    Bank Oversight Structure: U.S. and Foreign Experience May Offer Lessons
    for Modernizing U.S. Structure (Chapter Report, 11/20/96, GAO/GGD-97-23).

    Pursuant to a congressional request, GAO reviewed its previous work on
    the structure and operations of bank oversight in five countries,
    focusing on: (1) aspects of those systems that may be useful for
    Congress to consider in any future modernization efforts; (2) perceived
    problems with federal bank oversight in the United States; and (3)
    principles for modernizing the U.S. federal bank oversight structure.

    GAO found that: (1) the five foreign banking systems reviewed had less
    complex and more streamlined oversight structures than the United
    States; (2) in all five countries, fewer national agencies were involved
    with bank regulation and supervision than in the United States; (3) in
    all but one of these countries, both the central bank and the ministry
    of finance had some role in bank oversight, and several of these
    countries relied on the work of the banks' external auditors to perform
    certain oversight functions; (4) in all cases, there was one entity that
    was clearly responsible and accountable for consolidated oversight of
    banking organizations as a whole; (5) the bank oversight structure in
    the United States is relatively complex, with four different federal
    agencies having the same basic oversight responsibilities for those
    banks under their respective purview; (6) industry representatives and
    expert observers have contended that multiple examinations and reporting
    requirements resulting from the shared oversight responsibilities of
    four different regulators contribute to banks' regulatory burden, and
    that the federal oversight structure is inherently inefficient; (7)
    having one agency responsible for examining all U.S. bank holding
    companies, with a different agency or agencies responsible for examining
    the holding companies' principal banks, could result in overlap and a
    lack of clear responsibility and accountability for consolidated
    oversight of U.S. banking operations; and (8) any modernized banking
    structure should provide for clearly defined responsibility and
    accountability for consolidated and comprehensive oversight,
    independence from undue political pressure, consistent rules,
    consistently applied for similar activities, and enhanced efficiency and
    reduced regulatory burden.

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

     REPORTNUM:  GGD-97-23
         TITLE:  Bank Oversight Structure: U.S. and Foreign Experience May
                 Offer Lessons for Modernizing U.S. Structure
          DATE:  11/20/96
       SUBJECT:  Banking regulation
                 Bank management
                 Bank failures
                 Reporting requirements
                 Bank examination
                 Financial institutions
                 Regulatory agencies
                 Bank holding companies
                 Foreign governments
                 Law enforcement
    IDENTIFIER:  Canada
                 Japan
                 France
                 Germany
                 United Kingdom

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

    Report to the Honorable
    Charles E.  Schumer
    House of Representatives

    November 1996

    BANK OVERSIGHT STRUCTURE - U.S.
    AND FOREIGN EXPERIENCE MAY OFFER
    LESSONS FOR MODERNIZING U.S.
    STRUCTURE

    GAO/GGD-97-23

    Bank Oversight Structure

    (233435)

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

      BIF - Bank Insurance Fund
      CBO - Congressional Budget Office
      CFTC - Commodity Futures Trading Commission
      CPA - Certified Public Accountant
      CRA - Community Reinvestment Act
      FBA - Federal Bank Agency
      FBC - Federal Banking Commission
      FDIC - Federal Deposit Insurance Corporation
      FDICIA - Federal Deposit Insurance Corporation Improvement Act of
         1991
      FFIEC - Federal Financial Institutions Examination Council
      FHLBB - Federal Home Loan Bank Board
      FHLBS - Federal Home Loan Bank System
      FIRREA - Financial Institution Reform, Recovery, and Enforcement
         Act of 1989
      FRS - Federal Reserve System
      FSLIC - Federal Savings and Loan Insurance Corporation
      GAAP - Generally Accepted Accounting Principles
      NAIC - National Association of Insurance Commissioners
      NCUA - National Credit Union Administration
      OCC - Office of the Comptroller of the Currency
      OTS - Office of Thrift Supervision
      SAIF - Savings Association Insurance Fund
      SEC - Securities and Exchange Commission
      U.K.  - United Kingdom

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

    B-259978

    November 20, 1996

    The Honorable Charles E.  Schumer
    House of Representatives

    Dear Mr.  Schumer:

    Proposals to consolidate U.S.  bank regulatory agencies have raised
    questions about how other countries structure and carry out their
    various bank regulation and central bank activities.  You asked us to
    provide you with information about the structure and operations of
    bank oversight and central bank activities in five countries:
    Canada, France, Germany, Japan, and the United Kingdom, which we have
    done.  You then asked us to draw on these reports to identify
    potential avenues for oversight modernization, and to identify the
    characteristics of the five countries' regulatory structures that
    might be useful to consider in any U.S.  oversight modernization
    effort.  This report responds to that request.  It contains
    recommendations to Congress concerning characteristics that should be
    included in any effort to modernize the U.S.  bank oversight
    structure.

    We are sending copies of this report to the Chairman of the Board of
    Governors of the Federal Reserve System, the Chairman of the Federal
    Deposit Insurance Corporation, the Comptroller of the Currency, and
    the Acting Director of the Office of Thrift Supervision.  We are also
    sending copies to Members of the House and Senate banking committees,
    other interested committees and subcommittees, and other interested
    parties.

    This report was prepared under the direction of Mark J.  Gillen,
    Assistant Director.  If you have any questions, please call me on
    (202) 512-8678.  Other major contributors are listed in appendix
    VIII.

    Sincerely yours,

    James L.  Bothwell, Director
    Financial Institutions
     and Markets Issues

    EXECUTIVE SUMMARY
    ============================================================ Chapter 0

       PURPOSE
    ---------------------------------------------------------- Chapter 0:1

    Many proposals have been made to restructure the multiagency system
    for federal oversight of banking institutions in the United States.
    In five recent reports, GAO reviewed how banks are regulated and
    supervised in Canada, France, Germany, Japan, and the United Kingdom
    (U.K.).  Although GAO found that each country's oversight structure
    and approach reflected a unique history, culture, and banking
    industry, GAO believes that certain aspects of these foreign
    regulatory systems may be useful for Congress to consider in any
    future deliberations about how to modernize bank oversight in the
    United States.

    Several specific proposals to modernize and consolidate the U.S.
    bank oversight structure were debated in the 103rd Congress.  To
    obtain insight into how banks are regulated in other major countries,
    Congressman Charles E.  Schumer asked GAO to review the structure and
    operation of bank oversight in Canada, France, Germany, Japan, and
    the U.K., with a particular focus on the regulatory roles of the
    central banks in these countries.  This report draws on these
    findings,\1 as well as previous GAO work\2 on the U.S.  financial
    regulatory system, to discuss (1) aspects of the five foreign systems
    GAO reviewed that may be useful for Congress to consider in any
    future modernization efforts, (2) perceived problems with federal
    bank oversight in the United States, and (3) principles for
    modernizing the U.S.  federal bank oversight structure.

    --------------------
    \1 See Bank Regulatory Structure:  The Federal Republic of Germany
    (GAO/GGD-94-134BR, May 9, 1991); Bank Regulatory Structure:  The
    United Kingdom (GAO/GGD-95-38, Dec.  29, 1994); Bank Regulatory
    Structure:  France (GAO/GGD-95-152, Aug.  31, 1995); Bank Regulatory
    Structure:  Canada (GAO/GGD-95-223, Sept.  28, 1995); and Bank
    Regulatory Structure:  Japan, which is currently a draft report.

    \2 See listing of related products at the end of this report.

       BACKGROUND
    ---------------------------------------------------------- Chapter 0:2

    In many respects, the structure of the U.S.  banking system is unlike
    those of the other major industrialized countries that GAO reviewed.
    For example, the United States has a dual banking system composed of
    almost 12,000 commercial banks and savings and loan institutions
    (banking institutions) that can be either state or federally
    chartered.  As a result, all 50 states and the federal government are
    involved with bank oversight in the United States.  In contrast, the
    banking industries in the five foreign countries were more
    concentrated, and bank oversight was generally the responsibility of
    the national governments.  Any regional or local government
    involvement was typically limited to oversight of specialized
    financial institutions, such as credit cooperatives.

    Differences also existed in the predominant organizational structure
    of banking institutions in the United States and these foreign
    countries.  Specifically, the bank holding company structure,
    consisting of a parent company with one or more subsidiaries that may
    include banks, savings and loans, and other financial entities
    providing services that are deemed closely related to banking, is
    particular to the United States.  Foreign bank organizational
    structures generally consisted of banks and their directly owned
    subsidiaries, with no parent holding companies.  These organizational
    differences exist partly because bank activities are generally more
    restricted in the United States than in other countries.  Each of the
    five foreign countries, for example, allowed banks or bank
    subsidiaries to conduct securities and, with the exception of Japan,
    insurance activities.  In the United States, such activities are
    generally restricted to affiliates of banks within a holding company
    structure or prohibited entirely.  Banks in some of these foreign
    countries were also permitted to own or affiliate with nonfinancial
    commercial firms, which is generally prohibited in the United
    States.\3

    Most of the five countries GAO reviewed had substantially reformed
    their bank oversight structures, or supervisory processes, to respond
    to changing conditions in their financial services sectors or to some
    financial crises.  For example, Canada created a single federal
    banking supervisor in 1987 to improve bank supervision after a series
    of bank failures, and France revised its bank oversight structure in
    1984 to address perceived regulatory inequities among financial
    institutions.  Germany replaced its system of state bank oversight in
    1961 with a federal system, involving both a single federal bank
    supervisor and the German central bank, to better address the
    increasing complexity of the banking industry.  And bank oversight in
    the U.K.  became more formal in nature, both as a result of changes
    in financial markets and as a consequence of three banking crises
    that prompted changes in British banking laws.  In addition, both the
    U.K.  and Japan are currently considering reforms to their
    supervisory structures and processes in the wake of recent financial
    institution failures.

    In contrast to these foreign experiences, the bank oversight
    structure in the United States has evolved in a more piecemeal
    fashion and has not changed significantly since the 1930s.  At the
    federal level, four agencies have supervisory responsibilities for
    different segments of the banking industry, as shown in figure 1.\4

       Figure 1:  Federal
       Responsibilities for Bank
       Oversight

       (See figure in printed
       edition.)

    \a OCC and OTS are within Treasury.

    \b The Board of Directors of FDIC includes the heads of OCC and OTS
    as well as three independent members, including the chairman and vice
    chairman, who are appointed by the President and confirmed by the
    Senate.

    Source:  FDIC, FRS, OCC, OTS, and Treasury.

      -- The Office of the Comptroller of the Currency (OCC), established
         in 1864, charters and supervises national banks and federal
         branches and agencies of foreign banks.

      -- The Federal Reserve System (FRS), established in 1913,
         supervises bank holding companies, state-chartered banks that
         are members of FRS, and the U.S.  operations of foreign banking
         organizations; it also regulates foreign activities and
         investments of FRS member banks (both national and state
         chartered), and Edge Act corporations.\5

      -- The Federal Deposit Insurance Corporation (FDIC), established in
         1933, is the federal supervisor of federally insured,
         state-chartered banks that are not FRS members.

      -- The Office of Thrift Supervision (OTS) charters and supervises
         national thrifts and also supervises state-chartered thrifts and
         thrift holding companies.  OTS assumed these functions in 1989
         from the Federal Home Loan Bank Board, which was established in
         1932.

    Congress created the Federal Financial Institutions Examination
    Council (FFIEC) in 1979--comprising OCC, FDIC, FRS, OTS, and the
    National Credit Union Administration representatives--to promote
    consistency among these regulatory agencies, primarily in the area of
    financial examinations.

    FRS and FDIC have other major responsibilities in addition to their
    bank oversight functions.  For FRS, these include responsibility for
    developing and implementing monetary policy, liquidity lending, and
    operating and overseeing the nation's payments and clearance systems.
    For FDIC, these include responsibility for administering the federal
    deposit insurance funds, resolving failing or failed banks, and
    disposing of failed bank assets.

    Organizationally, OCC and OTS are within the Department of the
    Treasury (Treasury), which has a major role in developing legislative
    and other policy initiatives regarding regulation of U.S.  financial
    institutions and markets.  Treasury also performs certain limited
    banking-related functions directly, such as approving resolutions of
    depository institutions whose failure could threaten the stability of
    the financial system.

    GAO reviewed the bank oversight structures in Canada, France,
    Germany, Japan, and the U.K.  to identify aspects that could be
    useful for Congress to consider if it decides to modernize the
    federal bank oversight structure in the United States.  Although GAO
    did not attempt to assess the comparative effectiveness of these
    foreign oversight structures, GAO notes that (1) the major goals of
    bank oversight in these countries are similar to those in the United
    States; (2) the oversight structures and processes in these countries
    have evolved to keep pace with changing banking conditions and
    activities; and (3) the increasing consolidation of the U.S.  banking
    industry and the growing importance of nontraditional banking
    activities for many U.S.  banks are bringing it closer to its foreign
    counterparts.

    --------------------
    \3 U.S.  unitary thrift holding companies may be owned by or own any
    type of financial services or other business.

    \4 This report does not address federal oversight of credit unions--
    which are also classified as depository institutions--because of
    their relatively small size, focus on consumer lending activities,
    and the fact that they have not been included in most recent reform
    proposals.

    \5 Edge Act corporations are generally limited to international
    banking and certain incidental activities, and are used primarily by
    U.S.  banks to invest indirectly in foreign banks or financial
    institutions.

       RESULTS IN BRIEF
    ---------------------------------------------------------- Chapter 0:3

    Several aspects of the bank oversight systems that GAO reviewed in
    Canada, France, Germany, Japan, and the U.K.  may be useful for
    Congress to consider if it decides to modernize federal bank
    oversight in the United States.  First, these foreign systems had
    less complex and more streamlined oversight structures.  In all five
    countries, fewer national agencies were involved with bank regulation
    and supervision than in the United States.  In all but one of these
    countries, both the central bank and the ministry of finance had some
    role in bank oversight, and several of these countries relied on the
    work of the banks' external auditors to perform certain oversight
    functions.  Second, in those countries with more than one national
    oversight entity, various mechanisms and procedures existed so that
    banking institutions were generally subject to a single set of rules,
    standards, or guidelines.  Third, in all cases, there was one entity
    that was clearly responsible and accountable for consolidated
    oversight of banking organizations as a whole.

