Failing Banks: Lessons Learned from Resolving First City Bancorporation
of Texas (Letter Report, 03/15/95, GAO/GGD-95-37).

In fewer than five years, the Federal Deposit Insurance Corporation
(FDIC) was called upon twice to resolve the financial problems of the
federally insured banks of the First City Bancorporation of Texas, Inc.
In April 1988, FDIC provided about $970 million in an attempt to restore
First City's financial health.  Four years later, the two largest First
City banks were deemed insolvent, and FDIC was appointed receiver of all
20 First City banks.  This report answers the following four questions:
Regarding the first resolution, why did the FDIC Board of Directors
decide to resolve First City's financial difficulties in 1988 by
providing financial help instead of using other available resolution
alternatives? Regarding the second resolution, why did FDIC's estimate
of the Bank Insurance Fund costs to resolve First City at the time of
the 1992 failure differ so from the estimate when the banks were sold
the following year? What, if any, additional cost to the Fund is
expected from the second resolution of First City? What lessons does the
First City experience offer relevant to the assistance, closure, and
resolution process?

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

 REPORTNUM:  GGD-95-37
     TITLE:  Failing Banks: Lessons Learned from Resolving First City 
             Bancorporation of Texas
      DATE:  03/15/95
   SUBJECT:  Bank failures
             Financial management
             Insured commercial banks
             Financial institutions
             Bank management
             Bank examination
             Banking law
             Cost effectiveness analysis
IDENTIFIER:  Bank Insurance Fund
             BIF
             Dallas (TX)
             Houston (TX)
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman and Ranking Minority Member, Committee on
Banking, Housing, and Urban Affairs
U.S.  Senate

March 1995

FAILING BANKS - LESSONS LEARNED
FROM RESOLVING FIRST CITY
BANCORPORATION OF TEXAS

GAO/GGD-95-37

First City Bancorporation of Texas

(233398)


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

  ALLL - allowance for loan and lease losses
  BIF - Bank Insurance Fund
  CEBA - Competitive Equality Banking Act of 1987
  DOL - Division of Liquidation
  DOR - Division of Resolutions
  EIC - Examiner-in-charge
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act of
     1991
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act of 1989
  FRB - Federal Reserve Board of Governors
  FRS - Federal Reserve Sysyem
  SAIF - Saving Association Insurance Fund
  OCC - Office of the Comptroller of the Currency

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


B-258350

March 15, 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

In fewer than 5 years, the Federal Deposit Insurance Corporation
(FDIC) was called upon twice to resolve the financial difficulties of
the federally insured banks of the First City Bancorporation of
Texas, Inc.  (First City).  In April 1988, FDIC provided about $970
million of assistance in an attempt to restore First City's financial
health.  Four years later, in October 1992, the Office of the
Comptroller of the Currency (OCC) and the Texas Banking Commissioner
determined that the two largest First City banks were insolvent and
imminently insolvent, respectively.  FDIC was appointed receiver of
all 20 First City banks.  At that time, FDIC estimated the second
resolution would cost the Bank Insurance Fund (BIF) about $500
million.  In January 1993, FDIC reviewed bids for the 20 failed
banks, announced the sale of the banks, and revised its estimated BIF
cost to zero.  Lawsuits were filed by First City against FDIC, OCC,
and the Texas Banking Commissioner.  The lawsuits asserted, among
other things, that federal and state banking regulators acted without
regard to due process and illegally and unnecessarily closed a
solvent banking organization.  In June 1994, FDIC and First City
signed a settlement agreement that provided for payments by FDIC
exceeding $200 million in cash and assets to be paid out of the
receiverships of the First City banks and termination of all related
litigation.  In FDIC's view, the settlement is based on the following
two principles:  (1) the 1992 resolution of the First City banks
would be at no cost to BIF, and (2) FDIC would not receive any money
in excess of its actual costs incurred in connection with the
resolution of the First City banks.  Any settlement reached between
the parties cannot be consummated until it is approved by the
bankruptcy court.  FDIC officials anticipate a decision on the
settlement agreement in early 1995. 

At the request of the former Committee Chairman, we reviewed both
resolutions of the First City banks.  This report addresses the
following four questions: 

  -- Regarding the first resolution, why did the FDIC Board of
     Directors decide to resolve First City's financial difficulties
     in 1988 by providing financial assistance instead of using other
     available resolution alternatives? 

  -- Regarding the second resolution, why did FDIC's estimate of BIF
     costs to resolve First City at the time of the 1992 failure
     differ so much from the estimate when the banks were sold in
     1993? 

  -- What, if any, additional cost to BIF is expected to result from
     the second resolution of First City? 

  -- What lessons does the First City experience offer relevant to
     the assistance, closure, and resolution processes? 

As agreed with the Committee, we focused our review on First City's
largest bank (located in Houston) and its second largest bank
(located in Dallas) because the financial difficulties of these banks
resulted in the failure of First City's 18 other banks.  Our
objectives, scope, and methodology are further discussed in appendix
I. 


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

In the first resolution in 1988, FDIC decided to provide $970 million
in financial assistance to First City as part of a method of
resolution known as open bank assistance.  This method generally
involves recapitalizing and restructuring a banking organization, as
well as attracting new management.  FDIC chose this method of
resolution because it was determined to be less costly than
liquidating the banks in the event of insolvency, which FDIC
projected to be likely.  FDIC estimated BIF costs to liquidate the
banks to be about $1.74 billion, as opposed to the $970 million
estimated for open bank assistance.  Another alternative resolution
method would have been to sell the banks if they became insolvent. 
However, at the time, FDIC did not believe that it would be able to
find acceptable acquirers with sufficient private capital to restore
the banks to long-term viability. 

In the second resolution in 1992, the estimated BIF costs to resolve
First City at the time of failure differed from the estimated cost at
the time of sale primarily because FDIC made its first cost estimate
without the benefit of having actually received bids from potential
acquirers.  Instead, to facilitate the orderly resolution of the
banks, FDIC placed them under its control for about 3 months and
operated them as bridge banks\1

while it arranged a sale.  According to FDIC officials, the FDIC
Board of Directors relied on its "best business judgment" in
estimating BIF costs at the time of the banks' failures.  In arriving
at the $500 million loss estimate, the Board considered loss
estimates that ranged from $300 million to over $1 billion in making
its least-cost resolution determination. 

At the time of the sale of the banks in January 1993, FDIC officials
expressed "astonishment" at the market interest in the banks and
projected that the second resolution would result in no cost to BIF. 
Indeed, FDIC estimated that the proceeds of the sale would exceed its
costs for the second resolution by $60 million.  FDIC's no-cost
projection for BIF remained intact even after lawsuits were filed on
behalf of First City's shareholders.  In June 1994, FDIC and First
City signed a settlement agreement whose basic tenet is that BIF will
incur no loss.  The bankruptcy court must approve any settlement
reached between the two parties. 

The First City experience offers valuable lessons for both FDIC as
the insurer, and FDIC and the other federal agencies that regulate
depository institutions, in how to better assist, close, or otherwise
resolve troubled institutions.  For example, in the case of First
City, the economic assumptions used as a basis to determine the
likely success of open bank assistance would have been more realistic
if FDIC had drawn upon the shared judgment of all the involved
regulatory agencies.  The 1988 financial assistance may also have had
a greater chance for success if FDIC had (1) required First City to
establish better controls over lending practices and other bank
activities, and (2) tailored its assistance agreement with First City
to provide tighter control over the flow of funds through dividends
and other payments to protect against the undue erosion of bank
capital.  Regarding the closure decisions, OCC could have better
supported its decision to close First City-Houston in 1992 by
ensuring that its examination reports and underlying workpapers were
clear, well documented, and self-explanatory.  FDIC resolution
officials could also have benefitted from having earlier access to
information on OCC examiners' preliminary findings regarding the
financial condition of the largest First City bank.  This could have
given FDIC more time to consider the widest possible range of
available resolution alternatives and a means of verifying its own
valuation of the First City assets. 


--------------------
\1 FDIC may establish a bridge bank to temporarily take control and
operate a failed bank until an acquirer can be found and an orderly
resolution can be arranged. 


   EVOLUTION OF RESOLUTION
   ACTIVITIES ON BEHALF OF FIRST
   CITY BANKS
------------------------------------------------------------ Letter :2

By the late 1970s, the First City Bancorporation of Texas, Inc.,
through its subsidiary banks, had a high concentration of loans to
the energy industry in the Southwest United States and was regarded
as a principal lender in that industry.  In the early and mid-1980s,
when the energy industry experienced financial difficulties, so did
First City.  By 1986, First City was reporting operating losses. 
First City, its regulators, and FDIC recognized that many of the
subsidiary banks could not survive without major infusions of
capital.  These parties agreed that the capital needed for long-term
viability could not come wholly from the private sector due to the
financially strained condition of the Southwest's economy and banking
industry. 

A chronology of events leading to FDIC's open bank assistance in 1988
and the final resolution of the First City banks in 1993 appears
below.  A description of changes in various legal authorities over
the same period, 1987 to 1993, is contained in appendix II. 


