1993 Bank Resolutions: FDIC Further Improved Its Resolution Process
(Letter Report, 06/09/95, GAO/GGD-95-118).

Pursuant to a legislative requirement, GAO reviewed the Federal Deposit
Insurance Corporation's (FDIC) compliance with the Federal Deposit
Insurance Corporation Improvement Act's (FDICIA) least-cost provisions
for resolving troubled depository institutions.

GAO found that: (1) FDIC has improved its resolution process and
consistently makes decisions based on the least costly resolution
alternatives; (2) FDIC adequately documented its valuations of failed
banks' assets, deposits, and other liabilities and the bids received
from potential acquirers in 6 of the 10 resolutions reviewed; (3) FDIC
made improvements in communicating with potential bidders and monitoring
its prior resolution experience, including previous arrangements with
acquirers to share with FDIC in the losses of certain failed bank
assets; (4) FDIC was unable to conform to its standard resolution
process in 4 of the 10 resolutions reviewed because it had to move
quickly to resolve liquidity problems without the benefit of on-site
asset valuations; (5) FDIC cannot identify assets tainted by fraud or
other legal problems or available resolution alternatives without
on-site asset valuations; (6) FDIC expects the relative number of
failing banks with liquidity problems to increase, so it is taking
action to improve its resolution process; and (7) FDIC will be unable to
conduct on-site asset valuations unless it can get earlier access to
banks with liquidity problems.

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

 REPORTNUM:  GGD-95-118
     TITLE:  1993 Bank Resolutions: FDIC Further Improved Its Resolution 
             Process
      DATE:  06/09/95
   SUBJECT:  Bank failures
             Financial institutions
             Assets
             Documentation
             Compliance
             Banking law
             Cost effectiveness analysis
             Insured commercial banks
             Bank management
             Financial management
IDENTIFIER:  BIF
             Bank Insurance Fund
             FDIC Risk Analysis and Value Estimation System
             
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Cover
================================================================ COVER


Report to the Senate Committee on Banking, Housing, and Urban Affairs
and the House Committee on Banking and Financial Services

June 1995

1993 BANK RESOLUTIONS - FDIC
FURTHER IMPROVED ITS RESOLUTION
PROCESS

GAO/GGD-95-118

1993 Bank Resolutions


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

  AVR - Asset Valuation Review
  BIF - Bank Insurance Fund
  DOR - Division of Resolutions
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act of
     1991

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


B-259981

June 9, 1995

The Honorable Alfonse M.  D'Amato
Chairman
The Honorable Paul S.  Sarbanes
Ranking Minority Member
Committee on Banking, Housing, and
 Urban Affairs
United States Senate

The Honorable James A.  Leach
Chairman
The Honorable Henry B.  Gonzalez
Ranking Minority Member
Committee on Banking and Financial Services
House of Representatives

This report presents our analysis of the Federal Deposit Insurance
Corporation's (FDIC) compliance with section 13(c)(4) of the Federal
Deposit Insurance Act, as amended by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA).  This section of the
act requires FDIC to calculate and document its evaluation of the
costs of alternatives for resolving a troubled depository institution
and to choose the resolution alternative that it determines to be
least costly to the deposit insurance fund.  These statutory
provisions establish the basic requirements that FDIC must meet in
making its resolution decisions. 

The act requires that we annually audit FDIC's compliance with the
FDICIA least-cost provisions.  This is our second such report.  In
our first report,\1 we stated that FDIC's process for resolving
failed institutions during 1992 was adequate to provide for
compliance.  During the course of that review, FDIC continuously
improved its process relative to on-site asset valuations and
documentation of the valuation assumptions.  We reported that FDIC's
process also included using a research model primarily as a secondary
source to check the reasonableness of its on-site asset valuations. 
We also reported that in the 22 resolutions we reviewed, FDIC had
chosen the resolution alternative that it determined was the least
costly of the alternatives considered and adequately documented the
bases for those resolution decisions.  However, we found that in 18
of the 22 cases, FDIC had not documented its rationale for the
marketing strategy it selected. 