    In contrast to these foreign systems, the bank oversight structure in
    the United States is relatively complex, with four different federal
    agencies having the same basic oversight responsibilities for those
    banks under their respective purview.  GAO's prior work has shown
    that these agencies have often differed on how laws should be
    interpreted, implemented, and enforced; how banks should be examined;
    and how to respond to troubled institutions.\6 Industry
    representatives and expert observers have contended that multiple
    examinations and reporting requirements resulting from the shared
    oversight responsibilities of four different regulators contribute to
    banks' regulatory burden, and that the federal oversight structure is
    inherently inefficient.  Furthermore, having one agency responsible
    for examining all U.S.  bank holding companies, with a different
    agency or agencies responsible for examining the holding companies'
    principal banks, can result in overlap and a lack of clear
    responsibility and accountability for consolidated oversight of the
    operations of U.S.  banking organizations.

    GAO's work on these foreign systems underscored the relevance of four
    basic principles that GAO believes Congress could use to help guide
    its decisionmaking if Congress considers modernizing the U.S.  bank
    regulatory structure in the future.  Following these principles,
    which GAO previously identified based on prior extensive work on the
    federal bank regulatory agencies, any modernized structure should
    provide for (1) clearly defined responsibility and accountability for
    consolidated and comprehensive oversight of entire banking
    organizations, with coordinated functional regulation and supervision
    of individual components; (2) independence from undue political
    pressure, balanced by appropriate accountability and adequate
    congressional oversight (3) consistent rules, consistently applied
    for similar activities; and (4) enhanced efficiency and reduced
    regulatory burden, consistent with maintaining safety and soundness.

    --------------------
    \6 See list of related products at the end of this report.

       PRINCIPAL FINDINGS
    ---------------------------------------------------------- Chapter 0:4

          FOREIGN OVERSIGHT SYSTEMS
    -------------------------------------------------------- Chapter 0:4.1

    In general, the foreign oversight systems GAO reviewed had less
    complex structures, better defined mechanisms to coordinate policies
    and procedures, and clearer responsibility and accountability for
    consolidated oversight than that of the United States.  Typically,
    foreign central banks, finance ministries, and sometimes a federal
    supervisory agency, had some role in these foreign oversight
    processes.  Deposit insurers in these foreign countries usually had
    narrower roles than that of FDIC in the United States.

             BANK OVERSIGHT INVOLVED
             FEWER NATIONAL ENTITIES,
             BUT GENERALLY INCLUDED
             CENTRAL BANKS AND FINANCE
             MINISTRIES
    ------------------------------------------------------ Chapter 0:4.1.1

    The number of national entities involved with bank oversight in the
    five countries GAO reviewed ranged from one to three, with no more
    than two national agencies ever significantly involved in any one
    major aspect of bank oversight, such as chartering, regulation,
    supervision, or enforcement.  Commercial bank chartering, for
    example, was the direct responsibility of only one entity in each
    country.  In those countries where two entities were involved in
    oversight, the division of oversight responsibilities generally was
    based on whichever entity had the required expertise.

    Central banks generally had significant oversight roles.  While no
    two countries had identical oversight roles for their central banks,
    the central bank in each country had the ability to influence bank
    behavior either formally or informally and had access to information
    about the banking industry.  In all five countries except Canada,
    central bank staff were directly involved in bank oversight.  In
    large part, central bank involvement was based on the premise that
    traditional central bank responsibilities for monetary policy,
    payment systems, liquidity lending, and crisis intervention are
    closely interrelated with bank oversight.

    Each of the five countries recognized that its national government
    had the ultimate responsibility for maintaining public confidence in,
    and the stability of, the financial system, and thus provided the
    ministry of finance, or its equivalent, with a role in bank
    oversight.  In at least one country, the finance ministry had a more
    substantial oversight role than did the central bank, and in all five
    countries the finance ministries had influence over bank oversight
    and access to information about the financial condition of the
    industry.  While finance ministries were generally included in bank
    oversight, most of these countries also incorporated unique checks
    and balances into their systems to guard against undue political
    influence.

             DEPOSIT INSURERS
             GENERALLY HAD MORE NARROW
             ROLES AND OFTEN WERE NOT
             GOVERNMENT FUNDED OR
             ADMINISTERED
    ------------------------------------------------------ Chapter 0:4.1.2

    While central banks and finance ministries generally had substantial
    roles in bank oversight, deposit insurers, with the exception of the
    Canada Deposit Insurance Corporation, did not.  Their less
    substantial oversight roles may be attributable to the fact that
    there were no explicit guarantees of deposit insurance funds by the
    national governments in most of these countries and that deposit
    insurers were often industry administered.  Thus, in most of these
    countries, deposit insurers were viewed primarily as a source of
    funds to help resolve bank failures--either by covering insured
    deposits or by helping to finance acquisitions of failed or failing
    institutions by healthy institutions.  Supervisory information was
    generally not shared with these deposit insurers, and resolution
    decisions for failed or failing banks were commonly made by the
    primary bank oversight entities.

             MECHANISMS AND PROCEDURES
             WERE USED TO HELP ENSURE
             CONSISTENT OVERSIGHT AND
             REDUCE BURDEN
    ------------------------------------------------------ Chapter 0:4.1.3

    Most of the foreign structures with multiple oversight entities
    incorporated mechanisms and procedures to help ensure consistent
    oversight and reduce regulatory burden.  As a result, banking
    institutions that were conducting the same lines of business were
    generally subject to a single set of rules, standards, or guidelines.
    Oversight coordination mechanisms included having oversight
    committees or commissions with interlocking boards, shared staff, or
    mandates to share information.  Some countries also relied on the
    work of the banks' external auditors, at least in part, to increase
    efficiency and reduce burden.  Supervisors in two countries used
    external auditors as the primary source of monitoring information.
    In Germany, the use of external auditors was part of an explicit plan
    to minimize agency staffing and duplication of effort between
    examiners and auditors.  In the U.K., their use was seen as the most
    efficient way of producing the necessary checks on banks' systems of
    controls and as being compatible with the Bank of England's
    traditional supervisory approach "based on dialogue, prudential
    returns, and trust," according to Bank of England staff.  In part,
    the use of external auditors' work was also facilitated because bank
    oversight in these countries was focused almost exclusively on
    assessing the safety and soundness of banking institutions, and not
    on consumer protection issues.

             CLEAR RESPONSIBILITY AND
             ACCOUNTABILITY EXISTED
             FOR CONSOLIDATED
             OVERSIGHT
    ------------------------------------------------------ Chapter 0:4.1.4

    In the five countries GAO reviewed, banking organizations typically
    were subject to consolidated oversight, with one oversight entity
    clearly being legally responsible and accountable for an entire
    banking organization, including its subsidiaries.  For example, if
    securities or insurance activities were permissible in bank
    subsidiaries, functional regulation of those subsidiaries was
    generally to be provided by the supervisory authority with the
    requisite expertise.  Bank supervisors commonly relied on those
    functional regulators for information but remained responsible for
    ascertaining the safety and soundness of the consolidated banking
    organization as a whole.

          U.S.  BANK OVERSIGHT SYSTEM
    -------------------------------------------------------- Chapter 0:4.2

    In contrast to the five foreign oversight systems GAO reviewed, the
    U.S.  bank oversight system has a more complex structure, involves
    less coordination and more varied policies and procedures, and lacks
    clear responsibility and accountability for consolidated oversight of
    entire banking organizations.

             FOUR FEDERAL AGENCIES
             HAVE SIMILAR OVERSIGHT
             RESPONSIBILITIES
    ------------------------------------------------------ Chapter 0:4.2.1

    In the United States, the division of oversight responsibilities
    among the four bank regulatory agencies is not generally based on
    specific areas of expertise, functions, or activities, of either the
    regulator or the banks for which they are responsible.  Instead, it
    is based primarily on the type of charter--thrift or bank, national
    or state--and whether banks are members of FRS.  Consequently, the
    four agencies have similar oversight responsibilities for developing
    and implementing regulations, taking enforcement actions, and
    conducting examinations and off-site monitoring, for those banking
    institutions that are under their respective purview.

             SUPERVISORY INFORMATION
             IS USED TO HELP FULFILL
             NONOVERSIGHT DUTIES
    ------------------------------------------------------ Chapter 0:4.2.2

    Officials from both FRS and FDIC told GAO that they relied on
    information obtained under their respective supervisory authorities
    to help fulfill their important, nonsupervisory duties.  As GAO has
    stated in the past, the extent to which FRS needs supervisory
    authority over financial institutions to obtain the knowledge and
    influence necessary to carry out its other important functions is a
    question involving policy judgments that Congress should make.\7

    GAO believes that past experience, as well as evidence from the five
    foreign oversight structures GAO reviewed, supports the need for
    central banks, like FRS, to have direct access to supervisory
    information and to have some influence over banking institutions and
    regulatory decisionmaking.

    GAO has also previously stated its support for a strong, independent
    deposit insurer to help protect the taxpayers' interest in insuring
    more than $2.5 trillion in deposits.  Prior GAO work suggested that
    this can be achieved by providing FDIC with (1) the capability to
    assess the financial condition of insured institutions by having
    access to examinations and being able to independently assess the
    quality of those examinations; (2) the ability to go into problem
    institutions without having to obtain prior approval from another
    regulatory agency; and (3) backup enforcement authority over all
    federally insured depositories.\8

    Treasury also has several important responsibilities that require it
    to regularly obtain information about the financial condition of the
    banking industry and, at certain times, supervisory information about
    specific problem institutions.  According to Treasury officials,
    Treasury's current level of involvement, through its housing of OCC
    and OTS and the representation of these two agencies on the FDIC
    board of directors, and the information it receives from other
    agencies as needed, is sufficient for carrying out its
    responsibilities.

    --------------------
    \7 Bank Regulation:  Consolidation of the Regulatory Agencies
    (GAO/T-GGD-94-106, Mar.  4, 1994).

    \8 GAO/T-GGD-94-106.

             PERCEIVED PROBLEMS AND
             ADVANTAGES WITH THE U.S.
             OVERSIGHT SYSTEM
    ------------------------------------------------------ Chapter 0:4.2.3

    Analysts, legislators, industry representatives, and numerous past
    and present agency officials have identified both weaknesses and
    strengths in the current federal bank oversight system.  Some have
    broadly characterized the federal system as redundant, inconsistent,
    inefficient, and burdensome.  Some have also raised concerns about
    negative effects of the oversight structure on supervisory
    effectiveness and believe that the multiplicity of federal
    regulators, despite FFIEC and other interagency coordination efforts,
    has resulted in inconsistent treatment in examinations, enforcement
    actions, and regulatory standards and decisionmaking.  During the
    period 1990 to 1993, GAO identified significant inconsistencies in
    examination policies and practices among FDIC, OCC, OTS, and FRS,
    including differences in (1) examination scope, frequency, and
    documentation; (2) loan quality and loss reserve evaluations; (3)
    bank and thrift rating systems; and (4) examination guidance and
    regulations.  Furthermore, divided supervisory authority, with FRS
    being responsible for overseeing bank holding companies and other
    federal regulators being responsible for the major bank subsidiaries
    of holding companies, obscures supervisory responsibility and
    accountability for banking organizations as a whole and may hinder
    regulators from obtaining a complete picture of an entire banking
    organization.  Despite these weaknesses, some analysts and agency and
    banking institution officials credit the current structure with
    encouraging financial innovations and providing checks and balances
    to guard against arbitrary oversight decisions or actions.

       PRINCIPLES FOR MODERNIZING U.S.
       OVERSIGHT STRUCTURE
    ---------------------------------------------------------- Chapter 0:5

    On the basis of the extensive work GAO has done in areas such as bank
    supervision, enforcement, failure resolution, and innovative
    financial activities--such as derivatives--GAO previously identified
    the following four fundamental principles that it believes Congress
    could use when considering the best approach for modernizing the
    current regulatory structure.\9 GAO's studies of the five foreign
    oversight structures reinforced the relevance of these principles.
    Specifically, GAO believes that any modernized bank oversight
    structure should provide for

      -- clearly defined responsibility and accountability for
         consolidated and comprehensive oversight of entire banking
         organizations, with coordinated functional regulation and
         supervision of individual components;

      -- independence from undue political pressure, balanced by
         appropriate accountability and adequate congressional oversight;

      -- consistent rules, consistently applied for similar activities;
         and

      -- enhanced efficiency and reduced regulatory burden, consistent
         with maintaining safety and soundness.

    --------------------
    \9 Bank Oversight:  Fundamental Principles for Modernizing the U.S.
    Structure (GAO/T-GGD-96-117, May 2, 1996).

       RECOMMENDATIONS
    ---------------------------------------------------------- Chapter 0:6

    GAO's work on the five foreign oversight systems showed that there
    are a number of different ways to simplify bank oversight in the
    United States in accordance with the four principles of consolidated
    oversight, independence, consistency, and enhanced efficiency and
    reduced burden.  GAO recognizes that only Congress can make the
    ultimate policy judgments in deciding whether, and how, to
    restructure the existing system.  If Congress does decide to
    modernize the U.S.  system, GAO recommends that Congress:

      -- Reduce the number of federal agencies with primary
         responsibilities for bank oversight.  GAO believes that a
         logical step would be to consolidate OTS, OCC, and FDIC's
         primary supervisory responsibilities into a new, independent
         federal banking agency or commission.  Congress could provide
         for this new agency's independence in a variety of ways,
         including making it organizationally independent like FDIC or
         FRS.  This new independent agency, together with FRS, could be
         assigned responsibility for consolidated, comprehensive
         supervision of those banking organizations under its purview,
         with appropriate functional supervision of individual
         components.

      -- Continue to include both FRS and Treasury in bank oversight.  To
         carry out its primary responsibilities effectively, FRS should
         have direct access to supervisory information as well as
         influence over supervisory decisionmaking and the banking
         industry.  The foreign oversight structures

    GAO reviewed showed that this could be accomplished by having FRS be
    either a direct or indirect participant in bank oversight.  For
    example, FRS could maintain its current direct oversight
    responsibilities for state chartered member banks or be given new
    responsibility for some segment of the banking industry, such as the
    largest banking organizations.  Alternatively, FRS could be
    represented on the board of directors of a new consolidated banking
    agency or on FDIC's board of directors.  Under this alternative, FRS'
    staff could help support some of the examination or other activities
    of a consolidated banking agency to better ensure that FRS receives
    first hand information about, and access to, the banking industry.