      THE FIRST RESOLUTION:  OPEN
      BANK ASSISTANCE
---------------------------------------------------------- Letter :2.1

After considering available alternatives, FDIC and First City entered
into a recapitalization agreement--commonly referred to as open bank
assistance--that called for First City to reduce its subsidiary banks
from nearly 60 to about 20.  The agreement also required the creation
of a "collecting bank"\2 to dispose of certain troubled assets held
by the subsidiary banks.  The open bank assistance included a $970
million capital infusion from FDIC along with $500 million of private
capital raised by the new bank management to restore First City's
financial health.  As part of the agreement, FDIC received $970
million in preferred stock of the collecting bank.  FDIC also
received a guarantee, from both First City Bancorporation and the
subsidiary banks, for $100 million payable in 1998 toward the
retirement of the collecting bank preferred stock.\3

The recapitalized First City banks embarked on a short-lived
aggressive growth policy that resulted in First City banks' assets
increasing from about $10.9 billion as of April 19, 1988, to about
$13.9 billion as of September 30, 1990.  First City banks' loan
portfolios included high-risk loans, such as loans to finance highly
leveraged transactions, international loans, and out-of-territory
lending.  During this period, First City reported $183 million in
profits and paid $122 million in cash dividends.  In part, the
earnings used to justify the cash dividends were profits that
depended on income from nontraditional and onetime sources, such as
the sale of its credit card operations. 


--------------------
\2 The Collecting Bank was a nationally chartered bank with the sole
purpose of liquidating the nearly $2 billion in troubled assets it
received from the First City banks as part of the 1988
recapitalization.  The Collecting Bank did not accept insured
deposits and, as a general rule, did not extend credit. 

\3 As a means of both providing the holding company with operating
capital and participating in any appreciation of the stock value,
FDIC also provided First City Bancorporation with an additional $43
million in exchange for the holding company's junior preferred stock
and common stock warrants.  In August 1989, FDIC sold the stock and
warrants for $43.8 million. 


      LENDING PRACTICES CAUSED
      LOSSES
---------------------------------------------------------- Letter :2.2

By September 1990, problems with the quality of its loan portfolios
not only caused operating losses but also started to erode First
City's capital.  A 1990 OCC examination report strongly criticized
the lending practices of First City's lead bank,\4 First
City-Houston.  Some of its loan losses resulted from continued
deterioration in loans made before April 1988.  However, other losses
were attributed to new loans associated with an aggressive
risk-taking posture by new management combined with poor underwriting
practices.  During and immediately after OCC's 1990 examination,
First City made changes in the lead bank's senior executive
management, and OCC entered into formal supervisory agreements with
First City's Houston, Austin, and San Antonio banks.\5 The agreements
required each of the banks to achieve and maintain adequate levels of
capital.  They also required improvements in (1) underwriting
standards, (2) bank management and board oversight, (3) strategic
planning, (4) budgeting, (5) capital and dividend policies, (6)
management of troubled assets, (7) internal loan review, (8)
allowance for loan and lease losses (ALLL), (9) lending activities,
and (10) loan administration and appraisals. 

According to OCC, First City bank management complied with
substantially all of the provisions of the formal agreements, except
the capital maintenance provisions.  While First City significantly
strengthened its underwriting criteria, reduced its aggressive
high-risk lending practices, and initiated actions to recapitalize,
these efforts did not prevent the First City banks from failing. 
Between September 30, 1990, and October 30, 1992, problems in the
loan portfolios continued to mount.  First City bank assets decreased
from about $13.9 billion to about $8 billion, and First City incurred
total losses of about $625 million.  Most of the
post-recapitalization losses were from loans at First City's lead
bank in Houston and its second-largest bank in Dallas.  Among the
primary reasons for the banks' financial difficulties were the
continued decline in the Texas economy, weaker-than-anticipated loan
portfolios in the recapitalized banks, questionable lending activity
by First City management within the first 2 years of the
recapitalization, and high bank operating expenses. 

OCC, as primary federal bank regulator for the lead bank, projected
in early 1991 that operating losses would deplete the capital of this
bank by year-end 1992.  Later, on the basis of First City's operating
results, OCC projected that by the end of 1992 bank losses would
either (1) deplete the capital at the Houston bank and cause its
insolvency or (2) erode the bank's capital to less than 2 percent of
its assets, in which case OCC had the authority to close the bank
effective December 19, 1992, in accordance with the prompt corrective
action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).\6 The Federal Reserve System
(FRS)--the primary federal bank regulator for the Dallas bank--also
projected its likely insolvency by the end of 1992.  Under the
cross-guarantee provisions of the Financial Institution Reform,
Recovery and Enforcement Act of 1989 (FIRREA),\7 FDIC could require
the 18 otherwise solvent First City banks to reimburse FDIC for any
anticipated losses resulting from the failures of the Houston and
Dallas banks.  FDIC staff advised the FDIC Board that the capital of
the 18 banks would not be sufficient to cover the projected losses
from the 2 insolvent banks, and the application of the
cross-guarantee provision could result in the insolvency of all 20
First City banks. 


--------------------
\4 The lending strategy of a lead bank--which is generally the
largest subsidiary bank--often reflects that of the whole banking
organization. 

\5 The management changes included First City's voluntary removal of,
among others, a lead bank senior official who was later indicted and
convicted of charges stemming from loans he authorized to parties
with whom he had affiliations. 

\6 Among other provisions, FDICIA gave regulators the authority to
take prompt corrective action and declare banks insolvent that are
critically undercapitalized (i.e., those with less than 2 percent
capital) to reduce costs to the applicable insurance fund. 

\7 As part of FIRREA, Congress authorized FDIC to assess anticipated
losses associated with a bank failure against commonly controlled
depository institutions. 


      REGULATORS BEGAN CONTINGENCY
      PLANNING FOR CLOSURE WHILE
      FIRST CITY INITIATED FURTHER
      RECAPITALIZATION PROPOSALS
---------------------------------------------------------- Letter :2.3

OCC, FDIC, and the Texas Banking Commissioner closely monitored the
First City banks following the recapitalization, and along with FRS,
shared information concerning the Houston and Dallas banks'
deteriorating financial conditions.  Following its September 1991 and
January 1992 examinations of First City-Houston, OCC advised First
City that its future viability could not be ensured without a
significant capital infusion.  Similarly, FRS examination of the
holding company in 1991 found that First City lacked adequate capital
to support its network of subsidiary banks.  Beginning in June 1991,
representatives of OCC began working with their counterparts at FDIC
on a plan for early intervention and resolution of First
City-Houston.  These efforts were intense and ongoing throughout 1991
and into 1992. 

During 1991 and 1992, First City, OCC, and FDIC considered a number
of alternative resolution plans.  The resolution plans considered by
First City involved three types of transactions: 

(1) Type A--Acquisition of First City banks by a stronger,
well-capitalized banking company. 

(2) Type B--Major capital infusion by an outside investor or investor
groups. 

(3) Type C--A self-rescue by the banking organization through some
combination of consolidation or sale of subsidiary banks, new
capital, and FDIC concessions and financial support. 

Initially, First City favored a Type B transaction and indentified a
number of potential investors as possible sources of significant new
capital.  However, in anticipation that raising new capital would be
extremely difficult given the banking organization's precarious
financial position and continuing OCC concerns with bank management,
First City did not actively pursue a Type B transaction.  Thereafter,
it pursued a Type A transaction almost exclusively. 

In October 1991, OCC, FDIC, and First City developed a proposal (Type
A transaction) that called for the banks' acquisition by a stronger
institution, with the possible need for FDIC financial assistance. 
In late 1991, FDIC's Division of Resolutions (DOR) staff contacted a
number of banking organizations to assess their interest in acquiring
the First City banks.  While a number of institutions expressed
considerable interest in the First City banks and conducted in-depth
reviews of bank operations, only one institution ultimately submitted
a bid.  DOR staff recommended that the bid be rejected for a number
of reasons, including its estimated $240 million cost to FDIC, which
was higher than FDIC's estimate of $179 million to liquidate the
banks at that time.  DOR staff also asserted that the proposal was
not in the best interest of FDIC because it contained several items
that were difficult to quantify and would require costly negotiations
with the acquirer.  DOR staff asserted that these negotiations could
significantly delay completion of any open bank assistance until
after December 1992, when FDIC projected the banks would become
insolvent. 

After the Type A transaction for open bank assistance was rejected by
FDIC, First City developed two new self-rescue proposals (Type C) to
recapitalize the troubled banks.  In July 1992, First City submitted
its first self-rescue plan, which called for the closure and
immediate reopening of four of the largest First City banks under the
control of an acquiring bank.  Under this proposal, the acquiring
bank would purchase about $7.5 billion of First City banks'
performing and fixed assets, and FDIC would enter into a loss-sharing
agreement with the acquiring bank for the remaining $1.2 billion of
troubled assets.\8 DOR staff recommended this alternative be pursued
because they estimated no losses to BIF.  According to the staff's
projections, a combination of the financial commitments made by the
acquiring bank and the ALLL previously established by First City
banks could absorb additional deterioration that might occur in the
quality of the loan portfolios.  However, the FDIC Board was
concerned about the ability of First City bank management to execute
the proposal.  In August 1992, the FDIC Board rejected the proposal
mainly because of a condition in the plan that required FDIC to
guarantee payment in full for all deposits, including uninsured
deposits. 

