that may have limited
their profitability. In particular, in response to Community Reinvestment
Act (CRA) incentives, the officials said that larger banks and other
financial institutions were increasing competition for minority banks'
traditional customer base.^14 The officials said that larger banks could
offer loans and other financial services at more competitive prices
because they could raise funds at lower rates and take advantage of
operational efficiencies. In addition, officials from some
African-American and Hispanic banks cited attracting and retaining quality
staff as a challenge to their profitability.
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 the customers' primary
language provided a competitive advantage.
Regulators Adopted Differing Approaches to Supporting Minority Banks, but
Assessment Efforts Were Limited
Our report found that FDIC--which supervises 109 of 195 minority
banks--had developed the most extensive efforts to support minority banks
among the banking regulators (see fig. 5). FDIC had also 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. OTS had developed a variety of
support programs, including developing a minority bank policy statement
and staffing support structure. OCC had also taken steps to support
minority banks, such as developing a policy statement. OCC and the Federal
Reserve had also hosted events for some minority banks.
^14Section 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).
Figure 5: Banking Regulators' Efforts to Support Minority Banks, as of
October 2006
^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 highlights some key support activities discussed in our
October 2006 report.
Policy Statements. FDIC, OTS, and OCC all have policy statements that
outline the agencies' efforts for minority banks. They 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, 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. While OCC
and the Federal Reserve did not have similar staffing structures,
officials from these agencies had contacted minority banks among their
responsibilities.
Minority Bank Events and Training. FDIC has taken the lead role in
sponsoring, hosting, and coordinating events in support of minority banks.
For example, in August 2006 FDIC sponsored a national conference for
minority banks in which representatives from OTS, OCC, and the Federal
Reserve participated. FDIC also has sponsored the Minority Bankers
Roundtable (MBR) series, which agency 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. To varying degrees, OTS, OCC,
and the Federal Reserve also have held events to support minority banks,
such as Native American Institutions.
Technical Assistance. 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 from 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. OCC and the Federal
Reserve provide technical assistance to all of their banks, but had not
established outreach procedures for all their minority banks outside of
the customary examination and supervision processes. However, OCC
officials told us that they were in the process of developing an outreach
plan for all minority banks regulated by the agency. 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.
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 asked to bid on the assets of troubled minority banks that are
expected to fail. However, FDIC is required to accept the bids on failing
banks that pose the lowest expected cost to the Deposit Insurance Fund.^15
As a result, all bidders, including minority bidders, are subject to
competition. OTS and OCC have developed written policies that describe how
the agencies will work with FDIC to identify qualified minority banks or
investors to acquire minority banks that are failing. While the Federal
Reserve does not have a similar written policy, agency officials say that
they also work with FDIC to identify qualified minority banks or
investors. All four agencies also said that they try to assist troubled
minority banks improve their financial condition before it deteriorates to
the point that a resolution through FDIC becomes necessary. For example,
agencies may provide technical assistance in such situations or try to
identify other minority banks willing to acquire or merge with the
troubled institutions.
At the Time of our Report, Regulators Did Not Assess Their Support Efforts
through Surveys or Performance Measures
While FDIC was proactive in assessing its support efforts for minority
banks, none of the regulators 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 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.
As part of its assessment methods, FDIC conducted roundtables and surveyed
minority banks on aspects of its minority bank efforts. For example, in
2005, FDIC requested feedback on its 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.^16 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.
^15Section 13(c) of the Federal Deposit Insurance Act (codified at 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 would
incur in doing so would represent the least costly alternative.
While FDIC had taken steps to assess the effectiveness of its minority
bank support efforts, we identified some limitations in its approach. For
example, in FDIC's 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. None of the other regulators had surveyed minority banks recently
on support efforts or developed performance measures.
By not taking such steps, we concluded that the regulators were not well
positioned to assess their support efforts or identify areas for
improvement. Further, the regulators could not 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 officials we surveyed 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. Some 36 percent of survey respondents described their
regulators' efforts as very good or good, 26 percent described them as
fair, and 13 percent described the efforts as poor or very poor (see fig.
6). A relatively large percentage--25 percent--responded "do not know" to
this question.
^16The museum exhibition would have traced the history of minority banks
in the United States. However, after conducting additional research on
this proposal, FDIC decided not to pursue the project, in part because of
limited interest from some minority banks.