    To carry out its mission effectively, Treasury also needs access to
    supervisory information about the condition of the banking industry
    as well as the safety and soundness of banking institutions that
    could affect the stability of the financial system.  GAO's reviews of
    foreign regulatory structures provided several examples of how
    Treasury might obtain access to such information, such as having
    Treasury represented on the board of the new banking agency or
    commission and perhaps on the board of FDIC as well.

      -- Continue to provide FDIC with the necessary authority to protect
         the deposit insurance funds.  Under any restructuring, GAO
         believes FDIC should still have an explicit backup supervisory
         authority to enable it to effectively discharge its
         responsibility for protecting the deposit insurance funds.  Such
         authority should require coordination with other responsible
         regulators, but should also allow FDIC to go into any problem
         institution on its own without the prior approval of any other
         regulatory agency.  FDIC also needs backup enforcement power,
         access to bank examinations, and the capability to independently
         assess the quality of those examinations.

      -- Incorporate mechanisms to help ensure consistent oversight and
         reduce regulatory burden.  Reducing the number of federal bank
         oversight agencies from the current four should help improve the
         consistency of oversight and reduce regulatory burden.  Should
         Congress decide to continue having more than one primary federal
         bank regulator, GAO believes that Congress should incorporate
         mechanisms into the oversight system to enhance cooperation and
         coordination between the regulators and reduce regulatory
         burden.

    Although GAO does not recommend any particular action, such
    mechanisms--which could be adopted even if Congress decides not to
    restructure the existing system--could include

      -- expanding the current mandate of FFIEC to help ensure
         consistency in rulemaking for similar activities in addition to
         consistency in examinations;

      -- assigning specific rulemaking authority in statute to a single
         agency, as has been done in the past when Congress gave FRS
         statutory authority to issue rules for several consumer
         protection laws that are enforced by all of the bank regulators;

      -- requiring enhanced cooperation between examiners and banks'
         external auditors; (While GAO strongly supports requirements for
         annual full-scope, on-site examinations for large banks, GAO
         believes that examiners could take better advantage of the work
         already being done by external auditors to better plan and
         target their examinations.)

      -- requiring enhanced off-site monitoring to better plan and target
         examinations as well as to identify and raise supervisory
         concerns at an earlier stage.

       AGENCY COMMENTS
    ---------------------------------------------------------- Chapter 0:7

    FRS, FDIC, OCC, and OTS provided written comments on a draft of this
    report, which are discussed in chapter 4 and reprinted in appendixes
    IV, V, VI, and VII.  Treasury also reviewed a draft and provided oral
    comments of a technical nature, which GAO incorporated where
    appropriate.

    The agencies generally believed that GAO's information and
    observations about the five foreign oversight systems could be useful
    to Congress in its consideration of a potential modernization of the
    bank oversight structure in the United States.  Each of the agencies
    also provided some additional insights from its own unique oversight
    role and responsibilities, which GAO summarizes below and discusses
    further in the report where appropriate.  GAO believes the agencies'
    perspectives will be helpful for Congress in any consideration of
    changes to the U.S.  bank oversight structure.

    FRS agreed with GAO's recommendation that it continue to be included
    in bank oversight.  However, it felt that GAO should be specific in
    stating that FRS needs "active supervisory involvement in the largest
    U.S.  banking organizations and a cross-section of other banking
    institutions" to carry out its key central bank functions.  To
    clarify what was meant by this statement, a senior FRS official
    advised GAO that FRS' current regulatory authority gives it the
    access and influence FRS believes it needs.  However, if the
    regulatory structure were changed so that there is only one federal
    regulator for each banking organization--both holding company and
    bank subsidiaries--then FRS believes that it would have to be the
    regulator for the largest banking organizations, as well as a
    cross-section of others.

    FDIC provided four fundamental principles for an effective bank
    regulatory structure, which are generally consistent with the
    principles and recommendations that GAO set forth.  These principles
    include providing FDIC with explicit backup supervisory authority,
    backup enforcement power, and the capability to assess the quality of
    bank examinations.  FDIC also noted that the broader regulatory
    responsibilities related to the role of the deposit insurer require
    current and sufficient information on the ongoing financial condition
    and operations of financial institutions.  In FDIC's judgment,
    periodic on-site examinations by FDIC staff remain an essential tool
    by which such information may be obtained.

    OCC described GAO's report as comprehensive and conveying more about
    the foreign regulatory structures than has been available to the
    public.  OCC agreed with GAO that the foreign structures are not
    readily adaptable to the United States.  OCC also suggested that,
    given the complexity of the subject, Congress should consider further
    information before deciding on making any changes to the existing
    oversight structure in the United States.  OCC agreed with GAO that
    the central banks in the five foreign countries had substantial
    oversight roles, but noted that GAO's analysis showed that central
    banks do not necessarily need a direct role in bank supervision in
    order to have direct access to supervisory information as well as
    influence over supervisory decisionmaking and the banking industry.
    OCC also stated that supervisory methods contribute to the overall
    effectiveness of oversight structures and that, although the five
    countries may not have explicit government guarantees of deposit
    insurance funds, they do convey some guarantee.

    OTS generally concurred with GAO's recommendations and reiterated its
    position that consolidation will make the bank oversight system more
    efficient and effective.

    FRS, FDIC, and OTS also commented on recent steps that have been
    taken to enhance regulators' cooperation and coordination and reduce
    regulatory burden.  GAO discussed these actions in the report as
    appropriate.

    INTRODUCTION
    ============================================================ Chapter 1

    The nearly 12,000 federally insured banks and thrifts\1 in the United
    States, which hold more than $5 trillion in assets, are regulated and
    supervised by four federal agencies with similar and sometimes
    overlapping regulatory and supervisory responsibilities.  Although
    many industry representatives, legislators, and regulators have in
    the past recognized the need for consolidation and modernization of
    federal bank oversight, major reform proposals changing the structure
    of bank and thrift oversight have not been adopted.  This report was
    prepared in response to a request from Congressman Charles E.
    Schumer that we provide information to help evaluate efforts to
    modernize the U.S.  system of financial industry oversight and
    identify potential avenues for such modernization.  Much of the
    information in this report is based on our studies of the structures
    and operations of bank regulation and supervision (oversight)\2
    activities in Canada, France, Japan, Germany, and the United
    Kingdom.\3

    --------------------
    \1 Thrifts include FDIC-insured savings and loan associations and
    savings banks.

    \2 In this report, we use the term oversight to mean both regulation
    and supervision.  Regulation includes any rulemaking activities, and
    supervision includes examinations and off-site monitoring of
    institutions and enforcement actions to ensure compliance with laws
    and regulations.  The term regulator is used when referring to an
    agency or individual conducting (1) general oversight activities not
    specified as either supervisory or regulatory, or (2) specific
    regulatory activities.  The term supervisor is used when referring to
    an agency or individual conducting supervisory activities.

    \3 See Bank Regulatory Structure:  Canada (GAO/GGD-95-223, Sept.  28,
    1995); Bank Regulatory Structure:  France (GAO/GGD-95-152, Aug.  31,
    1995); Bank Regulatory Structure:  The Federal Republic of Germany
    (GAO/GGD-94-134BR, May 9, 1994); Bank Regulatory Structure:  The
    United Kingdom (GAO/GGD-95-38, Dec.  29, 1994), and Bank Regulatory
    Structure:  Japan, which is currently a draft report.

       OVERVIEW OF THE U.S.  BANKING
       INDUSTRY
    ---------------------------------------------------------- Chapter 1:1

    This report focuses on the oversight of two major categories of
    depository institutions:  commercial banks and thrifts.  Commercial
    banks and thrifts originally served very different purposes and
    markets.  Commercial banks issued debt payable on demand, which was
    backed by short-term commercial loans.  The customers of commercial
    banks tended to be businesses and wealthy individuals seeking liquid
    deposit accounts.  Savings and loan associations, however, used
    deposits to fund home mortgages of their members.  But, because of
    the long terms of mortgages, members were restricted in their ability
    to withdraw their funds.  Savings banks were initially designed to
    provide a range of financial services to the small saver.  Their
    asset portfolios were generally more diversified than those of
    savings and loan associations to enable them to provide more flexible
    deposit terms.  Despite the historical differences between these
    institutions, the powers and services of banks and thrifts have
    converged over time with few practical differences remaining in their
    authorities, except that these institutions continue to be subject to
    different regulatory schemes.\4 (See app.  I for more information on
    the history of U.S.  bank and thrift oversight.)

    At the end of 1995, the United States had nearly 12,000 banking
    institutions.  In this report, we refer to commercial banks and
    thrifts collectively as banking institutions.\5 These institutions
    held about $5.3 trillion in loans and other assets (see table 1.1).

                                   Table 1.1

                         Assets Held by Insured Banking
                     Institutions, as of December 31, 1995

                             (Dollars in billions)

                                                                Percentage
                                   Number of      Amount of             of
    Types of institutions       institutions         assets   total assets
    -------------------------  -------------  -------------  -------------
    Commercial banks\a                 9,941         $4,313            81%
    Thrifts\b                          2,029          1,026             19
    ======================================================================
    Total                             11,970         $5,339           100%
    ----------------------------------------------------------------------
    \a Commercial banks do not include 39 insured U.S.  branches of
    foreign banks with $12 billion in assets.

    \b Thrifts include Federal Deposit Insurance Corporation (FDIC)
    insured savings and loans associations and savings banks.

    Source:  FDIC Quarterly Banking Profile, Fourth Quarter 1995.

    As shown in table 1.1, the 9,941 commercial banks held 81 percent of
    total bank and thrift assets at the end of 1995.  The 2,029 thrifts
    held 19 percent.

    --------------------
    \4 Unlike bank holding companies, whose business is restricted to
    that which is "closely related to banking," unitary thrift holding
    companies may be owned by or own any type of financial services or
    other business.  Thrifts also have broader powers than banks in areas
    such as insurance and real estate development.

    \5 For the sake of simplicity, the oversight structure for
    supervising and regulating banks and thrifts is referred to as the
    bank oversight structure and the four oversight agencies as bank
    oversight agencies, bank regulators, or bank supervisors.

          HOLDING COMPANIES ARE THE
          DOMINANT BANKING STRUCTURE
          IN THE
          UNITED STATES
    -------------------------------------------------------- Chapter 1:1.1

    Holding companies, which are established for a variety of business,
    regulatory, and tax reasons, are the dominant form of banking
    structure in the United States.  In fact, 96 percent of the assets of
    all U.S.  commercial banks are in banks that are part of a holding
    company.  As of December 31, 1995, about 6,122 bank holding companies
    and 895 thrift holding companies were operating in the United States.
    Of those, 4,494 bank holding companies and 833 thrift holding
    companies each held only 1 bank or thrift.

    Holding companies may consist of a parent company, banking
    subsidiaries, nonbanking subsidiaries, and even other holding
    companies--each of which may have its own banking or nonbanking
    subsidiaries.  Figure 1.1 is a simplified illustration of a
    hypothetical holding company with wholly owned banking and nonbanking
    subsidiaries.

       Figure 1.1:  Simplified
       Structure of a Hypothetical
       Bank Holding Company

       (See figure in printed
       edition.)

    Source:  GAO.

    Parent companies own or control subsidiaries through the ownership of
    voting stock and generally are "shell" corporations--that is, they do
    not have operations of their own.  Banking subsidiaries are
    separately chartered banks subject to the same regulation and capital
    requirements that apply to other banking institutions.  Nonbanking
    subsidiaries are companies that may be engaged in a variety of
    businesses other than banking; however, any nonbanking activities of
    a bank holding company subsidiary must be closely related to the
    business of banking and produce a public benefit.\6

    Thrift holding companies may be owned by or own any type of financial
    services or other business.  Many bank holding companies have
    established nonbank subsidiaries engaged in consumer finance, trust
    services, leasing, mortgage lending, electronic data processing,
    insurance underwriting, management consulting services, and
    securities brokerage services.

    Holding companies in the United States may also have multiple tiers.
    For example, as we mentioned above, holding companies may have
    subsidiary holding companies that have their own banking or
    nonbanking subsidiaries.  Banking subsidiaries may also have their
    own subsidiaries.  However, the activities of these bank subsidiaries
    are limited to those allowable for their parent institution.  The
    largest holding companies in the United States often have very
    complex, multitiered structures.

    Bank and thrift holding companies are particular to the U.S.
    financial system.  In many other countries, nonbanking activities may
    be conducted either in a bank or in subsidiaries of a bank rather
    than in subsidiaries of a parent company.

    --------------------
    \6 Section 4 of the Bank Holding Company Act of 1956 generally
    prohibits bank holding companies from owning or controlling any
    company that is not a bank.  The law, however, lists several
    exemptions from this rule.  The most important of these authorizes
    the Federal Reserve Board to approve the acquisition of a nonbank
    affiliate where the board determines that the activities of the
    affiliate are "so closely related to banking .  .  .  as to be a
    proper incident thereto" and would produce a public benefit.  12
    U.S.C.  S 1843.  Under this authority, the board promulgated in its
    regulation Y the nonbanking activities that are or may be approved.

          U.S.  BANKING INDUSTRY
          IS CONSOLIDATING AND
          CHANGING ITS PRODUCT FOCUS
    -------------------------------------------------------- Chapter 1:1.2

    The structure of the U.S.  banking industry has changed substantially
    over the past 10 years.  The industry is consolidating in response to
    the removal of legal barriers to geographic expansion, advancing
    technologies, and the globalization of wholesale banking, among other
    things.  Between 1985 and 1995, the number of banks and thrifts in
    the United States fell by about 34 percent due to consolidation
    through mergers and also bank and thrift failures.  The number of
    banks decreased by 4,476--from 14,417 to 9,941.  The number of
    thrifts decreased by 1,597--from 3,626 to 2,029.\7

    Industry consolidation has been characterized by a greater
    concentration of deposits among the largest banking companies in the
    country.  For example, the 10 largest bank holding companies
    controlled 17.4 percent of bank deposits in 1984; they increased this
    share to 25.6 percent in 1994.  Similarly, the 10 largest thrift
    institutions increased their share of deposits from 12.4 percent to
    17 percent.  However, although nationwide concentration has been
    increasing over the past 10 years, increases in local market
    concentration have been much more modest relative to the changes at
    the national level.\8 According to industry analysts, this has
    occurred because banking institutions not located in the same local
    market have merged, and constraints imposed by antitrust laws have
    helped to prevent increases in concentration at the local level.