In August 1992, First City management submitted another self-rescue
proposal to OCC to recapitalize the banks.  This proposal called for
First City to merge its four largest banks--Houston, Dallas, Austin,
and San Antonio.  This plan also called for 13 of the remaining 16
First City banks to be sold for an estimated $200 million.  An
additional $100 million in new equity capital would be raised through
a stock offering to new investors and current shareholders. 
Approximately $96 million would be raised through cost savings from
proposed renegotiation of long-term leases.  Finally, the proposal
would have required FDIC to make concessions totaling over $100
million--stemming largely from the 1988 open bank assistance.  The
plan projected that the reconstituted and recapitalized First City
banks would work their way back to profitability.  According to First
City documents, it had received commitments from potential investors
and landlords needed to raise more than $300 million in capital. 

OCC's analysis of First City's August self-rescue proposal concluded
that the plan lacked viability due to an estimated $200 million
capital shortfall at the reconstituted banks.  OCC concluded that the
plan did not provide sufficient incoming capital to cover asset
quality problems and to provide the capital base required to
reestablish the banks for long-term viability.  OCC documents also
showed that the planned lease renegotiations would not result in the
projected savings.  Finally, OCC also believed that First City would
not be able to raise sufficient capital through stock issuances. 


--------------------
\8 Under a loss-sharing agreement, the acquirer assumes specified
assets and disposes of them with FDIC sharing in any losses (or
gains) under stipulated terms and conditions. 


      OCC'S ACCELERATED SCHEDULED
      EXAMINATION IN TURN
      ACCELERATED THE SECOND FDIC
      RESOLUTION
---------------------------------------------------------- Letter :2.4

Shortly after receipt of First City's August 1992 self-rescue plan,
OCC determined that an up-to-date examination was necessary to
evaluate the likelihood that the plan would result in long-term
viability for First City.  The examination of the Houston bank, which
began in late August 1992, focused on problem loans.  OCC noted
significant deterioration in several large loans since its last
examination.  On the basis of the results of its August examination,
OCC determined that the bank had underestimated its ALLL by about $67
million.  This amount exceeded the Houston bank's existing equity
capital of about $28 million, thus making the Houston bank insolvent
and requiring OCC to close it. 

The Examiner-In-Charge (EIC) and other OCC officials told us that
their adjustment of ALLL was based on both objective and subjective
considerations.  They said they gave consideration to First
City-Houston's history relating to its management's inadequate
recognition of loan quality problems and provision for ALLL.  The OCC
officials said they were also concerned about deteriorating financial
conditions at the bank as reflected in dangerous classification
trends within its loan portfolio, whereby a higher percentage of
loans were recognized as troubled loans and the bank had not
experienced the same recovery pattern as experienced by most banks. 
Further, OCC officials said they were concerned about the bank's
financial condition relative to other comparable institutions.  In
comparing First City's ALLL to that of peer institutions, OCC said
that it found that First City had maintained an ALLL level far below
that of its peers.  OCC said that given First City's asset problems,
it believed that First City's ALLL should have been far higher than
the peer average.  OCC officials said they were also concerned about
the weakening economic conditions in Texas and First City's ability
to overcome its problems in this environment.  Finally, OCC officials
said that, by this time, they had lost confidence in First City's
management and its processes for establishing proper reserve levels. 

On October 16, 1992, OCC advised FDIC of its latest examination
findings and its plans to close First City-Houston as soon as
practicable so that FDIC could resolve it in an orderly manner.  FDIC
advised OCC that FDIC could accelerate its projected December 1992
resolution to October 30, 1992, in light of the OCC examination
findings.  Accordingly, on October 30, 1992, OCC declared the First
City-Houston bank insolvent and appointed FDIC receiver.  On that
same day, the Texas Banking Commissioner closed First City-Dallas on
the grounds of imminent insolvency, and FDIC exercised its statutory
authority to issue immediately payable cross-guarantee demands on the
remaining 18 First City banks.  This resulted in the closure of the
entire First City banking organization on October 30, 1992. 


      THE SECOND RESOLUTION: 
      FIRST CITY BANKS WERE
      "BRIDGED" IN 1992 AND SOLD
      IN 1993
---------------------------------------------------------- Letter :2.5

After being advised of OCC's examination findings, FDIC considered
two basic alternatives to provide for the orderly resolution of the
First City banks:  (1) liquidate them immediately or (2) place them
under FDIC control and operate them as bridge banks until a sale
could be arranged.  FDIC chose the latter alternative, which would
provide time for FDIC to compare the cost of liquidation to the cost
of selling the banks based on bids it planned to solicit after the
banks failed.  FDIC assumed potential acquirers would be interested
in purchasing the banks only if FDIC removed certain risks associated
with asset quality problems, potential litigation liabilities, and
costly contractual obligations. 

The January 1993 sale attracted bids from 30 potential acquirers and
resulted in the sale of all 20 of the bridge banks.  At the time of
sale, FDIC estimated the sale would result in a gain, or surplus, of
about $60 million--substantially different from the $500 million loss
that FDIC had estimated 3 months earlier.  FDIC officials said they
were astonished by the proceeds.  After resolution and liquidation
expenses are paid, FDIC is to return any surplus to First City
creditors and shareholders. 


      FIRST CITY FILED LAWSUITS ON
      BEHALF OF SHAREHOLDERS
---------------------------------------------------------- Letter :2.6

Shortly after the First City banks were closed, the holding company
filed lawsuits on behalf of the shareholders.  The lawsuits asserted,
among other things, that federal and state banking regulators acted
without regard to due process and illegally and unnecessarily closed
a solvent banking organization.  More specifically, the lawsuits
allege that OCC wrongfully closed the lead national bank and that the
Texas Banking Commissioner wrongfully closed First City-Dallas. 

The lawsuits also asserted that FDIC, as the insurer, was responsible
for the inappropriate closure of the financially sound First City
banks.  According to the suit, FDIC used its cross-guarantee
authorities to execute the agency's preconceived plan to gain control
of the First City banking organization.  The holding company asserted
that FDIC's use of its cross-guarantee provisions was both
inappropriate and unnecessary, and violated the Fifth Amendment of
the Constitution.  The suit also noted that on numerous occasions
during the summer of 1992, First City Bancorporation offered to merge
all the First City banks and restore the capital at the troubled
banks.  The holding company asserted that if the regulators had
approved such an action, their plans to close the First City banks
could not have been carried out. 


   FDIC CONSIDERED FIRST CITY'S
   1988 OPEN BANK ASSISTANCE THE
   BEST RESOLUTION ALTERNATIVE
   AVAILABLE
------------------------------------------------------------ Letter :3

In 1988, FDIC could have waited until the First City banks were
insolvent and either liquidated them or sold them to interested
potential acquirers.  However, FDIC determined that providing $970
million in assistance to the First City banks was the best
alternative available.  When FDIC approved First City's open bank
assistance, FDIC's resolution alternatives were limited by both
regulatory requirements and economic conditions.  In April 1988, OCC
could not have closed First City banks for insolvency because, at
that time, OCC could close a bank for insolvency only when a bank's
primary capital was negative.  At the time, a bank's primary capital
was defined by OCC as the sum of the bank's retained earnings and the
bank's ALLL.  Although First City had negative retained earnings of
$625 million, it also had $730 million in ALLL; hence, it had
positive primary capital of $105 million. 

Additionally, in the mid-1980s, the Texas banking industry was
experiencing its worst economic performance since the Great
Depression, which limited FDIC's resolution alternatives.  According
to FDIC, the economic conditions increased the cost to liquidate
troubled banks and reduced the number of potential acquirers. 
Consequently, FDIC considered two resolution alternatives in August
1987.  One was to allow First City losses to continue to mount until
the banks' primary capital was depleted, then either liquidate or
operate First City banks as bridge banks until potential acquirers
could be found.  Under the other alternative, FDIC could have
provided open bank assistance to willing acquirers of the First City
banks--as long as the estimated cost of assistance was less than the
estimated cost of liquidation to the insurance fund. 

FDIC decided against the first alternative for three reasons.  First,
FDIC believed that allowing First City banks to continue to
deteriorate could jeopardize the stability of the regional banking
industry.  FDIC also was unsure about operating First City as a
bridge bank because bridge banks were new to FDIC (the agency had
received bridge bank authority in August 1987).  Second, the First
City banks were far too large and complex to be the agency's first
bridge banks, in FDIC's opinion.  And third, FDIC rejected
liquidation because estimated liquidation costs were determined to be
higher than the estimated cost to the fund for open bank assistance. 

FDIC approved $970 million of open bank assistance as the best
resolution alternative available.  A total of eight parties expressed
interest in acquiring the troubled banks, and three submitted bids. 
FDIC's estimates of potential insurance fund commitments based on
those bids ranged from the $970 million for open bank assistance to
$1.8 billion for the bid most costly to the insurance fund. 
According to FDIC records, one of the bids led to estimated fund
costs as low as $603 million, but FDIC found that the bidder had used
overly optimistic assumptions in the offer.  When adjusted, the
insurance fund cost of that bid was nearly $1.3 billion. 

The Federal Reserve Board (FRB) approved the change of control of
these recapitalized banks to the new First City bank management with
reservations.  FRB's memo approving the change of control warned the
new management that assumptions agreed upon by FDIC and First City
and used to forecast the banks' road to recovery were optimistic.  It
also warned that if regional economic conditions did not drastically
improve, the recapitalization effort was not likely to succeed. 

We reviewed the First City banks' performance following the
recapitalization to identify the factors that contributed to the
October 1992 failures.  We found that the failures resulted from a
combination of factors, including the payment of dividends to
shareholders, deteriorating loan portfolios, and relatively high
operating costs.  These findings are described in appendix III. 