Figure 6: Minority Banks' Ratings of Support Efforts, by Regulator
Banks' responses varied by regulator, with 45 percent of banks regulated
by FDIC giving very good or good responses, compared with about 25 percent
of banks regulated by other agencies. 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 "do not 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.
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 (see fig. 7). 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 that the information 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 7: Usefulness of FDIC's Roundtables and Conferences, by Regulator
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 (see fig. 8). Minority banks regulated by OCC and the Federal
Reserve reported similarly low usage of technical assistance services.
However, of the few banks that used technical assistance--41--the majority
rated the assistance provided as extremely or very useful.^17 Further,
although small minority banks and African-American banks of all sizes have
consistently faced financial challenges and might benefit from certain
types of assistance, the banks also reported low rates of usage of the
agencies' technical assistance. While our survey did not address the
reasons that relatively few minority banks appear to use the 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.
^17The survey did find that minority banks that FDIC and OTS regulated
were more aware of the agencies' technical assistance outreach efforts
than institutions that OCC and the Federal Reserve regulated. This finding
is consistent with the fact that FDIC and OTS have formalized technical
assistance outreach efforts, while the other regulators do not.
Figure 8: 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
More than 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 respondents mentioned this issue when asked for suggestions about
how regulators could improve their efforts to support minority banks, and
several minority banks that we interviewed 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 relative to the Bank Secrecy Act's
requirements for cash transactions.^18 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.
Many survey respondents also said that a CRA provision that was designed
to assist their institutions was not effectively achieving this goal. The
provision allows bank regulators conducting CRA examinations to give
consideration to banks that assist minority banks through capital
investment, loan participation, and other ventures that help meet the
credit needs of local communities. Despite this provision, only 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 (see fig. 9). Some minority
bankers attributed their view that the CRA provision has not been
effective, in part, to a lack of clarity in interagency guidance on the
act's implementation. They said that the interagency guidance should be
clarified to assure banks that they will receive CRA consideration in
making investments in minority banks.
^18The body of law commonly referred to as the Bank Secrecy Act (BSA) is
codified at 31 U.S.C. SS 5311-5322 and 12 U.S.C. SS 1829b and 1951-1959.
Figure 9: Minority Banks' Evaluation of the Extent to Which CRA Has
Encouraged Partnerships with Other Institutions
Regulators Recently Have Taken Steps to Assess and Enhance Their Minority Bank
Support Efforts, but It Is Too Soon to Assess Their Effectiveness
Our 2006 report recommended that the bank regulators regularly review the
effectiveness of their minority bank support efforts and related
regulatory activities and, as appropriate, make changes necessary to
better serve such institutions. In conducting such reviews, we recommended
that the regulators consider conducting periodic surveys of minority banks
or developing outcome-oriented performance measures for their support
efforts. In conducting such reviews, we also suggested that the regulators
focus on the overall views of minority banks about support efforts, the
usage and effectiveness of technical assistance (particularly assistance
provided to small minority and African-American banks), and the level of
training provided to agency examiners on minority banks and their
operating environments.
Over the past year, bank regulatory officials we contacted identified
several steps that they have initiated to assess the effectiveness of
their minority bank support efforts or to enhance such support efforts.
They include the following actions:
o A Federal Reserve official told us that the agency has
established a working group that is developing a pilot training
program for minority banks and new banks. The official said that
three training modules have been drafted for different phases of a
bank's life, including starting a bank, operating a bank during
its first 5 years of existence, and bank expansion. The official
said that the program will be piloted throughout the U.S.
beginning in early November 2007. Throughout the course of
developing, drafting, and piloting the program, Federal Reserve
officials said they have, and will continue to, consult with
minority bankers to obtain feedback on the effort.
o An OCC official said that the agency recently sent a survey to
minority banks on its education, outreach, and technical
assistance efforts that should be completed by the end of October.
OCC also plans to follow up this survey with a series of focus
groups. In addition, the official said OCC just completed an
internal survey of certain officials involved in supervising
minority institutions, and plans to review the results of the two
surveys and focus groups to improve its minority bank support
efforts.
o FDIC officials told us that the agency has developed a survey to
obtain feedback on the agency's minority bank support efforts.
They estimate that the survey will be sent out to all minority
institutions (not just those minority banks FDIC supervises) in
mid-December 2007.
o An OTS official told us that the agency will send out a survey
to the minority banks the agency supervises on its efforts in the
next couple weeks and that it has also conducted a series of
roundtables with minority banks in the past year.