    The nature of the activities that banking institutions engage in has
    also changed drastically over the past several decades.  Although
    traditional lending still dominates banking institutions' balance
    sheets, banking institutions have been moving toward more
    nontraditional products, such as mutual funds, securities, and
    derivatives and other off-balance sheet products.\9

    --------------------
    \7 GAO analysis of FDIC data.

    \8 Concentration refers to the market share of deposits held by
    certain institutions.  Concentration statistics were published in an
    article by Dean F.  Amel, "Trends in the Structure of Federally
    Insured Depository Institutions, 1984-94" in the January 1996 Federal
    Reserve Bulletin, (Vol.  82, No.  1, pp.  1-15).

    \9 Off-balance sheet products represent wholesale activities and fall
    into two broad categories:  (1) derivative products and (2)
    contingent liabilities.  Derivative products--such as futures,
    forwards, options, and swaps--are financial instruments whose value
    depends on the value of another underlying financial product.
    Contingent liabilities represent agreements by a banking institution
    to provide funds when certain conditions are met.  They have been
    used, in part, to replace traditional loans from banks.

          BANKING INSTITUTIONS' SHARE
          OF TOTAL ASSETS HELD IN THE
          FINANCIAL SERVICES INDUSTRY
          HAS DECREASED
    -------------------------------------------------------- Chapter 1:1.3

    Banking institutions, with about $5.3 trillion in assets at the end
    of 1995, constitute the largest single segment of the financial
    services industry.  However, banking institutions' share of the
    financial services industry shrank from about 45 percent in 1985 to
    about 30 percent in 1995.\10 This decrease has been attributed to
    greater competition in the financial services industry.  Consumers
    can now choose from a variety of providers in obtaining financial
    services once offered only by commercial banks and thrifts.  For
    example, money market mutual funds, securities firms, and insurance
    companies all now offer interest-bearing transaction accounts.
    Further, although banks and thrifts were long regarded as the primary
    providers of consumer credit, such credit is now routinely provided
    by finance companies as well as by a wide variety of retail firms
    through credit cards and other means.

    --------------------
    \10 GAO analysis of FRS Flow of Funds Accounts data.  Some academic
    studies have shown that when asset figures are adjusted to
    incorporate some measures of the new off-balance sheet activities
    banking institutions are now engaging in, the rate of decline of
    banking institutions' share of the industry is reduced.

       CURRENT U.S.  OVERSIGHT
       STRUCTURE IS COMPLEX
    ---------------------------------------------------------- Chapter 1:2

    The federal system of oversight of banking institutions in the United
    States is a highly complex system.  Federal responsibilities for bank
    authorization, regulation, and supervision are assigned to three bank
    regulators and one thrift regulator that have jurisdiction over
    specific segments of the banking industry (see table 1.2).\11
    Although Treasury plays no formal role in bank oversight, it has some
    related responsibilities.

    --------------------
    \11 Each state also has its own agency to regulate and supervise the
    banks, thrifts, and credit unions it charters.  The organization of
    these agencies varies from state to state.

          OFFICE OF THE COMPTROLLER OF
          THE CURRENCY
    -------------------------------------------------------- Chapter 1:2.1

    The Office of the Comptroller of the Currency (OCC)\12 currently has
    primary responsibility for regulating and supervising national
    banks--that is, banks with a federal charter.  OCC also has primary
    responsibility for regulating and supervising federal branches and
    agencies of foreign banks operating in the United States.  As of
    December 31, 1995, OCC was the primary federal supervisor of 2,861 of
    the 11,970 banking institutions in the United States.  Those banks
    held about 45 percent of the total U.S.  banking assets in the United
    States.

    --------------------
    \12 OCC, a bureau of the Treasury Department, is headed by the
    Comptroller of the Currency, who is appointed by the President to a
    5-year term.  OCC has six district offices in addition to its
    Washington, D.C., headquarters.  At the end of 1995, OCC data show
    that it had 3,556 staff members, including 2,051 examiners.  About
    147 of OCC's examiners are part of OCC's Multinational Division,
    which oversees the activities of the largest banks.

          FEDERAL RESERVE SYSTEM
    -------------------------------------------------------- Chapter 1:2.2

    The Federal Reserve System (FRS)\13 is the federal regulator and
    supervisor for bank holding companies and their nonbank subsidiaries,
    and it is the primary federal regulator for state-chartered banks
    that are members of FRS.  It is also a federal regulator for foreign
    banking organizations operating in the United States.\14 In addition,
    it regulates foreign activities and investments of FRS member banks
    (national and state), Edge corporations, and holding companies.\15 As
    of December 31, 1995, FRS had primary supervisory responsibility for
    1,041 of the 11,970 banking institutions in the United States.  The
    assets of these banks represented about 18 percent of the total U.S.
    banking assets.  As of December 31, 1995, FRS also had responsibility
    for regulating 6,122 bank holding companies, 393 foreign branches,
    and 153 foreign agencies operating in the United States.

    --------------------
    \13 FRS is headed by a seven-member Board of Governors, appointed by
    the President to 14-year terms.  One Governor is designated by the
    President as Chairman with a 4-year, renewable term.  The major
    components of FRS include the Board, located in Washington, D.C.; and
    12 Federal Reserve Banks, with 25 Reserve Bank branches located
    throughout the country.  Each Federal Reserve Bank has a board of
    nine directors, six elected by member banks and three appointed by
    the Board of Governors.  As of December 31, 1995, FRS data show that
    it had 25,288 staff members, including 1,546 examiners.

    \14 In addition, FRS has the authority to regulate all foreign
    branches of U.S.  banks.  All national banks and state member banks
    must receive permission from FRS before they can open a foreign
    branch.  Although FRS has primary regulatory authority for foreign
    branches of U.S.  banks, it defers its examination authority to OCC
    concerning foreign branches of national banks because OCC is the
    primary federal regulator of national banks.

    \15 Edge corporations are generally limited to international banking
    and certain incidental activities and are used primarily by U.S.
    banks to invest indirectly in foreign banks or financial
    institutions.  However, Edge corporations historically have also been
    used to offer international banking services in U.S.  markets, which
    interstate banking restrictions would otherwise have prohibited.
    With the increased opportunities for interstate banking, the
    significance of the latter has markedly declined.

          FEDERAL DEPOSIT INSURANCE
          CORPORATION
    -------------------------------------------------------- Chapter 1:2.3

    The Federal Deposit Insurance Corporation (FDIC)\16 is the primary
    federal regulator and supervisor for federally insured
    state-chartered banks that are not members of FRS and for state
    savings banks whose deposits are federally insured.  FDIC is also
    responsible for administering the Bank Insurance Fund (BIF) and the
    Savings Association Insurance Fund (SAIF).\17 Additionally, FDIC is
    responsible for resolving failed banks and for the disposition of
    assets from failed banking institutions.\18 At the end of 1995, FDIC
    was the primary federal regulator and supervisor for 6,632 of the
    11,970 insured banking institutions.  These banking institutions
    represented 22 percent of the total U.S.  banking assets.

    --------------------
    \16 FDIC is an independent federal agency.  It is managed by five
    directors, one of whom is the Comptroller of the Currency and another
    is the Director of the Office of Thrift Supervision--the national
    regulator of thrifts.  Three others are appointed by the President
    for 6-year terms, with one appointed as Chairman and another as
    Vice-Chairman.  FDIC's main office is in Washington, D.C., and it has
    eight regional supervisory offices and several other regional offices
    that liquidate assets from failed banks.

    \17 BIF member institutions are predominantly commercial banks, but
    they also include some state and federal savings banks and certain
    savings and loan associations.  SAIF members are predominantly
    savings and loan associations, but they also include some state and
    federal savings banks and certain commercial banks.

    \18 As of December 31, 1995, FDIC officials said FDIC had 2,311
    examiners in its Division of Supervision.  It also had 476 total
    staff members in its Division of Compliance and Consumer Affairs,
    including examiners, management, and clerical staff.  FDIC data show
    that it had 12,059 staff as of December 31, 1995.

          OFFICE OF THRIFT SUPERVISION
    -------------------------------------------------------- Chapter 1:2.4

    The Office of Thrift Supervision (OTS)\19 is the primary regulator of
    all federally- and state-chartered thrifts whose deposits are
    federally insured and their holding companies.  At the end of 1995,
    it was the primary federal regulator of 1,436 institutions, whose
    assets represented 14 percent of the total assets held by banking
    institutions.\20

    --------------------
    \19 OTS, like OCC, is a bureau of the U.S.  Department of the
    Treasury.  The Director of OTS is appointed by the President for a
    5-year term.  OTS has five regional offices.  As of December 31,
    1995, OTS data show that it had about 1,463 staff members, including
    716 examiners.

    \20 As shown in table 1.1, there were 2,029 thrifts as of December
    31, 1995.  However, 593 of these thrifts were state savings banks
    supervised by FDIC.

          THE DEPARTMENT OF THE
          TREASURY
    -------------------------------------------------------- Chapter 1:2.5

    The Department of the Treasury (Treasury) is one of 14 executive
    departments that make up the Cabinet.  It is headed by the Secretary
    of the Treasury\21 and performs four basic functions, of which
    formulating and recommending economic, financial, tax, and fiscal
    policies is the one most directly related to bank oversight.\22
    Ultimately, Treasury is responsible for financially backing up the
    U.S.  guarantee of the deposit insurance funds\23 and may also
    approve special resolution options for financial institutions whose
    failure "could threaten the entire financial system."\24 In addition,
    Treasury is a principal player in the development of legislation and
    policies affecting the financial services industries.  Treasury also
    shares responsibility for managing any systemic financial crises,
    coordinating financial market regulation, and representing the United
    States on international financial markets issues.

                                   Table 1.2

                    Overview of the Primary Jurisdictions of
                      the Four Federal Banking Institution
                               Oversight Agencies

    Agency    Primary jurisdiction
    --------  ------------------------------------------------------------
    OCC       National banks, federal branches, and agencies of foreign
              banks.

    FRS       State-chartered, FRS member banks. Bank holding companies
              and their nonbank subsidiaries. Foreign banking
              organizations operating in the United States.

    FDIC      State-chartered, non-FRS member banks. State savings banks.

    OTS       Federally and state-chartered thrifts. Thrift holding
              companies.
    ----------------------------------------------------------------------
    Source:  GAO analysis.

    --------------------
    \21 The Secretary is appointed by the President and confirmed by the
    U.S.  Senate.

    \22 Treasury's other three functions are serving as financial agent
    for the U.S.  government, enforcing the law, and manufacturing coins
    and currency.

    \23 Subsequent to the enactment of the Financial Institutions Reform,
    Recovery, and Enforcement Act of 1989, all obligations issued by BIF
    or SAIF were backed by the full faith and credit of the United States
    (section 15(d) of the Federal Deposit Insurance Act).

    \24 Section 13(3)(4)(g) of the Federal Deposit Insurance Act.  Such a
    resolution is permissible only if the Federal Reserve Board and
    FDIC's Board of Directors both recommend the exception to the
    Secretary of the Treasury, with at least two-thirds of each board's
    members voting for the recommendation.

       GOALS OF BANK OVERSIGHT INCLUDE
       SAFETY AND SOUNDNESS,
       STABILITY, AND FAIRNESS TO
       CONSUMERS
    ---------------------------------------------------------- Chapter 1:3

    A primary objective of banking institution regulators is to ensure
    the safe and sound practices and operations of individual banking
    institutions through regulation, supervision, and examination.\25

    The intent of regulators under this objective is primarily to protect
    depositors and taxpayers from loss, not to prevent banking
    institutions from failing.  To help accomplish this goal, the
    government has chosen to protect deposits through federal deposit
    insurance, which provides a safety net to depositors.

    Financial market stability is also considered a primary goal of
    banking institution regulators.  Because banking institutions play an
    important role as financial intermediaries that borrow and lend
    funds, public confidence in banking institutions is critical to
    economic stability at local and national levels.  In support of
    market stability, regulators seek to resolve problems of financially
    troubled institutions in ways that maintain confidence in banking
    institutions and thus prevent depositor runs that could jeopardize
    the stability of financial markets.

    Regulators are also aware that the stability of the banking industry
    depends both on the ability of banking institutions to compete in an
    increasingly competitive environment and on maintaining competition
    within the industry.  Regulators recognize that although their
    supervisory oversight should be sufficient to oversee safe and sound
    bank operations and practices, it should not be so onerous as to
    stifle the industry and impair banks' ability to remain competitive
    with financial institutions in other industries and in other
    countries.  Bank regulators also seek to maintain competition by
    assessing compliance with antitrust laws.

    Fairness in, and equal access to, banking services is also an
    important goal of banking institution regulators.  Bank regulators
    seek to ensure access by assessing institutions' compliance with
    consumer protection laws.  This goal of the banking regulators is
    unique to the U.S.  bank regulatory structure.

    --------------------
    \25 Regulation is the authority for rulemaking.  Supervision is the
    responsibility for off-site monitoring and on-site examination.
    Examination consists of reviewing banking practices and operations.

       AGENCIES HAVE
       OTHER MAJOR OVERSIGHT-RELATED
       RESPONSIBILITIES
    ---------------------------------------------------------- Chapter 1:4

    While the four federal banking regulators share many oversight
    responsibilities, some of the principal responsibilities of FDIC and
    FRS fall outside direct regulation and supervision but are related to
    the goals of bank oversight.  For FDIC these include responsibility
    for administration of the federal deposit insurance funds, resolution
    of failing and failed banks, and disposition of failed bank assets.
    For FRS, these include responsibility for monetary policy development
    and implementation, liquidity lending, and payments and settlements
    systems operation and oversight.  In addition, all four federal
    regulators may play a role in the management of financial crises,
    depending on the nature of the crisis.