   FDIC DETERMINED THAT 1992
   BRIDGE BANK RESOLUTION WAS
   LEAST COSTLY AND MOST ORDERLY
------------------------------------------------------------ Letter :4

On October 28, 1992, the FDIC Board determined that placing the
failed First City banks into interim bridge banks constituted the
least costly and most orderly resolution to First City's financial
difficulties.  On that date the FDIC Board considered three
alternatives.  Two involved bridge bank resolutions and the third
called for a liquidation of First City banks' assets.  The difference
between the two bridge bank alternatives was that one alternative
contained a loss-sharing agreement on a selected pool of troubled
assets.  Under this agreement, the acquirer would manage and dispose
of the asset pool, and FDIC would reimburse the acquirer for a
portion of the losses incurred when selling those assets.  The other
bridge bank alternative did not provide for loss sharing. 

The purpose of the two bridge bank alternatives was to provide for an
orderly resolution by continuing the business of the banks until
acceptable acquirers could be found.  FDIC's belief was that the
bridge banks would preserve the First City banks' value as going
concerns while FDIC marketed them.  FDIC estimated that a bridge bank
resolution would minimize BIF's\9 financial exposure.  FDIC was aware
of various parties' interest in acquiring the banks.  However, FDIC
believed that the potential acquirers would be interested in the
banks only after they were placed in receivership, since, after
closure, new bank management could renegotiate contractual and
deposit arrangements with bank servicers and customers. 

FDIC staff estimated resolution costs to BIF ranging from a low of
about $700 million (bridge bank with loss sharing) to a high of over
$1 billion (FDIC liquidation).  FDIC estimated both bridge bank
alternatives to be less costly than a liquidation primarily because
of the likelihood that FDIC would be able to obtain a premium, or a
cash payment, from potential acquirers who would be assuming the
deposits of the bridge banks.  In a liquidation, no such premium
would be paid because FDIC pays the depositors directly instead of
selling the right to assume the deposits to an acquirer.  FDIC also
estimated that it could minimize the losses to the insurance fund if
it provided loss sharing. 


--------------------
\9 With the passage of FIRREA, FDIC continued its responsibility for
the insurance fund for banks, which was renamed the Bank Insurance
Fund (BIF). 


      FDIC LACKED CONFIDENCE IN
      INITIAL LOSS ESTIMATES
---------------------------------------------------------- Letter :4.1

While the FDIC Board believed that a bridge bank with a loss- sharing
arrangement was the most orderly and least costly alternative
presented by DOR, the ultimate cost of resolving the First City banks
was uncertain.  DOR staff's initial cost model, which was based on
the estimated proceeds and costs of each resolution alternative,
estimated that a bridge bank resolution with loss sharing would cost
about $700 million.  This estimate was based largely on an asset
valuation review performed for DOR by an outside contractor.\10

Representatives from FDIC's Division of Liquidations (DOL), which was
responsible for disposing of assets assumed by FDIC, said that
liquidating the First City banks would likely cost more than $1
billion.  Other FDIC officials--including senior level DOR
officials--said that because of the considerable market interest in
the banks on a closed-bank basis, the cost to resolve First City
banks would likely be about $300 million.  The Board determined that
placing First City banks into interim bridge banks would cost the
insurance fund about $500 million. 

The then DOR Director told us that the fact that the Board did not
rely solely on the initial DOR cost model was not a deviation from
the normal resolution process.  He explained to us that the
resolution process is dynamic and takes into account FDIC Board
deliberations.  He noted that it was his responsibility to advise the
Board regarding the merits and shortfalls associated with the DOR
asset valuation process.  He pointed out that DOR's asset valuations
estimated the net realizable value for failed bank assets disposed of
by FDIC through a liquidation.  The methodology determining net
realizable value of assets may not always reflect the market value of
assets disposed of through such resolution alternatives as an interim
bridge bank.  Typically, a going concern (including a bridge bank)
establishes asset values that attempt to maximize the return to the
investor regardless of the period the assets may be held.  Net
realizable asset valuation in a liquidation, on the other hand,
attempts to maximize the return to the investor given a limited
holding period, often less than 2 years. 

According to FDIC documents used in its Board's deliberations, the
October 1992 decision to place the First City banks in bridge banks
and commit about $500 million to resolve First City was the least
costly of the three alternatives the FDIC Board formally considered
when the banks were closed.  During the year preceding the failure,
FDIC and OCC considered and rejected a number of alternatives to
resolve the First City banks because the alternatives were considered
too costly, did not ensure the banks' long-term viability, or
included provisions that were unacceptable from a policy perspective. 
As previously discussed, OCC had projected that operating losses,
caused by imbedded loan portfolio problems, would render First City
banks insolvent by December 1992.  However, OCC's determination that
the Houston bank was insolvent in October 1992 accelerated First City
banks' closure by about 2 months.  FDIC officials believed the
earlier than projected closure unintentionally but effectively
precluded either previous or new potential acquirers from doing due
diligence, i.e., determining the value of the bank assets, deposits,
and other liabilities necessary to ascertain their interest in
bidding on the First City banks at the time of closure. 


--------------------
\10 For more detailed information on FDIC's process for estimating
the cost of available resolution alternatives, see our related report
entitled 1992 Bank Resolutions:  FDIC Chose Methods Determined Least
Costly, but Needs to Improve Process (GAO/GGD-94-107), dated May 10,
1994. 


   WITH THE SALE OF ALL 20 BRIDGE
   BANKS, FDIC PROJECTED NO
   ADDITIONAL COSTS TO BIF AS A
   RESULT OF THE FIRST CITY BANKS'
   CLOSURE
------------------------------------------------------------ Letter :5

Although FDIC initially estimated the cost to BIF of the October 1992
resolution of First City banks to be $500 million, the agency has
since projected that this resolution will result in no cost to BIF. 
When it announced the sale of the First City banks in January 1993,
FDIC estimated the proceeds generated from the sale would amount to a
surplus of about $60 million.  In June 1994, FDIC estimated that the
surplus may exceed $200 million.  As mentioned earlier, any surplus
remaining after payment of FDIC's resolution expenses is to be
returned to First City's creditors and shareholders. 

According to FDIC's analysis of the resolution, sales proceeds were
higher than FDIC expected largely because acquirers paid a 17-percent
premium for the banks--substantially more than the 1- percent premium
on deposits that FDIC had estimated in arriving at the $500 million
loss estimate.  According to FDIC officials, a deposit premium of 1
percent was typical for failed bank resolutions contemporaneous with
the 1992 First City bank resolution.  Some FDIC officials, however,
told us that at least part of the premium paid by the acquirers
should be attributed to the value the acquirers placed on First City
bank assets.  Since acquirers do not specify in their bids how much
they are willing to pay for assets or deposits, neither we nor FDIC
can determine the exact basis for the premium. 


      FDIC DOES NOT EXPECT
      LAWSUITS WILL RESULT IN
      COSTS TO BIF
---------------------------------------------------------- Letter :5.1

As of June 1994, FDIC projected that settlement of the lawsuits by
First City Bancorporation would result in no cost to BIF.  FDIC's
projection was based on the assumption that the estimated surplus
from the bridge bank sale will exceed its costs to resolve and
liquidate the bridge banks, with any excess ultimately to be paid to
the holding company.  On June 22, 1994, FDIC and the holding company
signed a settlement agreement under which First City would
immediately receive in excess of $200 million.  The settlement would
allow the First City Bancorporation to pay its creditors and permit a
distribution to its shareholders sooner rather than later.\11 Basic
tenets of this proposed settlement are (1) BIF will incur no loss in
connection with the 1992 resolution of the First City banks and (2)
FDIC will not receive more than its out-of-pocket costs to resolve
the banks.  Consistent with these tenets, the proposed settlement
provides for FDIC to receive the net present value of over $100
million, largely based on First City's guarantee to pay in 1998
toward the retirement of the collecting-bank-preferred-stock FDIC
received in return for the 1988 open bank assistance.  Any settlement
between the two parties cannot be consummated until it is approved by
the bankruptcy court.  FDIC officials anticipate a decision on the
settlement in early 1995.\12


--------------------
\11 Failed bank shareholders cannot receive any payments until
creditors, including FDIC, have been paid from assets sales and
dispositions--a process generally expected to take several years. 

\12 FDIC sold its only equity interest in the First City holding
company and subsidiary banks in August 1989, and FDIC considers the
remainder of the collecting bank preferred stock it holds to be
worthless.  Consequently, FDIC does not anticipate receiving any
proceeds from the settlement that may ultimately be shared by First
City holding company stockholders. 


   LESSONS TO BE LEARNED FROM THE
   FIRST CITY EXPERIENCE
------------------------------------------------------------ Letter :6

Generally, the processes used in providing financial assistance,
closing banks, and resolving troubled banks should always include
adequate safeguards for BIF.  The events surrounding the First City
resolutions offer valuable lessons for FDIC as the insurer and for
all of the primary bank regulators.  These lessons relate to how to
better assist, close, or otherwise resolve troubled institutions in
the future. 


      LESSONS ON OPEN BANK
      ASSISTANCE
---------------------------------------------------------- Letter :6.1

Consultation between regulatory agencies might have led FDIC to adopt
more realistic assumptions concerning the likelihood of success of
the $970 million open bank assistance provided First City in 1988. 