--------------------
\1 1992 Bank Resolutions:  FDIC Chose Methods Determined Least
Costly, but Needs to Improve Process (GAO/GGD-94-107, May 10, 1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

From our current review of 10 of the 42 banks that failed and were
resolved during 1993, we found that FDIC further improved its
resolution process, particularly the documentation of its marketing
strategies and the bases for its resolution decisions.  We also found
that FDIC generally conformed to its resolution process and
consistently made decisions based on its determination of the least
costly available resolution alternative.  In 6 of the 10 resolutions
we reviewed, we found that FDIC performed prescribed on-site asset
valuations, estimated the values of deposits and other liabilities,
and developed a broad range of marketing strategies to solicit bids
from potential acquirers.  FDIC adequately documented its evaluations
of the failed banks' assets, deposits, and other liabilities as well
as the bids received from potential acquirers.  In addition, we found
that FDIC made improvements in communicating with potential bidders
and monitoring its prior resolution experience, including previous
arrangements with acquirers to share with FDIC in the losses of
certain failed bank assets. 

FDIC, however, was unable to fully conform to its standard resolution
process in 4 of the 10 resolutions we reviewed because conditions
causing the banks' failures, such as liquidity problems or fraud,
required FDIC to move quickly to resolve them without benefit of
complete on-site asset valuations.  Since FDIC did not have
sufficient time to make on-site valuations, it used its research
model to estimate the value of most or all of the failed banks'
assets.  FDIC officials told us that their model yields less accurate
and reliable asset valuations than those resulting from on-site
reviews.  Additionally, without benefit of an on-site review, FDIC
cannot identify any assets that may be tainted due to fraud,
environmental concerns, or other legal problems.  Further, without an
on-site review, potential acquirers do not have a basis on which to
bid for the failed bank's assets.  Consequently, in these cases, FDIC
did not offer potential acquirers the opportunity to purchase those
assets, thus limiting available resolution alternatives. 

Notwithstanding these circumstances, we found that FDIC adequately
documented its valuations and their related bases as well as the bids
received on the assets, deposits, and other liabilities offered to
potential acquirers.  We also found that FDIC selected the available
resolution alternative it determined to be the least costly. 

FDIC officials told us they expect the number of failing banks with
liquidity problems to increase relative to total failures, and
therefore they anticipate having to use the research model more in
the future.  FDIC is currently taking several actions to improve its
process relative to liquidity failures, such as enhancing the
research model and developing a broad-based asset disposition
tracking system.  However, FDIC officials told us that these efforts
will not appreciably improve the research model's asset valuation
reliability and thus they would not offer assets valued by the model
for sale at the time of resolution.  The officials also told us that
if they had earlier access to banks with liquidity problems, they
could do on-site asset valuations, allow potential acquirers the
opportunity to do an on-site review, and market the assets to
potential acquirers. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Resolving failed or failing banks is a primary FDIC responsibility. 
FDICIA generally requires FDIC to select the resolution alternative
it determines to be the least costly to the Bank Insurance Fund
(BIF).  To make this least-cost determination, FDIC must (1) consider
and evaluate all possible resolution alternatives by computing and
comparing their costs on a present-value basis, using realistic
discount rates, and (2) select the least costly alternative on the
basis of the evaluation. 

In selecting the least costly resolution alternative, FDIC's process
is to compare its estimated cost of liquidation-- basically, the
amount of insured deposits paid out minus the net realizable value of
an institution's assets--with the amounts that potential acquirers
bid for the institution's assets and deposits.  FDIC's Division of
Resolutions (DOR) must then estimate the net realizable value of an
institution's assets by performing an on-site Asset Valuation Review
(AVR) or, when time or other constraints exist, by using a computer
model (called the research model).  To solicit the greatest number of
bids, FDIC normally offers various marketing options to potential
acquirers. 