          FDIC'S PRINCIPAL FUNCTION IS
          AS DEPOSIT INSURER
    -------------------------------------------------------- Chapter 1:4.1

    Although FDIC supervises a large number of banking institutions, its
    primary function is to insure banking institutions' deposits up to
    $100,000.\26 FDIC administers BIF--which predominantly protects
    depositors of commercial banks--and SAIF--which predominantly
    protects depositors of thrift institutions.  FDIC receives no
    appropriated government funding.  BIF is funded wholly through
    premiums paid on the deposits of member institutions and with some
    borrowing authority from the government under prescribed conditions,
    such as liquidity needs of the insurance funds.  SAIF is primarily
    funded through premiums paid on the deposits of thrift institutions
    and has similar borrowing authority.  Both BIF and SAIF are required
    by statute to have a minimum reserve ratio of 1.25 percent of insured
    deposits.  According to FDIC, as of December 31, 1995, BIF's fund
    balance exceeded the ratio 1.30, but SAIF was not fully capitalized.

    FDIC relies on primary regulators to verify that institutions outside
    its direct supervisory jurisdiction are operating in a safe and sound
    manner.  Examinations are to be done by the institution's primary
    regulators on all the institutions FDIC insures, and FDIC is to
    receive copies of all examination reports and enforcement actions.
    However, FDIC may also protect its interest as the deposit insurer
    through its backup authority.  This allows FDIC to examine
    potentially troubled banking institutions and take enforcement
    actions, even when FDIC is not the institution's primary regulator.

    --------------------
    \26 All accounts owned by an individual in a single banking
    institution are aggregated for deposit insurance purposes and covered
    up to $100,000 per depositor per insured institution.  If a depositor
    has both checking and savings accounts in the same institution, both
    accounts taken together would be insured up to $100,000.  However, if
    an individual has a joint account with another person in the same
    bank, this joint account would be separately insured up to $100,000.
    An individual can thus significantly increase his or her insurance
    coverage in a single banking institution by establishing multiple
    accounts with different family members.  There is also no limit to
    the number of insured accounts an individual may have in different
    banking institutions.

             IN CONJUNCTION WITH
             DEPOSIT INSURANCE
             FUNCTION, FDIC HAS
             PRIMARY ROLE IN FAILURE
             RESOLUTION AND FAILED
             BANK ASSET DISPOSITION
    ------------------------------------------------------ Chapter 1:4.1.1

    Regardless of an institution's primary regulator, only its chartering
    authority--the state banking commission, OCC, or OTS--has the formal
    authority to declare that the banking institution is insolvent.  Once
    the chartering authority becomes aware that one of its institutions
    has deteriorated to the point of insolvency or imminent insolvency,
    it is to notify FDIC, which is responsible for arranging an orderly
    resolution.

    FDIC is required by law to generally select the resolution
    alternative it determines to be the least costly to BIF and SAIF.  To
    make this least-cost determination, FDIC must (1) consider and
    evaluate all possible resolution alternatives by computing and
    comparing their costs on a present-value basis, using realistic
    discount rates; and (2) select the least costly alternative on the
    basis of that evaluation.\27 If, however, the least-cost resolution
    would create a systemic problem--as determined by FDIC's Board of
    Directors with the concurrence of the Federal Reserve Board and the
    Secretary of the Treasury, then, under the Federal Deposit Insurance
    Corporation Improvement Act (FDICIA), another resolution alternative
    could be selected.  As of June 30, 1996, no systemic problem had been
    raised by FDIC in making its resolution decisions.

    Typically--and particularly in the case of large, known to be
    troubled, institutions--active communication has taken place among
    the chartering authorities, primary regulators, FDIC, and FRS as
    liquidity provider.  The interaction and coordination typically
    includes the sharing of examination information, strategies, and
    economic information, for example.  This communication most commonly
    takes place when the primary regulator considers failure likely so
    that all regulatory parties can discharge their responsibilities in
    an orderly manner.  When banks fail, FDIC is appointed receiver,
    directly pays insured claims to depositors or the acquiring bank, and
    liquidates the remaining assets and liabilities not assumed by the
    acquiring bank.

    --------------------
    \27 In selecting the least costly resolution alternative, FDIC's
    process is to compare its estimated cost of liquidation--basically,
    the amount of insured deposits paid out minus the net realizable
    value of an institution's assets--with the amounts that potential
    acquirers bid for the institution's assets and deposits.  FDIC's
    Division of Resolutions then is to estimate the net realizable value
    of an institution's assets by performing an on-site Asset Valuation
    Review or, when time or other constraints exist, by using a computer
    model based on FDIC's historical recovery experience, to value the
    institution's assets.  To solicit the greatest number of bids, FDIC
    normally offers various marketing options to potential acquirers,
    such as offering the whole institution, select pools of assets, or
    deposits.

          FRS HAS SEVERAL
          RESPONSIBILITIES
    -------------------------------------------------------- Chapter 1:4.2

    One of the principal responsibilities of FRS is conducting monetary
    policy.  As stated in the Federal Reserve Act, FRS is "to promote
    effectively the goals of maximum employment, stable prices, and
    moderate long-term interest rates." FRS conducts monetary policy by
    (1) using open market operations,\28 the primary tool of monetary
    policy; (2) determining the reserve requirements that banking
    institutions must hold against deposits; and (3) determining the
    discount rate charged banking institutions when they borrow from FRS.
    FRS is to act independently in conducting its monetary policy.

    FRS also is to act as lender-of-last-resort to ensure that a
    temporary liquidity problem at a banking institution does not
    threaten the viability of the institution or the financial system.
    Using the discount window, FRS may lend to institutions that are
    experiencing liquidity problems--for example, when these institutions
    cannot meet deposit withdrawals.\29 However, when acting in this
    capacity, FRS requires the lending to be collateralized, and it is to
    be assured by the banking institution's primary regulator that the
    institution is solvent.  According to FRS officials, institutions
    generally do not approach FRS for liquidity loans unless they have no
    alternative.  Liquidity lending may be perceived as a sign that an
    institution is in trouble, despite the fact that FRS is prohibited
    from lending to nonviable institutions.

    In addition, FRS has broad responsibility in the nation's payments
    and settlements systems.\30 It is mandated by Congress to act as an
    intermediary in clearing and settling interbank payments by
    maintaining reserve or clearing accounts for the majority of banking
    institutions.  As a result, it settles the payment transactions by
    debiting and crediting the appropriate accounts of banking
    institutions making payments.  In addition, FRS also collects checks,
    processes electronic fund transfers, and provides net settlement
    services to private clearing arrangements.

    --------------------
    \28 Open market operations involve the buying and selling of
    securities by FRS.

    \29 Banks may also approach FRS to manage liquidity needs that arise
    from regular, seasonal swings in loans and deposits, such as those at
    agricultural banks.

    \30 The Monetary Control Act of 1980 required all depository
    institutions to maintain reserves in accounts at the Reserve Banks
    and granted them all access to FRS payment services.  Recently, the
    Expedited Funds Availability Act of 1987 gave the Federal Reserve
    Board authority over private clearing arrangements.  Through these
    actions, Congress has made it clear that it holds FRS responsible for
    ensuring the integrity and the efficiency of the U.S.  dollar
    payments system.

          CRISIS MANAGEMENT
    -------------------------------------------------------- Chapter 1:4.3

    Depending on the nature of the situation, federal regulators may play
    a role in financial system crisis management.  FRS, for example,
    often has a significant role in crisis management in its role as a
    major participant in financial markets through its liquidity lending,
    payments and settlements, and other responsibilities.  A key role of
    any central bank is to supply sufficient liquidity to the financial
    system in a crisis.  For example, during the 1987 stock market crash,
    FRS provided liquidity support to the financial system, encouraged
    major banks to lend to solvent securities firms, coordinated with
    Treasury, and encouraged officials to keep the New York Stock
    Exchange open.  During the Ohio Savings and Loan crisis in 1985, FRS
    intervened with liquidity support until a permanent solution to the
    instability could be developed.  Treasury is also involved in
    resolving major financial crises, while OCC, OTS, and FDIC have
    played significant roles involving large bank or thrift failures.

       VARIOUS FEDERAL AND STATE
       AGENCIES OVERSEE ACTIVITIES OF
       NONBANK SUBSIDIARIES OF BANKS
       AND BANK HOLDING COMPANIES
    ---------------------------------------------------------- Chapter 1:5

    Many nonbank subsidiaries of banks and bank holding companies are
    engaged in securities, futures, or insurance activities.  These
    activities are subject to the oversight of the Securities and
    Exchange Commission (SEC), the Commodity Futures Trading Commission
    (CFTC), and state insurance regulators, respectively.  These
    regulators may provide information to the Federal Reserve about
    nonbank subsidiaries of bank holding companies.  They may also
    provide information about nonbank subsidiaries of banks to the
    responsible primary federal regulator of the parent bank.

          SEC AND CFTC
    -------------------------------------------------------- Chapter 1:5.1

    The primary goals of SEC and CFTC are to maintain fair and orderly
    markets and public confidence in the financial markets by protecting
    investors against manipulation, fraud, or other irresponsible
    practices.  The aftermath of the stock market crash of 1929 created a
    demand for federal oversight of securities and futures activities.\31
    The Securities Exchange Act of 1934 created SEC with powers to
    oversee the securities market exchanges--also called self-regulatory
    organizations--and to intervene if the exchanges did not carry out
    their responsibilities for protecting investors.  The Commodity
    Exchange Act of 1936, as amended, governs the trading of commodity
    futures contracts and options.  The Commodity Futures Trading
    Commission Act of 1974 created the current regulatory structure,
    consisting of industry self-regulation with government oversight by
    CFTC.

    Securities broker-dealers must register with SEC and comply with its
    requirements for regulatory reporting, minimum capital, and
    examinations.  They must also comply with requirements of the
    self-regulatory organizations, such as the New York Stock Exchange
    and the National Association of Securities Dealers.  SEC is to
    monitor broker-dealer capital levels through periodic reporting
    requirements and regular examinations.

    CFTC is to review exchange rules, ensure consistent enforcement, and
    monitor the positions of large traders.  CFTC also regulates the
    activities of various market participants, including futures
    commission merchants--which must comply with CFTC's requirements for
    regulatory reporting, minimum capital, and examinations.  In
    addition, they must comply with the rules imposed by the various
    exchanges, such as the Chicago Mercantile Exchange and the Chicago
    Board of Trade as well as the National Futures Association, all of
    which act as self-regulatory organizations.

    --------------------
    \31 The first regulation of commodity futures markets on a limited
    basis began in the 1920s, when falling commodity prices, farm
    depression, and speculative excesses on the grain exchanges led to
    demands for federal regulation of the grain exchanges.  The Grain
    Futures Act of 1922 was designed to allow the federal government,
    through the Department of Agriculture, to license these exchanges and
    require the exchanges to take responsibility for preventing price
    manipulation by their members.

          STATE INSURANCE REGULATORS
    -------------------------------------------------------- Chapter 1:5.2

    Regulation of the insurance industry and administration of insurance
    company receiverships and liquidations are primarily state
    responsibilities.\32 In general, state legislatures set the rules
    under which insurance companies must operate.  Among their other
    responsibilities, state insurance departments are to monitor the
    financial condition of insurers.  States use a number of basic
    methods to assess the financial strength of insurance companies,
    including reviewing and analyzing annual financial statements, doing
    periodic on-site financial examinations, and monitoring key financial
    ratios.

    State insurance departments are generally responsible for taking
    action in the case of a financially troubled insurance company.  If
    the insurance company is based in another state, the insurance
    department can suspend or revoke its license to sell insurance in the
    department's state.  If a home-based company is failing, the
    department can put it under state supervision or, in cases of
    irreversible insolvency, place a company in liquidation.  State
    insurance regulators have established a central structure to help
    coordinate their activities.  The National Association of Insurance
    Commissioners (NAIC) consists of the heads of the insurance
    departments of 50 states, the District of Columbia, and 4 U.S.
    territories.  NAIC's basic purpose is to encourage uniformity and
    cooperation among the various states and territories as they
    individually regulate the insurance industry.  To that end, NAIC
    promulgates model insurance laws and regulations for state
    consideration and provides a framework for multistate "zone"
    examinations of insurance companies.

    --------------------
    \32 In 1868, the U.S.  Supreme Court upheld the constitutionality of
    a state statute regulating insurance agents on the grounds that the
    insurance business is not commerce that the federal government may
    regulate under the commerce clause.  [Paul v.  Virginia, 75 U.S.  168
    (1868)] In 1944, the court abandoned the proposition that insurance
    is not commerce and upheld the application of federal antitrust laws
    to the insurance industry [United States v.  South-Eastern
    Underwriters Assoc., et.  al., 322 U.S.  533 (1944)].  In 1945,
    Congress reestablished the primacy of state regulation by enacting
    the McCarran-Ferguson Act, which strictly limited the extent to which
    federal law, including federal antitrust law, preempted state
    insurance law.

       OBJECTIVES, SCOPE, AND
       METHODOLOGY
    ---------------------------------------------------------- Chapter 1:6

    Congressman Charles E.  Schumer asked us to provide information to
    help Congress evaluate efforts to modernize the U.S.  system of
    federal oversight of banks and thrifts.  Our objectives were to (1)
    discuss previously reported problems with the bank oversight
    structure in the United States, (2) summarize those characteristics
    of the five countries' regulatory structures that might be useful for
    Congress to consider in any U.S.  modernization efforts, and (3)
    identify potential avenues for modernizing the U.S.  banking
    oversight structure.

    This report does not address federal oversight of credit unions by
    the National Credit Union Administration (NCUA), which are also
    classified as depository institutions.  Credit unions hold only a
    small percentage of all depository institution assets--about 5.5
    percent.  Also, although the legal and practical distinctions between
    thrifts and banks have all but disappeared in recent years, the core
    of credit union business remains traditional consumer lending
    activities.  Finally, the most recent proposals to modernize
    oversight of financial institutions have not included oversight of
    credit unions within their scope.