When FDIC and the new First City management forecasted the First City
banks' success in 1988, a key economic assumption was that the
economies of Texas and the Southwest would reverse their recessionary
trend and grow at about 3 percent per year to mirror the growth rate
of the national economy during the mid-1980s.  However, the Texas
economy grew only an average of 2.2 percent per year between 1989 and
1991.  Furthermore, by the late 1980s and early 1990s, the national
economy, which had been growing at about 3 percent per year, started
to weaken and experience its own recessionary conditions.  While
approving the change of control to the new First City bank
management, FRB raised a concern about these economic assumptions
being too optimistic and, if not realized, possibly jeopardizing the
success of the recapitalized banks.  If FDIC had consulted with its
regulatory counterparts in FRS and OCC on economic and financial
assumptions for the economy and market in which the assisted bank
would operate, it would have had a broader base for, and greater
confidence in, the economic assumptions used as a basis to approve
the open bank assistance.  Such consultation might have produced more
realistic assumptions and a better understanding of the likelihood
that the financial assistance that FDIC provided could be successful. 

The financial assistance agreement could have included safeguards to
better ensure that First City undertook only those operations that
were within its capabilities and capacities. 

At the time of the open bank assistance, the new management of the
First City bank projected relatively modest growth, primarily in
traditional consumer lending activities.  However, under pressure to
generate a return for its investors through earnings and dividends,
the management pursued much riskier lending and investment activities
than it had described in its reorganization prospectus.  In addition
to taking more risks, the new bank management did not have the
expertise, policies, or procedures in place to adequately control
these activities.  Further, the new bank management entered into
contractual arrangements based on projected growth that, when not
realized, resulted in higher operating expenses than the bank could
sustain.  FDIC's assistance agreement did not include sufficient
safeguards to ensure that the new bank management actually pursued a
business strategy comparable to the one agreed upon as being prudent,
or that the bank's activities were in line with management's
capabilities or the bank's capacities.  In retrospect, such
safeguards could have been specified in the agreement. 

For example, according to the reorganization prospectus, First City
projected that it would expand its overall loan portfolio an average
of about 10 percent per year for the first 3 years after the
recapitalization.  The new bank management projected that consumer,
credit card, and energy loans would grow at significantly higher
rates than the overall loan portfolio.  Management also projected
little growth in the riskier areas of real estate and international
lending.  Contrary to those projections, overall lending activity
grew by only about 3 percent in 1989 and actually declined by about 3
percent in 1990 and by over 31 percent in 1991.  First City sold its
credit card portfolio in early 1990.  In addition, First City's
actual real estate and international loans accounted for far greater
percentages of its total loan portfolio than projected in the 1988
prospectus. 

FDIC's financial assistance agreement with First City did not contain
provisions requiring First City's management to develop specific
business strategies reflecting safe and sound banking practices and
internal control mechanisms safeguarding FDIC's investment in the
First City banks.  Shortly after the recapitalization, OCC examiners
criticized the management of First City's Houston bank for not having
established policies and procedures to manage the risk associated
with the bank's highly leveraged transaction loans.  Consequently,
OCC directed the bank to establish policies and procedures to
minimize the risks of those transactions.  OCC similarly directed the
bank management to establish policies and procedures related to the
Houston bank's international lending activities. 

In the meantime, First City bank management paid dividends based on
income derived from its lending activity as well as from
extraordinary events, such as the sale of its credit card operations. 
While such payments were permissible under the law at the time, they
did not help the bank retain needed capital.  Consequently, First
City banks lacked sufficient capital to absorb the losses stemming
from their lending activities. 

Further, First City-Houston entered into long-term contractual
arrangements for buildings and services, such as data processing,
that were based on overly optimistic projections of future growth. 
When that growth was not realized, the overhead costs related to
these arrangements proved to be a drain on earnings and contributed
to the bank's failure. 

FDIC would have been in a better position to avoid the risks
associated with these banking practices if it had strengthened the
open assistance agreement by including provisions to (1) require bank
management to develop business strategies relative to its market,
expertise, and operational capabilities; and (2) control the flow of
funds out of the bank through dividends, contractual arrangements,
and other activities, such as management fees paid to the holding
company or affiliates.  The provisions could have been structured so
that the primary regulator held bank management accountable for
compliance with them.  Such a structure could have involved having
bank management stipulate that it would comply with specific
assistance agreement provisions.  Such a stipulation would have
allowed the primary regulator to monitor the bank's adherence to the
key provisions of the assistance agreement, including the development
of specific business strategies and lending policies and procedures. 
The primary regulator would then have had the information and
authority necessary to take the appropriate enforcement action to
ensure compliance with the key provisions of the agreement. 

Banks are required to follow statutory limitations on dividend
payments provided in 12 U.S.C.  ï¿½ï¿½ 56 and 60.  While the regulations
implementing the statutes and governing the payment of dividends have
been tightened since 1988, banks are still authorized to pay
dividends, as long as they satisfy the FDICIA minimum capital
requirements.\13 FDIC could have better controlled the flow of funds
from the assisted banks by either limiting dividend payments or
requiring regulatory approval based on the source of dividends.  Such
controls are typically used by FDIC and other regulators in
enforcement actions when they have reason to be concerned about the
safety and soundness of a bank's practices or condition, and they
could have been used in a similar manner in the First City assistance
agreement. 


--------------------
\13 FDICIA imposes restrictions on capital distributions consisting
of cash or other property if such a distribution would result in the
institution becoming undercapitalized--meaning one or more minimum
levels are not met for any relevant capital measure. 


      LESSON ON CLOSURE
      DETERMINATIONS
---------------------------------------------------------- Letter :6.2

OCC could have better documented the bases for its closure decision
had its examination reports and workpapers been clear, complete, and
self-explanatory. 

Congress authorized the Comptroller of the Currency, as the charterer
of national banks, to close a national bank whenever one or more
statutorily prescribed grounds are found to exist, including
insolvency.  It is generally agreed in the regulatory community that
closure decisions should be supported by clear, well-documented
evidence of the grounds for closure.  Thus, OCC and other primary
regulators' bank examination reports and underlying workpapers
supporting closure decisions need to be complete, current, and
accurate and provide documentation of the bases for closure decisions
that is self-explanatory.  However, we were unable to determine the
basis for the OCC examiners' finding that First City-Houston's ALLL
was insufficient solely from our review of the examination report or
workpapers.  Specifically, the examination report that OCC conveyed
to Houston bank management did not fully articulate the basis for
OCC's finding that the bank's ALLL was inadequate.  From our review
of OCC's workpapers, we were unable to reconstruct the analysis
performed to arrive at the need to increase the Houston bank's ALLL. 
We had to supplement the information in the working papers with
additional information obtained through discussions with the EIC and
senior level OCC officials in order to determine how OCC arrived at
its decision to require First City-Houston to increase its ALLL by
$67 million.  OCC officials were able to provide additional
clarifying information on the basis for this finding.  Although some
information regarding these concerns was included in the examination
workpapers, it was not sufficient for us to independently follow how
OCC's examiners arrived at the basis for their conclusion that First
City-Houston's ALLL was insufficient. 

Thoroughly documented workpapers would also have provided OCC and
FDIC with a clear trail of the examiners' methodology, analytical
bases of evidentiary support, and mathematical calculations.  This
would have precluded the need for resource expenditures to
reconstruct or verify the basis for examiners' conclusions. 
Workpapers are important as support for the information and
conclusions contained in the related report of examination.  As
described in OCC's examination guidance, the primary purposes of the
workpapers include (1) organizing the material assembled during an
examination to facilitate review and future reference, (2)
documenting the results of testing and formalizing the examiner's
conclusions, and (3) substantiating the assertions of fact or
opinions contained in the report of examination.  When examination
reports and workpapers are clear and concise, independent reviewers,
including those affected by the results, should be able to understand
the basis for the conclusions reached by the examiner. 

OCC officials agreed that the First City examination workpapers
should have included a comprehensive summary of the factors
considered in reaching the final examination conclusions, especially
regarding such a critical issue as a determination of bank
insolvency. 


      LESSON ON RESOLUTION
      DETERMINATIONS
---------------------------------------------------------- Letter :6.3

FDIC's DOR could have considered information from the primary
regulator relative to asset quality in making its resolution
decisions. 

In situations like First City, where the primary regulator had just
extensively reviewed a high proportion of the loan portfolio as part
of a comprehensive examination and found deficiencies in the bank's
loan classification and reserving processes, FDIC resolutions
officials should have been able to utilize the examination findings,
at least as a secondary source, to test their asset valuation
assumptions.  This would have been particularly useful because the
failure came on short notice and some FDIC officials had reservations
about some of the underlying assumptions. 

OCC examination officials were apparently communicating with their
FDIC examination counterparts about the accelerated First
City-Houston bank examination.  Even so, FDIC's DOR officials could
have benefitted from earlier information on OCC's preliminary
findings that indicated that First City-Houston would be insolvent
before December 1992, as had been anticipated by all affected
parties.  This information would have provided DOR more lead time to
consider a wider range of resolution alternatives, including
soliciting bids from parties it knew to be interested in acquiring
the banks.  FDIC officials, however, did not believe the interested
parties would submit bids since neither they nor FDIC had an
opportunity to perform due diligence on the First City bank assets on
such short notice. 