FDIC has resolved failed or failing banks using three basic methods,
which include (1) directly paying depositors the insured amount of
their deposits and disposing of the failed bank's assets (deposit
payoff and asset liquidation); (2) selling only the bank's insured
deposits and certain other liabilities, with some of its assets, to
an acquirer (insured deposit transfer); and (3) selling some or all
of the failed bank's deposits, certain other liabilities, and some or
all of its assets to an acquirer (purchase and assumption).  Within
this third category, many variations exist based on specific assets
that are offered for sale.  For example, some purchase and assumption
resolutions have also included loss-sharing agreements--an
arrangement whereby FDIC, in order to sell certain assets with the
intent of limiting losses to BIF, agrees to share with the acquirer
the losses on those assets. 

An interim resolution alternative available to FDIC--used
occasionally and only under certain conditions, such as known market
interest in the troubled bank--is to establish a bridge bank to take
interim control of the operations of the bank.  In this way, FDIC can
operate the bank temporarily to preserve the franchise value--that
is, its value as an ongoing entity--until an orderly final resolution
decision can be made.  FDIC can operate a bridge bank for 2 years
with the option for three 1-year extensions; however, FDIC officials
stated that their general practice is to operate a bridge bank for
less than 6 months. 

The resolution alternatives that FDIC considers in the agency's
least-cost deliberations result largely from FDIC's efforts to market
the failed banks' assets, deposits, and other liabilities.  On a
case-by-case basis, FDIC develops a marketing strategy for the
various ways to offer a failed bank to potential acquirers.  The
marketing strategy is shaped, according to FDIC policy, by the unique
characteristics of the institution and market conditions at the time
the strategy is developed.  Typically, the marketing strategy
includes any one approach or a combination of approaches to selling
the failed bank.  Usually, FDIC's marketing strategy includes a
potential bid framework for both purchase and assumption and insured
deposit transfer transactions.  Each bid received is an individual
resolution alternative that FDIC considers and evaluates in its
least-cost resolution process. 

FDIC officials believe that better returns on failed bank assets
ultimately result if those assets are immediately passed to the
private sector rather than being held by the government until they
are eventually sold.  Accordingly, FDIC devises its marketing
strategies so that, to the extent possible, more assets are available
for the private sector to consider acquiring at the time of
resolution. 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The objective of this review was to determine the extent to which
FDIC complied with FDICIA requirements to select the least costly
resolution alternative.  To address our objective, we judgmentally
selected for review 10 banks with the largest total asset value of
the 42 banks that failed and were resolved by FDIC during 1993. 
These 10 banks had total assets of $2.9 billion and had resolution
costs to BIF of $354 million.  The 42 banks had total assets of $4
billion and had estimated BIF losses of $532 million.  The 10 banks
included various attributes, such as different types of resolution
methods, the two asset valuation methods, and geographic dispersion. 
Of the 10 selected banks, 1 major resolution was done at DOR
headquarters in Washington, D.C., and 9 regional resolutions were
done at DOR regional offices--2 in Boston, 3 in Dallas, and 4 in San
Francisco.  See appendix I for profile information relative to the 10
sampled resolutions. 

We modified the data collection instrument we used in our last study
to document and track the information gleaned from our review of the
10 resolution case files.  We collected data from the inception of
resolution activity through the final resolution decision.  In
particular, we focused on DOR's performance of asset valuations,
documentation of the assumptions used, approaches to marketing the
bank, bids received and costed via application of the cost test, and
the treatment of uninsured depositors.  We also reviewed pertinent
policies and procedures, and interviewed numerous FDIC officials. 

In our first assessment of FDIC's least-cost resolution process, we
reviewed in considerable detail the computer programs underlying the
AVR and research model developed by FDIC to value assets.  Because
the computer programs remained unchanged for 1993 resolutions, we did
not repeat that review.  Instead, for our sampled resolutions, we
concentrated on the circumstances requiring the use of the different
asset valuation techniques and on the results they produced. 