    To address the objectives of this report, we conducted interviews
    with senior supervisory officials from the Board of Governors of FRS,
    Federal Reserve Bank of New York, FDIC, OCC, OTS, and SEC.  They also
    provided us with various documents and statistics, including bank and
    thrift examination manuals, guidance to examiners and banking
    industry officials, and statistics on the banking industry.

    In addition to our interviews with U.S.  supervisory officials, we
    met with officials representing the banking industry, including
    officials from the American Bankers Association, Independent Bankers
    Association of America, and Conference of State Bank Supervisors.  We
    also met with officials from the accounting profession, including
    officials from the American Institute of Certified Public
    Accountants.

    In conducting our work we also gathered information from many other
    sources.  These include studies of the history of the banking
    industry; records from congressional hearings related to regulatory
    restructuring; and professional literature concerned with the
    industry structure, regulation, and external audits.  We also
    reviewed relevant banking acts and regulations.  This review does not
    constitute a formal legal opinion on the requirements of the laws.

    Much of this report was based on our reports of the structures and
    operations of bank regulation and supervision activities in Canada,
    France, Japan, Germany, and the United Kingdom.\33 When preparing
    these reports, we interviewed regulatory and industry officials in
    each country and reviewed relevant banking laws, regulations,
    industry statistics, and other industry studies.  These reports did
    not assess the effectiveness or efficiency of bank oversight in the
    countries studied.

    This report also draws on extensive work that we have done over the
    past several years on depository institutions, the deposit insurance
    program, the securities and insurance industries, international
    competitiveness, and other aspects of the financial services system
    in the United States.  A comprehensive list of our products
    addressing issues related to the financial services industry is
    included at the end of this report.  (See Related GAO Products.)

    We conducted our work from July 1995 through June 1996 in accordance
    with generally accepted government auditing standards.  We provided a
    draft of this report for comment to the heads of FRS, FDIC, OCC, OTS,
    and Treasury.  FRS, FDIC, OCC, and OTS provided written comments,
    which are discussed at the end of chapter 4 and reprinted in
    appendixes IV to VII.  Treasury did not provide written comments.
    Each agency also provided technical comments, which we incorporated
    where appropriate.

    --------------------
    \33 See Bank Regulatory Structure:  The Federal Republic of Germany
    (GAO/GGD-94-134BR, May 1991); Bank Regulatory Structure:  The United
    Kingdom (GAO/GGD-95-38, Dec.  1994); Bank Regulatory Structure:
    France (GAO/GGD-95-152, Aug.  1995); Bank Regulatory Structure:
    Canada (GAO/GGD-95-223, Sept.  1995); and Bank Regulatory Structure:
    Japan, which is currently a draft report.

    BANK OVERSIGHT STRUCTURE IS
    REDUNDANT
    ============================================================ Chapter 2

    All four federal oversight agencies share several supervisory and
    regulatory responsibilities, including developing and implementing
    regulations, taking enforcement actions, conducting examinations, and
    off-site monitoring.  Chartering is the responsibility of 2 federal
    agencies, as well as all 50 states.  This structure of shared
    responsibilities has been characterized by some observers as being
    inherently inefficient.  Furthermore, our work has shown that despite
    good faith efforts to coordinate their policies and procedures, the
    four federal bank oversight agencies have often differed on important
    issues of bank supervision and regulation.

       FEDERAL AGENCIES OVERSEEING
       BANKS AND THRIFTS SHARE SEVERAL
       OVERSIGHT RESPONSIBILITIES
    ---------------------------------------------------------- Chapter 2:1

    The division of primary oversight responsibilities among the four
    oversight agencies is not based on specific areas of expertise,
    functions, or activities, either of the regulator or the banks for
    which they are responsible, but based on institution type--thrift or
    bank, bank charter type--national or state, and FRS membership.
    Consequently, the four oversight agencies share responsibility for
    developing and implementing regulations, taking enforcement actions,
    and conducting examinations and off-site monitoring.

       Figure 2.1:  Responsibility for
       U.S.  Bank Oversight Functions

       (See figure in printed
       edition.)

    \a OCC and OTS are within Treasury.

    \b The Board of Directors of FDIC includes the heads of OCC and OTS
    as well as three independent members, including the chairman and vice
    chairman, who are appointed by the President and confirmed by the
    Senate.

    Source:  FDIC, FRS, OCC, OTS, and Treasury.

          ALL FOUR REGULATORS DEVELOP
          AND IMPLEMENT REGULATIONS
          AND GUIDELINES
    -------------------------------------------------------- Chapter 2:1.1

    Regulations are the primary vehicle through which regulators
    elaborate on what the laws mean, clarify provisions of the laws, and
    provide guidance on how the laws are to be implemented.\1

    Regulations typically have the force of law--that is, they can be
    enforced through a court of law.  Regulators have, in some cases,
    issued guidelines rather than regulations because guidelines provide
    them greater flexibility to change or update as experience dictates.
    Guidelines, however, are not directly enforceable in court.\2

    In most cases, each regulator is responsible for issuing its own
    regulations for the banking institutions under its jurisdiction.
    This may result in four sets of regulations implementing essentially
    the same provision of the law.  Unless regulatory coordination in
    developing regulations is mandated by law, the regulators may develop
    regulations independently.  Even if the regulators develop
    regulations jointly, on an interagency basis, they each still issue
    similar individual regulations under their own legal authority.  In
    some instances, law designates a specific regulator to write the
    regulation for all banking institutions.  For instance, FRS has sole
    rulemaking responsibility for many consumer protection laws.

    --------------------
    \1 In issuing regulations, regulators must publish proposed drafts in
    the Federal Register to request public comments, after which they
    consider comments and finalize the regulations.

    \2 Banking guidelines typically do not serve as the basis for agency
    enforcement actions.  Noncompliance with guidelines may be cited by
    regulators in enforcement actions to encourage banking institution
    managers to take necessary actions.

          ALL FOUR REGULATORS MAY TAKE
          ENFORCEMENT ACTIONS
    -------------------------------------------------------- Chapter 2:1.2

    Each regulator has the authority to take enforcement actions against
    financial institutions under its jurisdiction.  Regulators may
    initiate informal or formal enforcement actions to get bank
    management to correct unsafe and unsound practices or conditions
    identified during the banking institution examination.\3 Regulators
    have broad discretion in deciding which, if any, regulatory action to
    choose, and they typically make such decisions on a case-by-case
    basis.  Regulators have said that they prefer to work with
    cooperative banking institution managers to bring about necessary
    corrective actions as opposed to asserting formal actions.  However,
    bank regulatory officials have also said that they may take more
    stringent action when the circumstances warrant it.

    Under agency guidelines, the regulators are to use informal actions
    for banking institutions if (1) the institution's overall strength
    and financial condition make failure a remote possibility and (2)
    management has demonstrated a willingness to address supervisory
    concerns.  Informal actions generally include

      -- meeting with banking institution officers or board of directors
         to obtain agreement on improvements needed in the safety and
         soundness of the institution's operations,

      -- requiring banks to issue resolutions to issue commitment letters
         to the regulators specifying corrective actions to be taken, and

      -- initiating memorandums of understanding between regulators and
         banking institution officers on actions that are to be taken.

    Informal actions typically are used to advise banking institutions of
    noted weaknesses, supervisory concerns, and the need for corrective
    action.  The regulators assume that banking institutions understand
    that if they do not comply with informal actions, regulators may take
    stronger enforcement actions.

    Under agency guidelines, the regulators use formal enforcement
    actions that are authorized in banking laws when informal actions
    have not been successful in getting management to address supervisory
    concerns, management is uncooperative, or the institution's financial
    and operating weaknesses are serious and failure is more than a
    remote possibility.  Formal enforcement actions generally include
    such actions as

      -- formal written agreements between regulators and bankers;

      -- orders to cease and desist unsafe practices or violations;

      -- assessments of civil money penalties; and

      -- orders for removal, suspension, or prohibition of individuals
         from banking institution operations.

    In addition, OCC and OTS may revoke national banking institutions'
    charters and place institutions in conservatorship; FDIC may remove
    an institution's deposit insurance.

    --------------------
    \3 The enforcement process for regulators begins when they notify
    institution management and directors of financial weaknesses,
    operational problems, or violations of banking laws or regulations
    identified during an examination.  Regulatory concerns are to be
    brought to a bank's attention through meetings with management upon
    completion of the examination.  A report of the examination findings
    is also to be provided to the bank's board of directors, management,
    and principal ownership interests.

          EACH REGULATOR IS TO EXAMINE
          BANKING INSTITUTIONS UNDER
          ITS JURISDICTION
    -------------------------------------------------------- Chapter 2:1.3

    Under FDICIA, all insured banking institutions are to be examined
    once every 12 months by federal regulators.\4 These examinations are
    to be conducted by the regulators with primary jurisdiction over the
    banking institutions.  In addition, FDIC may conduct backup
    examinations of any bank, if necessary, for the purpose of protecting
    BIF.

    The full-scope examinations\5 required under law are usually called
    safety-and-soundness examinations because their primary purpose is to
    assess the safety and soundness of a banking institution's practices
    and operations.  The objectives of these on-site examinations are to

      -- test and reach conclusions about the reliability of banking
         institutions' systems, controls, and reports;

      -- investigate changes or anomalies disclosed by off-site
         monitoring and analysis; and

      -- evaluate those aspects of the institution's operations for which
         portfolio managers cannot rely on the banks' own systems and
         controls.

    --------------------
    \4 The Federal Deposit Insurance Act allows for examinations of small
    well-capitalized institutions (less than $250 million in assets) to
    be extended to every 18 months and allows state examinations to
    alternate with federal examinations for state-chartered institutions.

    \5 Full-scope examinations include examining asset quality, assessing
    systems and internal controls, judging capital adequacy and reserves,
    and assessing compliance with laws and regulations.

          CAMEL RATINGS FOR BANKS AND
          THRIFTS
    -------------------------------------------------------- Chapter 2:1.4

    Examinations have historically been extensive reviews of loan
    portfolios.  Currently, according to officials with whom we spoke,
    regulators are moving toward a risk-management approach and
    concentrating on institutions' risk profiles\6 and internal controls.
    Examiners rate five critical areas of operations--capital adequacy
    (C), asset quality (A), management (M), earnings (E), and liquidity
    (L)--to determine an overall rating (CAMEL).  They use a five-point
    scale (with one as the best rating and five as the worst) to
    determine a CAMEL rating that describes the condition of the
    institution.

    As a part of the examination process, regulators are to meet with
    banking institution officials after every examination.\7 In addition,
    regulators are to hold separate meetings with the bank's audit
    committee and management after each examination to discuss the
    results of the examination.

    --------------------
    \6 Under this approach, the examiner is to look at the bank's
    portfolio, balance sheet, and other activities, like derivatives, to
    see whether there is adequate risk management, including policies and
    procedures to effectively manage the risk being taken by the
    institution.

    \7 Examiners are also encouraged to communicate with banking
    institution management often, and directors as needed, to discuss
    current significant issues about the bank.  This communication can
    take the form of a meeting or telephone contact.  Typical discussion
    topics may include financial performance and trends, new lines of
    business or other operating changes, management concerns about the
    bank, and other issues that could affect the bank's risk profile.

          HOLDING COMPANY INSPECTIONS
    -------------------------------------------------------- Chapter 2:1.5

    FRS and OTS also conduct holding company inspections.  Holding
    company inspections differ from bank examinations in that the focus
    of the inspection is to ascertain whether the strength of a bank
    holding company is being maintained and to determine the consequences
    of transactions between the parent company, its nonbanking
    subsidiaries, and the subsidiary banks.  According to FRS and OTS
    guidelines, the major components of an inspection include

      -- an assessment of the financial condition of the parent company,
         its banking subsidiaries, and any nonbanking subsidiaries;

      -- a review of intercompany transactions and relationships;

      -- an evaluation of the current performance of the company and its
         management; and

      -- a check of the company's compliance with applicable laws and
         regulations.

          BOPEC RATINGS FOR BANK
          HOLDING COMPANIES
    -------------------------------------------------------- Chapter 2:1.6

    Examiners are to rate five critical areas of the bank holding
    company--bank subsidiaries (B), other nonbank subsidiaries (O),
    parent company (P), earnings (E), and capital adequacy (C)--to
    determine an overall rating referred to as BOPEC.  Examiners use a
    five-point rating scale, similar to that used for CAMEL ratings on
    banks and thrifts.  They also rate management separately as
    satisfactory, fair, or unsatisfactory.

          CONSUMER COMPLIANCE AND
          COMMUNITY REINVESTMENT ACT
          EXAMINATIONS ARE DONE
          SEPARATELY FROM SAFETY AND
          SOUNDNESS EXAMINATIONS
    -------------------------------------------------------- Chapter 2:1.7

    In addition to safety and soundness examinations, regulators are to
    conduct examinations of banking institutions focusing on compliance
    with various consumer protection laws and the Community Reinvestment
    Act (CRA).  A consumer compliance examination results in a compliance
    rating for an institution's overall compliance with consumer
    protection laws to ensure that the provision of banking services is
    consistent with legal and ethical standards of fairness, corporate
    citizenship, and the public interest.  A compliance rating is to be
    given to the institution based on the numerical scale ranging from 1
    for top-rated institutions to 5 for the lowest-rated institutions.

    Although the regulators may do a CRA compliance examination
    separately from a consumer compliance examination, officials from all
    four regulators said that they generally do both examinations at the
    same time.  The purpose of the CRA examination is to evaluate the
    institution's technical compliance with a set of specific rules and
    to qualitatively evaluate the institution's efforts and performance
    in serving the credit needs of its entire community.  The CRA
    examination rating consists of a four-part descriptive scale
    including "outstanding," "satisfactory," "needs to improve," and
    "substantial noncompliance." Under the Financial Institution Reform,
    Recovery, and Enforcement Act of 1989 (FIRREA), CRA was amended to
    require that the regulator's examination rating and a written
    evaluation of each assessment factor be made publicly
    available--unlike the safety and soundness or compliance examination
    ratings, which are not made public by regulators.