DOR officials could have used the OCC examiners' assessment of asset
quality as a means of verifying the asset valuations estimated
through its own techniques.  This would have been similar to the way
FDIC uses its research model on smaller resolutions, i.e., as an
independent check against the valuations.  Also, the FDIC Board could
have used such information since it was not confident that the more
traditional resolution estimating techniques provided reliable
results for the circumstances relative to the failing bank.  The
going concern valuation used by OCC examiners may even have been more
relevant than the net realizable valuation used by DOR because FDIC
expected a bridge bank or open bank assistance resolution to be the
most orderly and least costly resolution alternative. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

FDIC and OCC provided written comments on a draft of this report,
which are described below and reprinted in appendixes IV and V.  FRS
also reviewed a draft, generally agreed with the information as
presented, but provided no written comments. 

FDIC described the report as being well researched and an overall
accurate recording of the events that led up to and through the 1988
and 1992 transactions.  FDIC offered further information and
explanation related to the two transactions, including reasons why
some of the lessons to be learned could not have been used by FDIC in
1988 and 1992 or would not have altered the outcomes of these
transactions.  FDIC further stated, however, that it will consider
the lessons enumerated in the report and, where appropriate,
incorporate them into future resolution decisions. 

We believe FDIC's elaborations about the 1988 and 1992 transactions
provide meaningful insights about its assistance and resolutions
processes.  The Executive Director, in later discussions about FDIC's
written comments, assured us that FDIC is open and receptive to the
lessons to be learned, and his elaborations were intended to explain
the bases for FDIC's decisions and why other positions were not
considered or taken at the time of the transactions. 

OCC raised concerns that the report might create an inference that we
were questioning OCC's basis to close the First City banks and about
our suggestion that OCC needs to improve the quality of its
examination reporting and workpaper documentation.  OCC believes its
basic standards for examiner documentation are appropriate for
supervisory oversight and examiner decisionmaking purposes.  While
OCC believes its basic approach to be sound, including its
documentation practices, it will consider our views in reviewing
current examination guidance for potential revision to provide
clarity, ensure consistency, and reduce burden. 

Our study was basically intended to provide an accurate accounting of
the events, involving both the banks and regulators, that led to the
1988 and 1992 transactions to resolve First City.  In compiling this
account, we identified lessons to be learned from the First City
experience that could potentially improve the insurer's and
regulators' open bank assistance, bank closure, and bank resolution
processes.  We did not question the bases used by the insurer or
regulators in making decisions relative to First City, but instead we
looked for opportunities to improve those processes to ensure the
insurer's and regulators' interests are adequately protected in
making future decisions.  The insurer and regulators, including FRS,
generally agreed to consider the lessons to be learned from the First
City experience to improve their processes. 


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

We will provide copies of this report to the Chairman, Federal
Deposit Insurance Corporation; the Comptroller of the Currency; the
Chairman of the Federal Reserve Board; and the Acting Director of the
Office of Thrift Supervision.  We will also provide copies to other
interested congressional committees and members, federal agencies,
and the public. 

This review was done under the direction of Mark J.  Gillen,
Assistant Director, Financial Institutions and Markets Issues.  Other
major contributors to this review are listed in appendix VI.  If you
have any questions about the report, please call me on (202)
512-8678. 

Sincerely yours,

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Concerned with FDIC's provision of $970 million financial assistance
to First City banks in 1988 and their ultimate failure less than 5
years later, the former Chairman of the Senate Committee on Banking,
Housing and Urban Affairs asked us to review the events surrounding
First City Bancorporation of Texas' 1988 and 1992 resolutions and to
use our review to reflect on FDIC's use of open bank assistance.  As
agreed with the Committee, we focused our review on First City's
largest bank in Houston and its second largest bank in Dallas,
because the financial difficulties of these two banks resulted in the
insolvency of First City's 18 other banks.  Our objectives were to
review the events leading up to First City's 1988 open bank
assistance and its 1992 bank failures to determine

  -- why FDIC provided open bank assistance in 1988 rather than close
     the First City banks;

  -- why the 1992 resolution estimate differed so much from the
     estimate resulting from the 1993 sale of the banks;

  -- whether the First City banks' failures in 1992 are expected to
     result in additional costs to BIF; and

  -- whether the First City experience provides lessons relevant to
     the assistance, closure, and/or resolution of failing banks. 

To achieve our objectives, we reviewed examination reports and
related available examination documents and workpapers relative to
First City's Houston and Dallas banks and other subsidiary banks for
1983 through 1992.  We began our review of examination reports with
the 1983 examination because OCC officials told us that was when they
first identified safety and soundness deficiencies in First City
banks.  The 1993 examination also precipitated the first supervisory
agreement between First City management and the bank regulatory
agencies. 

In reviewing the examination reports we sought to obtain information
on the condition of the banks at the time of each examination and the
significance of deficiencies as identified by the regulators.  We
reviewed examination workpapers, correspondence files, and management
reports to gain a broader understanding of the problems identified,
the approach and methodology used to assess the conditions of the
First City banks, and the regulatory actions taken to promote or
compel bank management to address deficient conditions found by
regulators.  We also used the examination workpapers to compile lists
of loans that caused significant losses to the banks to try and
compare the loan quality problems arising from loans made before the
recapitalization to those made by new bank management. 

We interviewed the OCC examiners-in-charge of the 1989 examinations
and all subsequent examinations to obtain their perspectives on the
conditions found at the First City banks.  We also interviewed OCC
National Office officials to obtain their views on the adequacy of
OCC's oversight of the banks.  We reviewed all relevant examination
reports, workpapers, and supporting documentation to assess their
adequacy in explaining the positions taken by OCC relative to First
City-Houston and the Collecting Bank.  When we were unable to gain
adequate information from the examination records, we sought further
explanations from OCC examination officials and assessed those
explanations when received.  We also reviewed FDIC and FRS records of
examinations and supporting documents, particularly those related to
First City-Dallas.  We also discussed issues relating to First City
banks with FDIC and FRS officials. 

Further, we reviewed First City Bancorporation financial records and
supporting documents and discussed issues relating to OCC, FDIC, and
FRS oversight with First City officials. 

Finally, we reviewed FDIC records relating to First City's 1988
recapitalization and FDIC's 1992 and 1993 bridge bank decisions.  We
discussed issues relating to these actions with FDIC, OCC, FRS, and
First City officials to obtain their viewpoints on the actions taken. 
We also reviewed FDIC, OCC, and FRS records assessing the economy and
the conditions of Texas financial institutions from the mid-1980s to
the early 1990s. 

FDIC and OCC provided written comments on a draft of this report. 
FRS also reviewed a draft, generally agreed with the information as
presented, but provided no written comments.  The agencies' written
comments are presented and evaluated on page 21 of the letter and
reprinted in appendixes IV and V.  We did our work between January
1993 and June 1994 at FDIC, OCC, and FRS in Washington, D.C.; at
FDIC, OCC, and FRS in Dallas; and at the First City banks in Houston
and Dallas.  We did our work in accordance with generally accepted
government auditing standards. 


CHANGES IN THE BANK REGULATORY
STRUCTURE AND RELATED AUTHORITIES
BETWEEN 1987 AND 1993
========================================================== Appendix II

The 1980s and the early 1990s were tumultuous times for the banking
industry, especially in the Southwest.  During this time, the banking
industry experienced record profits followed by record losses, and a
number of legislative and regulatory changes altered both the way
banks did business and the way banks were regulated. 


   THE BANKING REGULATORY
   STRUCTURE
-------------------------------------------------------- Appendix II:1

The responsibility for regulating federally insured banks is divided
among three federal agencies.  OCC is the primary regulator for
nationally chartered banks.  FRS regulates all bank holding companies
and state-chartered banks that are members of FRS.  FDIC regulates
state-chartered banks that are not members of FRS.  FDIC is also the
insurer of all federally insured banks and thrifts, which gives it
the dual role of being both the regulator and insurer for many banks. 

The primary role of federal regulators is to monitor the safety and
soundness of the operations of both individual banks and the banking
system as a whole.  The regulators' major means of monitoring the
banks is through the examination process.  Examinations are intended
to evaluate the overall safety and soundness of a bank's operations,
compliance with banking laws and regulations, and the quality of a
bank's management and directors.  Examinations are also to identify
those areas where bank management needs to take corrective actions to
strengthen performance.  When a regulator identifies an area where
the bank needs to improve, it can require the bank to initiate
corrective action through either formal or informal measures.  These
measures can be as informal as a comment in the examination report or
as severe as the regulator ordering the bank to cease and desist from
a particular activity or actually ordering the closure of the bank. 

The role of the insurer is to protect insured depositors in the
nation's banks, help maintain confidence in the banking system, and
promote safe and sound banking practices.  As the insurer of bank
deposits, FDIC may provide financial assistance for troubled banks. 
The assistance may be granted directly to the bank or to a company
that controls or will control it.  FDIC may also grant assistance to
facilitate the merger of banks.  When a chartering authority closes a
bank, it typically appoints FDIC as receiver for the bank.  FDIC then
arranges for insured depositors to be paid directly by FDIC or the
acquiring bank and liquidates the assets and liabilities not assumed
by the acquiring bank. 