We assessed the adequacy of FDIC's resolution process to determine
the least costly resolution alternative, using the criteria developed
in our earlier report on CrossLand Savings Bank.\2 We did not
determine whether, in fact, the least costly resolution alternative
resulted.  The ultimate cost of a resolution cannot be identified
until all remaining assets are sold and liabilities are paid by FDIC
as receiver, which generally takes several years. 

In addition to our detailed analysis of the 10 sampled resolutions,
we made a limited review of CrossLand Savings Bank, First City Texas,
and Missouri Bridge Bank, which were resolved during 1993 but failed
in previous years.  Each of those resolutions involved bridge bank
arrangements and loss-sharing agreements.  We reviewed them to assess
the effect the resolution alternatives had on the development of
FDIC's marketing strategies. 

We did our work between August and December 1994 at FDIC headquarters
in Washington, D.C., and DOR regional offices in Boston, Dallas, and
San Francisco.  FDIC provided written comments on a draft of this
report.  The comments are summarized on pages 11 and 12 and reprinted
in appendix II.  Our work was done in accordance with generally
accepted government auditing standards. 


--------------------
\2 Failed Bank:  FDIC Documentation of CrossLand Savings, FSB,
Decision Was Inadequate (GAO/GGD-92-92, July 7, 1992). 


   FDIC SELECTED RESOLUTION
   ALTERNATIVES IT DETERMINED TO
   BE LEAST COSTLY
------------------------------------------------------------ Letter :4

Our review of the 10 sampled resolutions showed that FDIC generally
conformed to its resolution process and consistently selected the
resolution alternative it determined to be the least costly.  FDIC
also adequately documented the marketing strategies and the bases for
its resolution decisions.  We further found that when circumstances
enabled FDIC to make on-site valuations of the assets of failed
banks, it generally developed a broad range of marketing options.  In
addition, we found that FDIC continued to improve its marketing
strategies to help ensure least costly resolutions. 


      AVRS ENABLED FDIC TO PROVIDE
      A WIDE RANGE OF RESOLUTION
      ALTERNATIVES
---------------------------------------------------------- Letter :4.1

FDIC had the opportunity to prepare on-site asset valuations, which
FDIC officials told us normally take 4 to 6 weeks, in 6 of the 10
banks we reviewed.  FDIC marketed the six banks by offering various
combinations of all or most of their assets.  Our review of these 6
resolutions showed that FDIC received 56 bids from 19 potential
acquirers and consistently chose the resolution alternative it
determined to be least costly. 

FDIC officials told us they offer failed bank assets to potential
acquirers only when on-site asset valuations are made.  The officials
also said they believe that assets made available to the market and
sold at resolution produce greater returns to FDIC than if FDIC
retained the assets for subsequent sale.  Our review of the six
resolutions wherein FDIC completed an AVR showed that FDIC offered
all or most of the assets for sale. 

FDICIA requires FDIC to document its evaluation of the costs of
resolution alternatives considered, including the assumptions on
which the evaluations are based.  Our review of the six resolutions
with an on-site asset valuation showed that the documentation
specifically noted the assumptions made for interest rates, asset
recovery rates, asset holding costs, and payments of contingent
liabilities.  For example, one AVR noted that current market interest
rates were used for various categories of commercial property,
residential real estate, and consumer loans.  Further, the AVR noted
that all rates were obtained by contacting local financial
institutions within the bank's area. 


      FDIC IMPROVED ITS
      COMMUNICATION WITH BIDDERS
      AND MONITORING OF
      LOSS-SHARING AGREEMENTS
---------------------------------------------------------- Letter :4.2

During 1993, FDIC expanded its communication with bidders and its
monitoring of loss-sharing agreements in order to develop a broad
range of resolution alternatives and improve future marketing
strategies.  These efforts involved (1) discussions with nonwinning
bidders after final resolution, (2) authorization of second-round
bids when acceptable bids were not received during initial bidding,
and (3) the monitoring of loss-sharing agreements through on-site
reviews and tracking of losses. 