          OFF-SITE MONITORING AND
          ANALYSIS SUPPLEMENTS
          EXAMINATIONS
    -------------------------------------------------------- Chapter 2:1.8

    In addition to on-site examinations of banking institutions, each of
    the regulators engages in off-site monitoring activities.  These
    activities--which generally consist of a review and analysis of
    bank-submitted data, including call reports, and discussions with
    bank management--are to help the regulators identify trends, areas of
    concern, and accounting questions; monitor compliance with
    requirements of enforcement actions; and formulate supervisory
    strategies, especially plans for on-site bank examinations.
    According to examination guidance issued by the regulators, off-site
    monitoring involves review and analysis of, among other things,
    quarterly financial reports that banks prepare for and submit to
    regulators\8 and reports and management letters prepared for banking
    organizations by external auditors of banks.  In general, meetings
    are not regularly held with banking institution management as part of
    normal off-site monitoring activities.  If off-site monitoring
    reveals significant changes or issues that could have an impact on
    the bank, then examiners may meet with management or contact
    management by telephone to discuss relevant issues.

    Oversight agencies are focusing more on risk assessment in their
    off-site monitoring efforts.  FDIC officials said that their off-site
    monitoring programs, such as quarterly reports and off-site reviews,
    help provide an early indication of a change in an institution's risk
    profile.  They also said that FDIC has developed new initiatives to
    improve identifying and monitoring risk.  One initiative is the
    development of decision flowcharts that aid examiners in identifying
    risks in an institution as well as possible approaches to address
    them.  Another initiative has included increasing the use of
    technology through the development of an automated examination
    package and expanding the access that examiners have to internal and
    external databases in order to provide relevant data to examiners
    prior to on-site examinations, enabling the examiner to identify
    specific risks areas.

    External auditors' reports, originally prepared to ensure the
    accuracy of information provided to a banking organization's
    shareholders, attest to the fairness of the presentation of the
    institution's financial statements and, in the case of large
    institutions, to management's assertions about the institution's
    financial reporting controls and compliance with certain laws and
    regulations.  Management letters describe important, but less
    significant, areas in which the banking institution's management may
    need to improve controls to ensure reliable financial reporting.

    Supervisors generally require banking institutions that have an
    audit--regardless of the scope of the audit--to send the reports,
    including management letters and certain other correspondence, to the
    supervisor within a specified time period.\9 Reviews of this
    information could lead examiners to focus on-site examinations on
    specific aspects of an institution--such as parts of an institution's
    internal control system--or even to eliminate some procedures from
    the examination plan.  The purposes of external audits and safety and
    soundness examinations differ in important respects and are guided by
    different standards, methodologies, and assumptions.  Even so,
    external auditors and examiners may review much of the same
    information.\10 To the extent that examiners could avoid duplicating
    work done by external auditors, examinations could be more efficient
    and less burdensome for financial institutions.

    --------------------
    \8 The reports for banks are called the Consolidated Reports of
    Condition and Income (Call Reports).  The reports for bank holding
    companies are called the Consolidated Financial Statements for Bank
    Holding Companies (Y-9 reports), and similar quarterly reports on
    thrifts and thrift holding companies are to be submitted to OTS.  The
    reports are to be prepared by bank management and submitted to the
    primary regulator on a quarterly basis.  The reports consist of a
    balance sheet, income statement, and various supporting detailed
    analyses of balances and related activities.

    \9 Bank and thrift regulators have either required or strongly
    encouraged all institutions to have annual external audits.  Large
    banks and thrifts--with total assets in excess of $500 million--are
    required to have annual independent audits; and smaller banks are
    generally required to have audits for the first 3 years after
    obtaining FDIC insurance.  Some state banking regulators also require
    such external audits for institutions chartered in their states.
    Additionally, the Federal Reserve requires bank holding companies
    with total consolidated assets of $150 million or more to have
    annual, independent financial audits; and OTS requires annual audits
    of holding companies whose subsidiary savings associations have
    aggregate assets of $500 million or more.  SEC also has a financial
    audit requirement for all public companies, including bank holding
    companies that are SEC-registrants and all banking institutions that
    are subject to SEC reporting requirements.

    \10 For example, an auditor may issue an unqualified opinion on an
    institution after determining that its transactions and balances are
    reported in accordance with Generally Accepted Accounting Principles
    (GAAP).  This does not necessarily mean, however, that the
    transactions reflect sound business judgment, that the associated
    risks were managed in a safe or sound manner, or that the asset
    balances could be recovered upon disposition or liquidation.

             SUPERVISORS' USE OF
             EXTERNAL AUDITORS' WORK
             HAS BEEN LIMITED BY
             VARIOUS FACTORS
    ------------------------------------------------------ Chapter 2:1.8.1

    Supervisors' actual use of external auditors' work has varied by
    agency as well as by individual examiner, according to supervisory
    officials we interviewed.  Primary factors in limiting use, according
    to some officials we interviewed, include skepticism among examiners
    about the usefulness of the work of external auditors and concerns
    that the findings of an external audit could be outdated by the time
    the financial institution is examined by its federal supervisor.

             RECENT INITIATIVES MAY
             HELP INCREASE SUPERVISORY
             USE OF EXTERNAL AUDITORS'
             WORK
    ------------------------------------------------------ Chapter 2:1.8.2

    OCC and FDIC recently have undertaken initiatives to improve
    cooperation between external auditors and examiners and potentially
    to identify areas in which examiners could better use the work of
    external auditors.  One impetus for improvement efforts was a 1995
    report by the Group of Thirty--"Defining the Roles of Accountants,
    Bankers and Regulators in the United States."\11 This report
    recommended, among other things, joint identification by the
    accounting profession and regulators of areas of reliance on one
    another's work; actions by independent audit committees to encourage
    interaction among regulators, external auditors, and banking
    institution management; routine use by examiners of audit workpapers;
    and a permanent board consisting of representatives from each of the
    federal banking agencies, SEC, the accounting profession, and the
    banking industry to recommend improvements in the relationship
    between regulators and external auditors.  Regulatory officials we
    interviewed disagreed with some of the recommendations set out by the
    Group of Thirty report, and some officials said the report did not
    give sufficient credit to regulators' past efforts to work with
    external auditors.  However, regulators generally agreed that this
    report helped provide some needed momentum for their initiatives.

    In November 1995, OCC announced plans for a 1-year pilot program to
    promote greater cooperation between examiners and external auditors
    and reduce wasteful duplication and oversight burden.  The program,
    which is to involve at least 10 large regional and multinational
    banks, is expected to result in nonmandatory guidelines on how and
    under what circumstances examiners and external auditors should work
    together and use each others' work.  Officials said that certain
    process-oriented functions where external auditors and examiners are
    tabulating or verifying the same information--such as documenting and
    flow-charting internal controls or confirming the existence and
    proper valuation of bank assets--may be an area where examiners could
    use the work of external auditors.

    FRS is also in the process of trying to establish procedures for
    cooperating more closely with external auditors.  As of June 1996,
    FRS staff had prepared a draft recommendation for the FRS Board to
    explore opportunities to share information and analytic techniques
    with external auditors and to seek opportunities to benefit from the
    work of external auditors.

    According to FDIC officials, representatives of FDIC have regular
    meetings with external auditors, and examiners have also recently
    begun reviewing selected external auditors' workpapers.  Examiners we
    spoke with told us that information found in the workpapers can be
    useful because information considered immaterial for financial
    accounting purposes (which is therefore not discussed in the audit
    report) can be useful for regulatory purposes.  They further found
    the auditors' work useful for identifying issues needing management's
    attention and providing indicators of management willingness or
    ability to address those issues.  Finally, one of the most important
    benefits of this workpaper review, according to examiners, is that
    these reviews promoted expanded communication and interaction between
    examiners and external auditors and helped acquaint examiners and
    auditors with each other's techniques, policies, procedures, and
    objectives.  FDIC officials told us they plan to issue examiner
    guidance to implement procedures to expand their review of internal
    and external audit workpapers of institutions that have substantial
    exposure to higher risk activities, such as trading activities.
    Officials also said examiners will be expected to contact an
    institution's auditor to solicit information that the auditor may
    have gained from his or her work at the institution since the last
    examination.  Finally, they said that this guidance will require that
    all Division of Supervision Regional Offices institute a program
    whereby annual meetings are held between regulators and local
    accountants to informally discuss accounting, supervisory, and
    examination policy issues.

    According to industry officials, OTS--and its predecessor the Federal
    Home Loan Bank Board (FHLBB)--has had a long-standing history of
    working with external auditors, and its examiners frequently use the
    work of external auditors to adjust the scope of examinations.  (See
    app.  II for additional information on the use of external auditors
    in bank supervision.)

    --------------------
    \11 The Group of Thirty is made up of officials from accounting
    firms, banks, securities firms, academia, and other private sector
    firms.

          CHARTERING OF BANKING
          INSTITUTIONS IS LIMITED TO
          STATES, OTS, AND OCC
    -------------------------------------------------------- Chapter 2:1.9

    Banking institutions have a choice of three chartering authorities:
    (1) state banking authorities, which charter state banks and thrifts
    and license state branches and agencies of foreign banks; (2) OTS,
    which charters national thrifts; and (3) OCC, which charters national
    banks and licenses federal branches and agencies of foreign banks.\12
    FRS and FDIC have no chartering authority.  However, according to
    FDIC, all deposit-taking institutions are required to apply to FDIC
    for federal deposit insurance before they are chartered.  Thus, FDIC
    may have a powerful influence over chartering decisions.

    Although the authority to charter is limited, each regulator has
    responsibility for approving mergers, branching, and
    change-of-control applications.  FRS, FDIC, and OTS share their
    authority to approve branching and mergers of banking institutions
    under their jurisdictions with state authorities, while OCC alone
    reviews national bank branch and merger applications.\13 FRS is
    responsible for approving bank holding company mergers even though
    the major banking institutions in the merging holding companies may
    be supervised by OTS, OCC, or FDIC.  Likewise, OTS approves thrift
    holding company mergers.

    --------------------
    \12 Bank and thrift holding companies are not chartered but are
    incorporated by the state chartering authority where they are
    headquartered or by OTS for national thrift holding companies.

    \13 For other supervisory decisions such as changes of control, the
    deposit-taking institution is to notify its primary regulator and
    meet its requirements.

       FRS AND FDIC RELY ON
       SUPERVISORY INFORMATION TO
       FULFILL NONOVERSIGHT DUTIES;
       TREASURY OBTAINS INFORMATION
       PRIMARILY THROUGH OCC AND OTS
    ---------------------------------------------------------- Chapter 2:2

    As described in chapter 1, in addition to their primary bank
    oversight functions, FRS and FDIC have other major responsibilities
    that include administration of the federal deposit insurance funds;
    failed or failing bank resolution; and asset disposition for FDIC
    and, for FRS, monetary policy development and implementation,
    payments and settlements systems operation and oversight, and
    liquidity lending.

    FRS and FDIC officials told us that to fulfill their duties, they
    rely on information obtained under their respective supervisory
    authorities.  FRS officials said that to carry out their
    responsibilities effectively, they must have hands-on supervisory
    involvement with a broad cross-section of banks.  FRS officials also
    said that the successful handling of financial crises often depends
    upon a combination of the insights and expertise gained through
    banking supervision and those gained from the pursuits of
    macroeconomic stability.

    Experience suggests that in times of financial stress, such as the
    1987 stock market crash, FRS needs to work closely with the
    Department of the Treasury and others to maintain market stability.
    As we have pointed out in the past, the extent to which FRS needs to
    be a formal supervisor of financial institutions to obtain the
    requisite knowledge and influence for carrying out its role is an
    important question that involves policy judgments that only Congress
    can make.\14 Nevertheless, past experience, as well as evidence from
    the five foreign oversight structures we studied (see ch.  3 for
    further discussion) provides support for the need for FRS to obtain
    direct access to supervisory information.  In its comment letter, FRS
    stated that it needs active supervisory involvement in the largest
    U.S.  banking organizations and a cross-section of others to carry
    out its key central banking functions.

    FDIC officials said that their formal supervisory responsibility
    enables them to maintain staff that can supervise and assess risk.
    In their view, this gives FDIC the expertise it requires when it
    needs to intervene to investigate a problem institution.  In
    addition, FDIC officials said that the agency's supervision of
    healthy institutions is useful because it increases their awareness
    of emerging and systemic issues, enabling them to be proactive in
    carrying out FDIC's insurance responsibilities.  In its comment
    letter, FDIC reiterated its need for information on the ongoing
    health and operations of financial institutions and stated that
    periodic on-site examination remains one of the essential tools by
    which such information may be obtained.

    Under FDICIA, FDIC was given backup examination and enforcement
    authority over all banks.\15 On the basis of an examination by FDIC
    or the appropriate federal banking agency or "other information,"
    FDIC may recommend that the appropriate agency take enforcement
    action with respect to an insured depository institution.  FDIC may
    take action itself if the appropriate federal banking agency does not
    take the recommended action or provide an acceptable plan for
    responding to FDIC's concerns and if FDIC determines that

      -- the institution is in an unsafe or unsound condition,

      -- the institution is engaging in unsafe or unsound practices and
         the action will prevent it from continuing those practices, or

      -- the institution's conduct or threatened conduct poses a risk to
         the deposit insurance fund or may prejudice the interests of
         depositors.

    We are on record as favoring a strong, independent deposit insurance
    function to protect the taxpayers' interest in insuring more than
    $2.5 trillion in deposits.\16 Previous work we have done suggests
    that a strong deposit insurance function can be ensured by providing
    FDIC with (1) the ability to go into any problem institution on its
    own, without having to obtain prior approval from another regulatory
    agency; (2) the capability to assess the quality of bank and thrift
    examinations, generally; and (3) backup enforcement authority.\17

    As described in chapter 1, Treasury also has several responsibilities
    related to bank oversight, including being the final decisionmaker in
    approving an exception to FDIC's least-cost rule and a principal
    participant in the development of financial institution legislation
    and policies.  These responsibilities require that Treasury regularly
    obtain information about the financial and banking industries, and,
    at certain times, institution-specific information.  According to
    Treasury officials, Treasury's current level of involvement, through
    its housing of OCC and OTS and their involvement on the FDIC Board of
    Directors, and the information it receives from the other agencies,
    like FDIC and FRS, as needed, is sufficient for it to carry out these
    responsibilities.  For example, according to Treasury, officials at
    OCC and OTS meet regularly with senior Treasury officials to discuss
    general policy issues and market conditions.  In addition, the
    Secretary of the Treasury meets regularly with the FRS Chairman, and
    other senior Treasury officials meet regularly with members of the
    FRS Board.  Furthermore, Treasury officials are in frequent contact
    with FDIC officials about issues relevant to both organizations.