Many banks, including First City's, are owned or controlled by a bank
holding company and have one or more subsidiary banks.  Typically, in
a bank holding company arrangement, the largest subsidiary bank is
referred to as the lead bank.  The subsidiary banks may or may not
have the same types of banking charters, i.e., either national or
state charters.  Consequently, different regulators may be
responsible for overseeing the lead bank and the other subsidiary
banks in the organization, with FRS responsible for overseeing all
bank holding companies.  First City Bancorporation of Texas typified
this structure.  It consisted of a holding company, a nationally
chartered lead bank, 11 other nationally chartered subsidiary banks,
5 state-chartered banks that were members of FRS, and 3
state-chartered banks that were not members of FRS.  Hence, the First
City organization was supervised and examined by all three federal
bank regulators. 


   SIGNIFICANT BANK CLOSURE AND
   RESOLUTION CHANGES
-------------------------------------------------------- Appendix II:2

Between the time FDIC first announced open bank assistance for First
City in 1987 and its closure in 1992, a number of regulatory and
legislative initiatives gave the federal government greater authority
to deal with troubled financial institutions.  Passage of the
Competitive Equality Banking Act of 1987 (CEBA), the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),
and the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) provided both regulators and the insurer greater authorities
in dealing with troubled financial institutions.  Their passage also
provided the impetus for regulatory changes that granted regulators
and the insurer greater authorities to close and resolve troubled
financial institutions. 


      CHANGES AFFECTING BANK
      CLOSURES
------------------------------------------------------ Appendix II:2.1

The regulators' expanded authority to close a bank is possibly one of
the most significant changes that has occurred in the federal
government's oversight of banks.  At the time of the 1988 First City
reorganization, OCC had the authority to appoint FDIC as receiver for
a national bank whenever OCC, through its examination of the bank,
determined that the bank was insolvent.  The National Bank Act did
not define insolvency, and the courts afforded OCC considerable
discretion in determining the standard for measuring insolvency.  OCC
used two standards to measure insolvency--a net worth standard and a
liquidity standard.  Basically, a bank becomes net worth or equity
insolvent when its capital has been depleted.  Similarly, a bank
becomes liquidity insolvent when it does not have sufficient liquid
assets--i.e., cash--to meet its obligations as they become due,
regardless of its net worth. 

Following the 1988 First City reorganization, OCC promulgated a
regulation that allowed it to find a national bank insolvent at an
earlier stage than before.  Under the new rule, OCC redefined primary
capital to exclude a bank's allowance for loan and lease losses. 
Prior to this change, OCC considered a national bank's regulatory
capital to include not only its retained earnings and paid-in capital
but also the allowance a bank had set up for loan and lease losses;
i.e., for uncollectible or partially collectible loans.  According to
OCC, the change brought OCC's measurement of a bank's equity more
closely in line with generally accepted accounting principles'
measurement of equity.  While this action was not specifically
required by FIRREA, OCC stated the change was within the spirit of
the 1989 amendments to the federal banking laws. 

The cross-guarantee provisions of FIRREA also granted FDIC authority
to recoup from commonly controlled depository institutions any losses
incurred or reasonably anticipated to be incurred by FDIC due to the
failure of a commonly controlled insured depository institution.  As
in the case of the First City banks, the cross-guarantee assessment
may result in the failure of an otherwise healthy affiliated
institution if the institution is unable to pay the amount of the
assessed liability.  This provision imposes a liability on commonly
controlled institutions for the losses of their affiliates at the
time of failure, thereby reducing BIF losses.  The law gives FDIC
discretion in determining when to require reimbursement and to exempt
any institution from the cross-guarantee provisions if FDIC
determines that the exemption is in the best interest of the
applicable insurance fund. 


      CHANGES AFFECTING BANK
      RESOLUTIONS
------------------------------------------------------ Appendix II:2.2

The manner in which FDIC can resolve troubled banks involves another
significant set of changes that has occurred since FDIC announced
First City's first resolution in 1987.  More specifically, FDICIA now
requires FDIC to evaluate all possible methods for resolving a
troubled bank and resolve it in a manner that results in the least
cost to the insurance fund.  Prior to FDICIA's least-cost test, FDIC
was required to choose a resolution method that was no more costly
than the cost of a liquidation.  Currently, the only exception to the
least-cost determination is when the Secretary of the Treasury
determines that such a selection would have a serious adverse effect
on the economic conditions of the community or the nation and that a
more costly alternative would mitigate the adverse effects.  To date,
the systemic risk exception has not been used. 


      CHANGES TO OPEN BANK
      ASSISTANCE AUTHORITY
------------------------------------------------------ Appendix II:2.3

FDIC's ability to provide open bank assistance has also undergone
significant changes since FDIC assisted First City in 1988.  At that
time, FDIC was authorized to provide assistance to prevent the
closure of a federally insured bank.  FDIC was permitted to provide
the assistance either directly to the troubled bank or to an acquirer
of the bank.  Before providing the assistance, FDIC had to determine
that the amount of assistance was less than the cost of liquidation,
or that the continued operation of the bank was essential to provide
adequate banking services in the community.  To implement these
provisions, FDIC adopted guidelines that open assistance had to meet. 
The key guidelines are summarized below: 

  -- The assistance had to be less costly to FDIC than other
     available alternatives. 

  -- The assistance agreement had to provide for adequate managerial
     and capital resources (from both FDIC and non-FDIC sources) to
     reasonably ensure the bank's future viability. 

  -- The agreement had to provide for the assistance to benefit the
     bank and FDIC and had to include safeguards to ensure that
     FDIC's assistance was not used for other purposes. 

  -- The financial effect on the debt and equity holders of the bank,
     including the impact on management, shareholders, and creditors
     of the holding company, had to approximate what would have
     happened if the bank had failed. 

  -- If possible, the agreement had to provide for the repayment of
     FDIC's assistance. 

FDICIA placed additional limits on FDIC's use of open bank
assistance.  FDICIA added a new precondition to FDIC's authority to
provide open assistance under section 13(c), which is summarized
below.  Under FDICIA, FDIC may consider providing financial
assistance to an operating financial institution only if the
following criteria can be met: 

(a) Grounds for the appointment of a conservator or receiver exist or
likely will exist in the future if the institution's capital levels
are not increased and it is unlikely that the institution will meet
capital standards without assistance. 

(b) FDIC determines that the institution's management has been
competent and has complied with laws, directives, and orders and did
not engage in any insider dealing, speculative practice, or other
abusive activity. 

In addition to the previously discussed statutory changes, FDICIA
contained a resolution by Congress that encourages banking agencies
to pursue early resolution strategies provided they are consistent
with the new least-cost provisions and contain specific guidelines
for such early resolution strategies. 

Since FDICIA, a further statutory limitation has been placed on open
assistance transactions.  Section 11 of the Resolution Trust
Corporation Completion Act of 1993 prohibits the use of BIF and
Saving Association Insurance Fund (SAIF) funds in any manner that
would benefit the shareholders of any failed or failing depository
institution. 

In FDIC's view, as set forth in its report to Congress on early
resolutions of troubled insured depository institutions, this
provision "largely eliminates the possibility of open assistance,
except where a systemic risk finding" is made pursuant to the
least-cost provisions. 


      BRIDGE BANK RESOLUTION
      AUTHORITY
------------------------------------------------------ Appendix II:2.4

Another change to FDIC's resolution alternatives occurred when CEBA
provided FDIC the authority to organize a bridge bank in connection
with the resolution of one or more insured banks.  Essentially, a
bridge bank is a nationally chartered bank that assumes the deposits
and other liabilities of a failed bank.  The bridge bank also
purchases the assets of a failed institution and temporarily performs
the daily functions of the failed bank until a decision regarding a
suitable acquirer or other resolution alternative can be made. 


BANK MANAGEMENT ACTIONS THAT
CONTRIBUTED TO THE FAILURE OF THE
1988 RECAPITALIZATION OF FIRST
CITY
========================================================= Appendix III

To better understand some of the factors that contributed to the
ultimate failure of the 1988 recapitalized First City banks, we
reviewed First City's activities from 1988 to 1990 as reflected in
examination reports and workpapers.  The results of that review are
summarized in this appendix. 


      FIRST CITY RELIED TOO
      HEAVILY ON INCOME FROM
      NONTRADITIONAL SOURCES
----------------------------------------------------- Appendix III:0.1

First City Bancorporation banks' reported profits in 1988, 1989, and
1990 depended on nontraditional sources of income that were not
sustainable.  These profits were then used to justify the payment of
cash dividends during 1989 and 1990 that significantly reduced the
banks' retained earnings.  First City's reliance on income from the
Collecting Bank nearly equalled First City's net income during 1988
and 1989, First City's only profitable years. 

Furthermore, we found that if it were not for the $73 million in
interest and fee income the Collecting Bank paid First City in 1988,
the latter would have lost about $7 million that year.  While First
City's 1989 net income did not completely depend upon the Collecting
Bank's interest and fees, we found that such income accounted for
nearly $100 million of the $112 million in net income earned by First
City during 1989.  Another nontraditional source of First City income
was generated in the first quarter of 1990 when First City sold its
credit card portfolio for a $139 million profit.  This sale enabled
First City to turn an otherwise $49 million loss from operations into
a $90 million net profit during the quarter that ended March 31,
1990. 