DOR took steps to ensure it was offering a broad range of options to
potential bidders by meeting with losing bidders to discuss ways to
better market future failed institutions.  While such meetings have
not yet been institutionalized for use nationwide, and the results of
the meetings held in 1993 were not always documented, FDIC officials
told us that the meetings were very informative and helped them
develop marketing strategies.  Our review of the six resolutions in
which FDIC performed an AVR provides some support for the FDIC
officials' belief that FDIC was responsive to the bidders' needs. 
For example, we found that no nonconforming bids\3 in our 10 sampled
cases were determined by FDIC to be the least costly resolution
alternative.  By comparison, our first least-cost resolution review
found that in 4 of the 22 cases reviewed, nonconforming bids were
judged to be the least costly resolution alternative.  Thus, meetings
with losing bidders may have helped FDIC stay abreast of market
concerns and offer resolution options more consistent with market
interests. 

In a further effort to communicate with bidders, to sell most or all
of the assets of failed banks, FDIC authorized second-round bids when
acceptable bids were not received during initial bidding.  For
example, the marketing of one bank produced six bids; however, none
of the six bids was determined by FDIC to be less costly than the
cost to liquidate the bank or included the required purchase of bank
operations.  FDIC facilitated the two highest bidders' efforts to
form a consortium and submit a new bid, which FDIC determined
resulted in the least-cost resolution.  While FDIC could have
liquidated the bank because no better bid was submitted, it took the
extra steps in this circumstance and was able to sell the bank and
its operations, lessening the cost to BIF. 

In another resolution, FDIC received two bids that were comparable
when the least-cost test was applied.  Rather than force a
distinction between the similar bids, FDIC requested a second round
of bidding from the two potential acquirers.  The second-round bids
created a distinction between the two potential acquirers and were
higher than the initial bids, enabling FDIC to lessen the cost of
resolution.  FDIC officials advised us that marketing techniques such
as these, as well as potentially selling failed bank branches to
different acquirers, will be considered relative to the circumstances
of the particular failed bank and its potential market. 
Consequently, they said these marketing techniques have been tried on
a case-by-case basis and will continue to be considered on that basis
in FDIC's resolution process. 

FDIC also improved its monitoring of loss-sharing agreements to
expand its knowledge of the efficiency and effectiveness of this
technique for selling poorly performing assets at resolution.  In a
typical loss-sharing agreement, FDIC reimburses acquirers 80 percent
of the loss on certain assets for a period of up to 5 years and
shares in any recoveries beyond the loss-sharing period.  To ensure
that only appropriate losses are shared, FDIC initiated on-site
reviews of assets held by acquirers and a quarterly reporting of
FDIC's loss-sharing amounts.  FDIC anticipates using information on
loss-sharing to improve its future marketing strategies. 


--------------------
\3 A nonconforming bid differs from FDIC's marketing strategy and
options offered.  A nonconforming bid may or may not be significantly
different from FDIC's recommended conforming bid. 


   LIQUIDITY OR SUSPECTED FRAUD
   FAILURES REDUCED RESOLUTION
   ALTERNATIVES
------------------------------------------------------------ Letter :5

When bank failures involved factors such as liquidity problems or
suspected fraud, FDIC used its research model to value all or most of
the assets because it did not have time to do complete AVRs. 
However, since FDIC officials were aware that the model's valuations
were not as reliable as those resulting from on-site asset
valuations, and also because time was not available for potential
acquirers to adequately review the failed bank's assets, FDIC did not
market the assets valued by the model at resolution.  Our review
confirmed that when time or other constraints precluded FDIC from
making on-site asset valuations, FDIC did not offer assets valued by
the model to potential acquirers. 