The federal banking agencies have also taken some steps to address
other issues raised in our report. For example, Federal Reserve
and FDIC officials told us that that the agencies will provide
additional training on minority bank issues to their examiners. In
addition, in July 2007 the federal banking agencies published a
CRA Interagency Notice that requested comments on nine new
"Questions and Answers" about community reinvestment.^19 One
question covers how majority banks may engage in and receive
positive CRA consideration for activities conducted with minority
institutions. An OCC official said that the comments on the
proposed "Q and As" are under review.
^19Community Reinvestment Act; Interagency Questions and Answers Regarding
Community Investment, 72 Fed. Reg. 37922 (notice and request for comment
Jul. 11, 2007).
While the regulators' recent efforts to assess and enhance their
minority bank support efforts and other activities are
encouraging, it is too soon to assess their effectiveness. For
example, the Federal Reserve's pilot training program for minority
and new banks is not scheduled to begin until later this year.
Further, the other regulators' efforts to survey minority banks on
support efforts generally also are at an early stage. We encourage
agency officials to ensure that they collect and analyze relevant
data and take steps to enhance their minority bank support efforts
as warranted.
Mr. Chairman, this concludes my prepared statement. I would be
happy to address any questions that you or subcommittee members
may have.
GAO Contacts
For further information about this testimony, please contact
George A. Scott on (202) 512-7215 or at [email protected].
Staff Acknowledgments
Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this statement.
Individuals making key contributions include Wesley M. Phillips,
Assistant Director; Allison Abrams; Kevin Averyt; and Barbara
Roesmann.
(250381)
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To view the full product, including the scope
and methodology, click on [21]GAO-08-233T .
For more information, contact George Scott at (202) 512-7215 or
[email protected].
Highlights of [22]GAO-08-233T , a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, U.S. House
of Representatives
October 2007
MINORITY BANKS
Regulators' Assessments of the Effectiveness of Their Support Efforts Have
Been Limited
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). While not required to do so by FIRREA, the Board of Governors of
the Federal Reserve System (Federal Reserve) and Office of the Comptroller
of the Currency (OCC) have established some minority bank support efforts.
This testimony, based on a 2006 GAO report, discusses the profitability of
minority banks, regulators' support and assessment efforts, and the views
of minority banks on the regulators' efforts as identified through
responses from a survey of 149 such institutions.
[23]What GAO Recommends
In the 2006 report, GAO recommended that the regulators review the
effectiveness of their support efforts by such means as (1) surveying
minority banks and/or (2) establishing performance measures.
Since the report, all of the regulators have reported taking steps to
survey or obtain information from minority banks on their support efforts.
However, it is too soon to evaluate the effectiveness of these assessment
efforts.
GAO reported in 2006 that the profitability of most large minority banks
(assets greater than $100 million) was nearly equal to that of their peers
(similarly sized banks) in 2005 and earlier years, according to FDIC data.
However, many small minority banks and African-American banks of all sizes
were less profitable than their peers. GAO's analysis and other studies
identified some possible explanations for these differences, including
relatively higher loan loss reserves and operating expenses and
competition from larger banks.
Bank regulators had adopted differing approaches to supporting minority
banks, but no agency had regularly and comprehensively assessed the
effectiveness of its efforts. FDIC--which supervises over half of all
minority banks--had the most comprehensive support efforts and leads
interagency efforts. OTS focused on providing technical assistance to
minority banks. While not required to do so by FIRREA, OCC and the Federal
Reserve had taken some steps to support minority banks. Although FDIC had
recently sought to assess the effectiveness of its support efforts through
various methods, none of the regulators comprehensively surveyed minority
banks or had developed performance measures. Consequently, the regulators
were not well positioned to assess their support efforts.
GAO's survey of minority banks identified potential limitations in the
regulators' support efforts that would likely be of significance to agency
managers and warrant follow-up analysis. Only about one-third 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" (see fig.). Banks
regulated by FDIC 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. Although
regulators may have emphasized the provision of technical assistance to
minority banks, less than 30 percent of such institutions have used such
agency services within the last 3 years and therefore may be missing
opportunities to address problems that limit their operations or financial
performance.
Minority Banks' Ratings of Support Efforts, by Regulator
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References
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19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-6
20. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-94-1
21. http://www.gao.gov/cgi-bin/getrpt?GAO-08-233T
22. http://www.gao.gov/cgi-bin/getrpt?GAO-08-233T
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