These nontraditional sources of income accounted for nearly all of
First City's net income during the first 2 years of operations after
recapitalization and did not necessarily indicate a significant
problem with First City's operations.  It is also not necessarily a
basis for criticizing First City's management.  First City's reliance
on income from nontraditional sources could be explained as the
result of initial start-up problems associated with taking over a
large regional multibank holding company during a period of economic
instability.  What is noteworthy is that First City used the profits
on income from nontraditional and onetime sources to pay $122 million
in cash dividends, thereby decreasing the bank's retained earnings. 
The assistance agreement's only limitation on the payment of
dividends was that common stock dividends could not exceed 50 percent
of the period's earnings. 


      FIRST CITY EXPERIENCED
      UNEXPECTED LOAN
      DETERIORATION
----------------------------------------------------- Appendix III:0.2

The anticipated success of the recapitalized First City was at least
partially based upon the assumption that First City Bancorporation,
including the Collecting Bank, would not experience further loan
portfolio deterioration.  This assumption proved to be incorrect. 
Problems with both pre- and post- recapitalization loan portfolios
resulted in significant loan charge-offs and the depletion of bank
equity.  For example, we found that about $270 million in assets that
originated prior to the recapitalization at First City's Houston and
Dallas banks resulted in nearly $75 million in losses.  Furthermore,
problems with pre-recapitalization assets also plagued the Collecting
Bank.  These problems forced First City to charge-off nearly $200
million of Collecting Bank notes by the time the banks were closed in
October 1992. 

First City also experienced significant problems with loans
originated after the 1988 reorganization.  We found that First City
suffered about $300 million in losses on such loans.  Some of these
losses occurred as a result of First City's aggressive loan growth
policy that increased its portfolio of loans to finance inherently
risky, highly leveraged transactions.  First City's highly leveraged
transaction lending peaked in 1989 at more than $700 million.  Other
significant losses resulted from First City's international and other
nonregional lending practices.  Still other losses resulted from poor
underwriting practices or adverse economic conditions. 


      FIRST CITY'S HIGH OPERATING
      COSTS STRAINED ITS PROFITS
----------------------------------------------------- Appendix III:0.3

First City's recapitalization prospectus predicted that the banks
would realize savings of more than $100 million per year by reducing
operating expenses to a level commensurate with industry standards. 
While First City realized at least some of the anticipated savings
during its first 2 years of operations, it was unable to sustain
these cost-cutting efforts.  According to both OCC and FDIC, high
operating expenses contributed to First City's 1992 failure. 

As shown in table III.1, First City's operating expenses did not
decrease as First City's net income, gross profits, and total assets
decreased.  Rather, First City's operating expenses were the lowest
during 1988 and 1989, when it reported year-end profits, and highest
during 1990 and 1991, when it lost more than $380 million.  Our
review of First City's escalating operating expenses showed that
during 1990 and 1991--a period when the banks' revenues and assets
were decreasing--its data processing and professional services
expenses increased because of the way in which payments for these
services were structured in related long-term contracts. 
Furthermore, First City's operating expenses were already high due to
above-market long-term building leases negotiated before the
recapitalization. 



                              Table III.1
                
                  Comparison of First City's Operating
                Expenses to Net Income, Total Revenues,
                      and Total Assets, 1988-1991

                         (Dollars in millions)

                         Operating                   Total       Total
Year ending               expenses  Net income    revenues      assets
----------------------  ----------  ----------  ----------  ----------
12/31/88                      $304         $66        $885     $12,195
12/31/89                       450         112       1,458      14,081
12/31/90                       590       (158)       1,492      13,344
12/31/91                       548       (225)       1,144       9,943
----------------------------------------------------------------------
Source:  OCC examination reports and workpapers. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
========================================================= Appendix III

See comment 1. 



(See figure in printed edition.)

See comment 2. 

See comment 3. 

See comment 4. 



(See figure in printed edition.)

See comment 5. 

See comment 6. 



(See figure in printed edition.)


The following are GAO's comments on the Federal Deposit Insurance
Corporation's letter dated October 24, 1994. 

GAO COMMENTS

1. We agree with FDIC that it received bridge bank authority in 1987,
prior to the 1988 First City resolution, but did not receive
cross-guarantee authority until later, in 1989.  We do not dispute
the FDIC scenario regarding what may have happened had it exercised
its bridge bank authority on the two troubled First City banks in
1988 without having the authority to recover the losses from the
other affiliated First City banks.  Under the circumstances, FDIC
alternatives for resolving the First City banks in 1988 were to
either provide open bank assistance for the two troubled banks, or
wait until they failed and consider the other resolution methods,
including bridge banks. 

2. We do not dispute the FDIC position that regulatory agencies were
invited to all important meetings or that its Board of Directors was
aware of the regulators' opinions prior to making the 1988 open bank
assistance decision.  Our suggestion, however, is for FDIC to
actively consult with its regulatory counterparts about key
assumptions used in resolution alternatives recommended to the Board. 
We believe FDIC could take better advantage through greater
consultation in making economic projections.  The Federal Reserve,
for example, has developed considerable expertise.  In later
discussions with the Executive Director, he agreed with us that such
consultation with regulatory counterparts would be of value, although
he noted that the accountability for the resolution decision, along
with its assumptions, resides with FDIC. 

3. In later discussions with the Executive Director, he told us that
he does not disagree with our suggestion that FDIC include safeguards
in open bank assistance agreements.  His only concern would be if the
safeguards were so stringent as to discourage potential private
investors, thereby potentially costing FDIC more to resolve a
troubled bank.  He agrees with us that FDIC's responsibility is to
protect the Bank Insurance Fund and FDIC should include safeguards in
its assistance agreements. 

4. We agree that FDIC could realistically enforce the assistance
agreement conditions only if FDIC determined that the bank breached
the contractual conditions.  The Executive Director told us that he
is receptive to including provisions in future FDIC assistance
agreements that authorize primary regulators to take enforcement
actions if they find noncompliance with safeguards contained in
future FDIC assistance agreements.  His primary concern involves the
potential of discouraging private investors, although he also
believes there may be some practical problems in agreeing on
conditions that serve the interests of the acquirer, the insurer, and
the primary regulator.  The Executive Director understands that such
provisions would enable the primary regulator to gather the necessary
information and have the requisite authority to take the appropriate
enforcement action to ensure compliance with the relevant provisions
of the assistance agreement. 

5. We agree that in 1992, earlier FDIC notification of OCC's finding
that First City-Houston was insolvent may not have provided FDIC with
a broader range of resolution alternatives because First City
management was still convinced that it could raise sufficient capital
to make the bank financially viable.  Consequently, while some
potential investors or acquirers had performed due diligence relative
to earlier First City self- rescue proposals, FDIC did not believe
sufficient due diligence had been performed by potential acquirers or
that First City management would permit those interested to perform
due diligence.  Therefore, FDIC believed bridge banks would provide
for the most orderly resolution, which FDIC also determined to be the
least costly resolution alternative available at that time.  While
earlier notification may not have affected the First City resolution,
the Executive Director agreed with us that early notification of
insolvency is critically important for FDIC to consider the full
range of resolution alternatives.  He also said that FDIC is in
regular contact with primary regulators to ensure early warning of
potential insolvencies to maximize its resolution options. 

6. We agree that examiners typically value assets on a going concern
basis, and resolvers value the assets on a net realizable value
presuming that they will be liquidated.  The Executive Director,
however, agreed with us that in unique situations like First
City--where a high percentage of the assets were just assessed by
examiners and market interest in the troubled banks suggests the
assets will be acquired by a healthy bank--FDIC could use the
examiners' assessments as a secondary source to check on the validity
of its asset valuation review results.  Such a use would be
comparable to how FDIC generally uses its research model, the results
of which the FDIC Board of Directors may consider in its
deliberations in making its resolution decisions. 




(See figure in printed edition.)Appendix V
COMMENTS FROM THE COMPTROLLER OF
THE CURRENCY
========================================================= Appendix III

See comment 1. 

See comment 2. 



(See figure in printed edition.)


The following are GAO's comments on the Comptroller of the Currency's
letter dated January 5, 1995. 

GAO COMMENTS

1. Our objectives in the First City study included a review of the
processes used by regulators to assist, close, or otherwise resolve
failing financial institutions.  We reviewed the adequacy of those
processes, including the bases for the related decisions made by
federal regulators for First City.  While we found some deficiencies
in the processes as applied in the First City decisions and suggested
opportunities to improve those processes from the First City
experience, it was not our objective nor did we take a position on
the regulators' decisions. 

2. We agree with OCC that its basic standards for examination
reporting and workpaper documentation are adequate based on this
study and on other GAO studies of OCC's examination process.  In our
report entitled Bank and Thrift Regulation:  Improvements Needed in
Examination Quality and Regulatory Structure (GAO/AFMD-93-15), dated
February 16, 1993, we found that OCC generally adequately documented
its examination results.  Although we did not find in our study of
First City adequate documentation for the examination results, OCC
officials assured us that our concerns are being considered in their
efforts to improve OCC examination processes, including the
documentation of examination results. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

James R.  Black, Senior Evaluator
Ned R.  Nazzaro, Evaluator
Desiree Whipple, Reports Analyst
Phoebe A.  Jones, Secretary

DALLAS REGIONAL OFFICE

Ronald Berteotti, Assistant Regional Manager
Jeanne Barger, Issue Area Manager
John V.  Kelly, Evaluator-in-Charge
Steven D.  Boyles, Site-Senior
Michael J.  Coy, Evaluator

OFFICE OF THE GENERAL COUNSEL

Rosemary Healy, Senior Attorney

*** End of document. ***