FDIC officials anticipate using the research model more in the
future, since they believe that bank failures involving liquidity
problems will increase relative to total failures.  Although they
have initiated several actions to improve the reliability of the
model's asset valuations, they have no current solution to the
model's shortcomings.  They are, however, exploring other options
aimed at increasing asset valuation reliability under the tight time
constraints often encountered in liquidity failures. 


      MODEL'S ASSET VALUATIONS
      LESS RELIABLE THAN AVRS
---------------------------------------------------------- Letter :5.1

FDIC uses its research model instead of an on-site asset valuation to
value a failed bank's assets only when certain conditions in the bank
require FDIC to promptly resolve it.  These conditions include
liquidity problems--which limit the bank's ability to meet
depositors' withdrawals--legal concerns, and suspected fraud.  The
research model is based on FDIC's recovery experience for six broad
categories of assets that belonged to small banks that failed between
1986 and 1990. 

FDIC officials told us that the research model produces asset
valuations that are less reliable than those resulting from on-site
asset valuations.  Further, one official stated that the model does
not provide enough information on specific asset valuations because
it groups assets into six broad and not very meaningful categories. 
For example, one-to-four family mortgages and commercial real estate
loans are included in the same category.  Also, use of the research
model prevents FDIC from determining whether any of the assets are
tainted due to possible fraud, environmental concerns, or other legal
problems.  As a result, FDIC does not offer assets valued only by the
model for sale at resolution, which limits FDIC's marketing
strategies. 

Our review of the 10 resolutions disclosed that in 4 of them FDIC
primarily used the research model to value assets.  FDIC marketed
three of the banks by offering deposits and limited loan portfolios
and marketed the other bank by offering only deposits.  Of the three
banks marketed with loan portfolios, one offered a small amount of
loans at a price to be determined by the receiver after the bank's
closure, and the other two offered only those loans that had been
valued by a limited on-site asset valuation.  Because of time or
other constraints, comprehensive on-site asset valuations could not
be made, which precluded FDIC from offering all of the failed banks'
assets to potential acquirers. 


      FDIC EFFORTS UNDER WAY TO
      IMPROVE MODEL
---------------------------------------------------------- Letter :5.2

FDIC officials are aware they need to improve the model's
reliability, particularly because they anticipate using it more in
the future.  The officials told us they believe that bank failures
due to liquidity problems will increase.  For instance, they believe
that the prompt corrective action provisions of FDICIA, such as the
requirement that regulators close banks whose capital falls below a
certain threshold, may result in some surprise liquidity insolvencies
that could have an impact on the resolution process. 

At present, FDIC does not have a ready solution to the research
model's shortcomings.  Its Division of Research and Statistics, which
assessed the model's accuracy by comparing its estimates with actual
sales, was unable to find conclusive evidence upon which adjustment
could prudently be made or determine why the model's estimates differ
appreciably from actual experience.  FDIC is refining the model's
formulas and updating the database to include its recovery experience
for the assets of small and medium banks that failed between 1989 and
1991.  However, FDIC officials told us these changes would not be
sufficient to provide the information needed to make accurate
valuations because the model will continue to group assets in six
broad categories. 

FDIC is also working on another initiative that may provide a basis
for improving asset valuation reliability.  FDIC plans to complete an
asset disposition system during 1996 that will track the performance
of assets from acquisition to disposition.  The system would assign
each asset a unique number so that its estimated value could be
tracked and compared with its eventual sales price, thus establishing
a feedback loop to assess the accuracy of the initial asset
valuation. 


      FDIC IS CONSIDERING OTHER
      ASSET VALUATION OPTIONS
---------------------------------------------------------- Letter :5.3

Without a viable interim solution to the model's shortcomings, FDIC
is reviewing other options for ways to more accurately value assets
when time constraints preclude on-site reviews.  For example, FDIC is
considering how to reduce the time needed to make an on-site
valuation.  Also, to expand the time available to value assets, FDIC
is planning to develop guidance on the use of bridge banks.  However,
FDIC officials believe that earlier access to failing banks with
liquidity problems is key to allowing them sufficient time to perform
on-site valuations of the assets. 

FDIC officials told us they are working on ways to reduce the time
required to make on-site asset valuations.  By using data from
another of its systems, called the Risk Analysis and Value Estimation
System, FDIC hopes it can reduce on-site asset valuation time. 
However, this project is in its initial stages, and FDIC has not
established timeframes for its completion. 

The only other option FDIC has at present is to expand the time
available to value assets.  One method to expand the time is
establishing a bridge bank.  Because the risk of changing market
conditions is inherent in bridge banks, and they can basically only
be considered when there is a known market interest in the troubled
bank, FDIC has been judicious in establishing them.  FDIC has not yet
provided guidance to help its officials decide when the bridge bank
option should be considered; however, its officials advised us that a
policy and users manual for bridge bank selection at resolution is in
the process of being developed and should be ready for use by June
1995. 

Another way to expand the time available for valuing assets is for
FDIC to gain earlier access to failing banks with liquidity problems. 
However, FDIC officials told us that when banks fail because of
liquidity problems, the banks' primary regulators have generally not
provided DOR with access early enough for it to complete on-site
valuations or for potential acquirers to do on-site reviews.  Thus,
FDIC has had to use the research model to value assets and has not
marketed those assets at the time of resolution.  FDIC officials said
they are working with primary bank regulators on a case-by-case basis
to gain early access to known problem banks to enhance the least-cost
resolution process. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

During 1993, FDIC generally conformed to its resolution process and
consistently selected the resolution alternative it determined to be
least costly to BIF on the basis of its valuations and the bids it
received.  When circumstances enabled FDIC to value assets on-site,
it developed a broad range of marketing strategies that produced
various resolution alternatives.  FDIC improved the documentation of
its marketing strategies and the bases for its resolution decisions,
including evaluations of the failed banks' assets, deposits, and
other liabilities.  It also improved its communication with bidders
and strengthened its monitoring of loss-sharing agreements. 

When time was not available to make complete on-site asset
valuations, because of conditions such as a failed bank's liquidity
problems, FDIC had to use its research model to value assets. 
Because FDIC officials lack confidence in the model's ability to
accurately value assets, they did not offer those assets to potential
acquirers at the time of resolution, thus limiting available
resolution alternatives.  FDIC has several initiatives under way to
improve its asset valuation capabilities.  Even so, FDIC officials
believe that gaining earlier access to failing banks with liquidity
problems is key to providing the time needed to do on-site reviews
and enable FDIC to provide a range of marketing options to potential
acquirers. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

FDIC, in its written comments on a draft of this report, indicated it
agreed with the content and conclusions.  It also said it was
drafting a letter to the Comptroller of the Currency to pursue
getting earlier access to failing banks with liquidity problems in
order to enhance the range of marketing options FDIC can present to
potential acquirers.  FDIC's comments are reprinted in appendix II. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairman, Federal Deposit
Insurance Corporation, and other interested parties.  We will also
make copies available to others upon request. 

This report was prepared under the direction of Mark J.  Gillen,
Assistant Director, Financial Institutions and Markets Issues.  Other
major contributors are listed in appendix III.  If there are any
questions about this report, please contact me on (202) 512-8678. 

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


SUMMARY DATA ON GAO SAMPLE OF
FDIC'S 1993 RESOLUTIONS
=========================================================== Appendix I

This appendix includes profile information on the DOR resolutions
included in our sample.  Table I.1 shows the data from our analyses
of the 10 sampled resolutions. 



                                    Table I.1
                     
                      GAO Sample of FDIC's 1993 Resolutions

                              (Dollars in thousands)

                                    Percenta
                                       ge of
DOR                                   assets                  Asset     Reason
office/   Date      Total    Total  retained  Least costly    valuatio  for
Failed    closed   assets  deposit        by  resolution      n method  resoluti
bank      (1993)       \a      s\a    FDIC\b  alternative     used      on
--------  -------  ------  -------  --------  --------------  --------  --------
BOSTON
--------------------------------------------------------------------------------
First     January  $293,4  $263,24        33  Whole bank      On-site   Critical
National  29           74        4            purchase and    review    ly
Bank of                                       assumption                undercap
Vermont                                       with loss                 italized
                                              sharing

Jefferso  Februar  226,51  219,028        88  Insured         Research  Liquidit
n         y 26          8                     deposit         model     y,
National                                      purchase and              equity,
Bank                                          assumption                and
                                                                        fraud
                                                                        problems


DALLAS
--------------------------------------------------------------------------------
American  Februar  96,984   95,999        40  Insured         On-site   Capital
Bank of   y 5                                 deposit         review    insolven
Haltom                                        purchase and              cy
City                                          assumption
                                              with optional
                                              asset pools

College   April 2  205,98  191,404        81  Insured         Research  Liquidit
Boulevar                7                     deposit         model     y
d                                             purchase and              problems
National                                      assumption                and
Bank                                                                    possible
                                                                        fraud

Midland   April 2  128,96  121,704        82  Insured         Research  Liquidit
Bank of                 3                     deposit         model     y
Kansas                                        purchase and              problems
                                              assumption                and
                                                                        possible
                                                                        fraud


SAN FRANCISCO
--------------------------------------------------------------------------------
American  April    131,16  117,835        92  Insured         Research  Unsafe
Commerce  30            6                     deposit         model     and
National                                      purchase and              unsound
Bank                                          assumption                practice
                                                                        s and
                                                                        conditio
                                                                        ns,
                                                                        possible
                                                                        fraud

Capital   June 18  229,36  219,509       100  Payout          On-site   Deterior
Bank of                 6                                     review    ation in
Californ                                                                asset
ia                                                                      quality,
                                                                        poor
                                                                        underwri
                                                                        ting

Mid City  October  104,41   96,354        66  All deposit     On-site   Critical
Bank,     21            4                     purchase and    review    undercap
N.A.                                          assumption                italizat
                                              with asset                ion,
                                              pool                      unsafe
                                                                        and
                                                                        unsound
                                                                        conditio
                                                                        n

The Bank  October  316,75  298,433        83  Insured         On-site   Critical
of San    29            5                     deposit         review    ly
Diego                                         purchase                  undercap
                                              and assumption            italized
                                              with asset
                                              pools


WASHINGTON
--------------------------------------------------------------------------------
New       May 21   1,146,  775,856        14  Whole bank      On-site   Signific
England               324                     purchase and    review    ant
Savings                                       assumption                decrease
Bank                                                                    in
                                                                        capital
--------------------------------------------------------------------------------
\a Values as noted by DOR before the bank's closing. 

\b Assets retained by FDIC upon closure of the bank. 




(See figure in printed edition.)Appendix II
COMMENTS FROM FDIC
=========================================================== Appendix I


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

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Mark J.  Gillen, Assistant Director
James R.  Black, Senior Evaluator
Joe E.  Hunter, Evaluator
Stephen J.  Saks, Senior Evaluator

OFFICE OF THE GENERAL COUNSEL

Rosemary Healy, Senior Attorney

BOSTON/NEW YORK FIELD OFFICE

Kevin F.  Murphy, Senior Evaluator
Raffaele Roffo, Evaluator

DALLAS FIELD OFFICE

Jeanne M.  Barger, Evaluator-in-Charge
Ronald M.  Haun, Senior Evaluator

SAN FRANCISCO FIELD OFFICE

Bruce K.  Engle, Evaluator
Frank Moore, Evaluator