    --------------------
    \14 Bank Regulation:  Consolidation of the Regulatory Agencies
    (GAO/T-GGD-94-106, Mar.  4, 1994).

    \15 Under FIRREA, FDIC was given similar backup enforcement authority
    for thrifts.

    \16 GAO/T-GGD-94-106.

    \17 GAO/T-GGD-94-106.

       ANALYSTS, REGULATORS, AND
       LEGISLATORS HAVE IDENTIFIED
       DISADVANTAGES AND ADVANTAGES OF
       THE OVERSIGHT STRUCTURE
    ---------------------------------------------------------- Chapter 2:3

    Analysts, legislators, banking institution officials, and numerous
    past and present regulatory agency officials have identified
    weaknesses and strengths in the structure of the federal bank
    oversight system.  Some representatives of these groups have broadly
    characterized the federal system as redundant, inconsistent, and
    inefficient.  Some banking institution officials have also raised
    concerns about negative effects of the structure on supervisory
    effectiveness.  At the same time, some agency and institution
    officials have credited the current structure with encouraging
    financial innovations and providing checks and balances to guard
    against arbitrary oversight decisions or actions.

          BANK OVERSIGHT STRUCTURE HAS
          CONTRIBUTED TO
          INEFFICIENCIES AND COULD
          CLOUD ACCOUNTABILITY TO
          CONGRESS, ACCORDING TO
          REGULATORS AND INDUSTRY
          OFFICIALS AND ANALYSTS
    -------------------------------------------------------- Chapter 2:3.1

    A principal concern associated with four regulators essentially
    conducting the same oversight functions for various segments of the
    industry is that the system is inefficient in numerous respects.  For
    example, each agency has its own internal support and administrative
    functions, such as facilities, data processing, and training to
    support the basic regulatory and supervisory tasks it shares with
    three other agencies.

    Concerns about inefficiency have also been raised by banking industry
    officials and analysts because a number of federal regulatory
    agencies may oversee the banking and nonbanking subsidiaries in a
    bank holding company.  Inefficiencies could result to the extent that
    the regulator responsible for supervision of the holding company
    itself, FRS, might duplicate work done by the primary regulator of
    the holding company subsidiaries--that is, OTS, OCC, or FDIC.\18

    According to SEC officials, another area of potential inefficiency is
    the lack of uniform regulations of bank securities activities.  For
    example, banking institutions that are not part of a holding company
    are exempted from SEC filing requirements, such as registering their
    securities offerings and making periodic filings with SEC.  This
    means that there is a duplication of expertise that both SEC and the
    federal banking institutions' regulators must develop and maintain to
    oversee securities offerings and related activities.

    Overlapping authority and responsibility for examination of
    subsidiaries could also have the effect of clouding accountability to
    Congress in cases of weaknesses in oversight of such subsidiaries.
    According to testimony by the Comptroller of the Currency in 1994,
    "it is never entirely clear which agency is responsible for problems
    created by a faulty, or overly burdensome, or late regulation."\19

    Regulators have also raised concerns about FDIC's backup examination
    authority.  The backup authority remains open to interpretation and,
    according to regulatory officials, gives FDIC the authority to
    examine banking institutions regardless of the examination coverage
    or conclusions of the primary regulator.  Regulatory officials said
    that they were concerned about FDIC's backup authority because of the
    possible duplication of effort and the resulting regulatory burden on
    the affected banks.  FDIC's Board of Directors has worked with FDIC
    officials in efforts to establish a policy statement clarifying how
    this authority will be applied in order to avoid inefficiency or
    undue burden while allowing FDIC to safeguard deposit insurance
    funds.

    --------------------
    \18 As the primary supervisor of bank holding companies, FRS collects
    and reviews information on nonbank subsidiaries.  If FRS determines,
    on the basis of its own information or information of other
    regulatory and supervisory agencies, that the nonbank subsidiary
    needs an on-site inspection, FRS examiners may inspect the nonbank
    subsidiary.  In addition, OCC can examine nonbank subsidiaries of
    national banks and FDIC can examine those of state-chartered
    nonmember banks.

    \19 Testimony of Eugene A.  Ludwig, Comptroller of the Currency, Mar.
    2, 1994.

          MULTIPLICITY OF REGULATORS
          CREATES INCONSISTENCIES
    -------------------------------------------------------- Chapter 2:3.2

    Regulators, banking officials, and analysts alike assert that the
    multiplicity of regulators has resulted in inconsistent treatment of
    banking institutions in examinations, enforcement actions, and
    regulatory decisions, despite interagency efforts at coordination.
    For example, in previous studies,\20 we have identified significant
    inconsistencies in examination policies and practices among FDIC,
    OCC, OTS, and FRS, including differences in examination scope,
    frequency, documentation, loan quality and loss reserve evaluations,
    bank and thrift rating systems, and examination guidance and
    regulations.  To address some of these problems, the federal agencies
    have operated under a joint policy statement since June 1993 designed
    to improve coordination and minimize duplication in bank examination
    and bank holding company inspections.  According to OTS, the
    oversight agencies have adopted a common examination rating system
    and have improved coordination of examinations, and some conduct
    joint examinations when feasible.

    Some of the differences among banking institution regulators result
    from differences in the way they interpret and apply regulations.
    Banking officials told us that the agencies sometimes apply different
    rules to similar situations and sometimes apply the same rules
    differently.  A 1993 Congressional Budget Office (CBO)\21 study cited
    frequent disagreements between OCC and FRS on the interpretation of
    laws governing the permissible activities of national banks.  These
    disagreements resulted in a failed attempt by FRS to prevent one
    national bank from conducting OCC-approved activities in a bank
    subsidiary.\22 The CBO study also detailed historical differences
    between the two agencies in other areas, such as merger approvals.

    In addition to interpreting regulations differently, the regulatory
    agencies sometimes enforced them differently as well.  For example,
    we observed that regulatory agencies have given different priority to
    enforcing consumer protection and community lending legislation.\23
    Similarly, in our examination of regulatory impediments to small
    business lending we also found that the agencies had given
    conflicting advice to their institutions about the procedures for
    taking real estate as collateral to support traditional small
    business working capital and equipment loans.\24

    Inconsistency among the regulators in examinations as well as in
    interpreting, implementing, and enforcing regulations may encourage
    institutions to choose one charter over another to take advantage of
    these differences.  For example, a merger of banking institutions
    with differing charters may be purposefully structured to place the
    application decision with the agency deemed most likely to approve
    the merger and expand permissible activities.  According to some
    former agency officials, a regulatory agency's desire to maintain or
    increase the number of institutions under its jurisdiction could
    inhibit the agency from taking the most appropriate enforcement
    action against an institution because that action could prompt a
    charter switch.

    Although the statutory mandates that define responsibilities of
    federal regulators help produce a common understanding of the
    principal goals of bank regulation, bank regulators may prioritize
    these goals differently, according to the mission of the particular
    regulatory agency, among other factors.  As a result, a banking
    organization overseen by more than one of the regulators can have
    different, and sometimes conflicting, priorities placed on its
    institutions.

    Various functions within an agency may also differ in the priority
    they assign oversight goals.  For instance, safety-and-soundness
    examiners from one agency focus on the goals of safety and soundness
    and the stability of the system and may emphasize high credit
    standards that could conflict with community development and
    investment goals.  Other examiners from the same agency focus on
    consumer protection and community reinvestment performance of banking
    institutions.  According to industry officials, the two types of
    examiners may have different priorities when assessing banking
    institution activities, even though each represents the same
    regulatory agency.  As a result, industry officials have said that
    they are sometimes confused about how consistently the goals are
    applied to individual institutions as well as across the industry.

    --------------------
    \20 GAO/T-GGD-94-106.  Bank and Thrift Regulation:  Improvements
    Needed in Examination Quality and Regulatory Structure
    (GAO/AFMD-93-15, Feb.  16, 1993).

    \21 Congressional Budget Office Staff Memorandum Options for
    Reorganizing Federal Banking Agencies, September 1993.

    \22 The Federal Reserve Board argued that it had jurisdiction over
    the bank subsidiary since it was responsible for the holding company
    as a whole.

    \23 GAO/T-GGD-94-106.

    \24 Bank Regulation:  Regulatory Impediments to Small Business
    Lending Should Be Removed (GAO/GGD-93-121, Sept.  7, 1993.

          REGULATORY COORDINATION IS
          NOT ALWAYS EFFICIENT
    -------------------------------------------------------- Chapter 2:3.3

    Coordination among regulators to ensure consistent regulation and
    supervisory policies has been encouraged by Congress in FIRREA and
    FDICIA and, according to agency officials, has taken place through
    the Federal Financial Institutions Examination Council (FFIEC),\25

    various interagency committees or subcommittees, interagency task
    forces or study groups, or through agency officials working together.
    Many joint policies and regulations have been developed in this way.
    Currently, for example, according to several of the oversight
    agencies, the federal agencies are working to develop consistent
    regulations and guidelines that implement common statutory or
    supervisory policies, pursuant to Section 303 of the Riegle Community
    Development and Regulatory Improvement Act.  How they are to
    coordinate and the degree to which coordination takes place is to be
    decided on a case-by-case basis.

    Although acknowledging the need for agency coordination, bank
    oversight officials have said that efforts to develop uniform
    policies and procedures--regardless of the coordination means
    used--can take months, involve scores of people, and still fail to
    result in uniformity.  Further, they said the coordination process
    has often caused long delays in decisions on important policy issues.
    Implementation of FDICIA is such a case.  Numerous staff from each of
    the regulatory agencies were involved over an extended period.
    However, despite this effort, the agencies missed the statutory
    deadline for the noncapital tripwire provision authorizing closure of
    banking institutions even when they still have positive capital
    levels (section 132 of the act) by several months.\26 In addition,
    banking institution officials have stated that efforts to coordinate
    have usually led to what too often becomes the "least common
    denominator" agreement rather than more explicit uniform regulatory
    guidance.

    --------------------
    \25 FFIEC was created by Congress in 1979 to promote consistency in
    the examination and supervision of financial institutions.  The
    Council is composed of the Comptroller of the Currency, one FRS
    Governor, the OTS Director, the FDIC Chairman, and the Chairman of
    the NCUA board.  FFIEC was principally designed to address
    duplication in examination procedures and has had some success in
    this area.  For example, with the passage of FIRREA, FDICIA, and the
    Riegle Community Development and Regulatory Improvement Act of 1994,
    regulators have worked more actively on an interagency basis to
    develop examination policies and procedures and to coordinate
    examinations, much of which was done through FFIEC.

    \26 GAO/T-GGD-94-106.

          CURRENT STRUCTURE MAY HAMPER
          EFFECTIVENESS OF OVERSIGHT
    -------------------------------------------------------- Chapter 2:3.4

    Certain aspects of the U.S.  banking oversight structure may also
    negatively affect regulatory effectiveness.  According to FRS
    testimony, as of April 30, 1996, about 60 percent of the nation's
    bank and thrift organizations were supervised by at least two
    different federal banking agencies.\27 Some holding companies may be
    subject to oversight by three or all four of the federal oversight
    entities (see fig.  2.2).

       Figure 2.2:  Regulation of a
       Hypothetical Bank Holding
       Company

       (See figure in printed
       edition.)

    Source:  GAO.

    The overlapping authority in bank holding company supervision has
    sometimes been a problem, according to regulatory officials, because
    each regulator examines only a segment of the holding company and so
    must rely upon other regulators for information about the remaining
    segments.  Banking officials have said this not only results in a
    fragmented approach to supervising and examining institutions but
    also ignores how the banking organization operates and hinders
    regulators from obtaining a complete picture of what is going on in
    the organization.  According to these officials, the regulatory
    structure may result in potential blind spots in supervisory
    oversight and, therefore, may not be the most effective way to guard
    against risk to banking institutions or the banking system as a
    whole.  Work that we have done supports these assessments.\28

    --------------------
    \27 Statement by Edward W.  Kelley, Jr., Member, Board of Governors
    of the Federal Reserve System before the Committee on Banking and
    Financial Services, U.S.  House of Representatives, Apr.  30, 1996.

    \28 See, for example, Bank Supervision:  OCC's Supervision of the
    Bank of New England Was Not Timely or Forceful (GAO/GGD-91-128, Sept.
    16, 1991).

          MULTIAGENCY SYSTEM HAS BEEN
          CREDITED WITH ENCOURAGING
          FINANCIAL INNOVATIONS AND
          PROVIDING CHECKS AND
          BALANCES TO ENSURE BANKS ARE
          TREATED FAIRLY
    -------------------------------------------------------- Chapter 2:3.5

    Although banking officials have acknowledged weaknesses in the
    structure of the U.S.  bank oversight system, they have also found
    strengths.  For example, some regulatory officials believe that
    regulatory monopolies or single regulators run the risk of being
    inflexible and myopic; are slow to respond to changes in the
    marketplace; and, in the long term, are averse to risktaking and
    innovation by banking institutions.  These officials have stated that
    having multiple federal regulators in the U.S.  system has resulted
    in the diversity, inventiveness, and flexibility in the banking
    system that is important for responding to changes in market share
    and in technology.  These officials consider the present system to be
    flexible enough to allow market-driven changes and innovations.  The
    same officials have said that the present system of multiple
    regulators--with the ability of banking institutions to change
    charters--provides checks and balances against arbitrary actions and
    rigid and inflexible policies that could stifle healthy growth in the
    banking industry.

       PRINCIPLES FOR BANK OVERSIGHT
       MODERNIZATION
    ---------------------------------------------------------- Chapter 2:4

    On the basis of the extensive work we have done in areas such as bank
    supervision, enforcement, failure resolution, and innovative
    financial activities--such as derivatives--we have previously
    identified four fundamental principles that we believe Congress could
    use when considering the best approach for modernizing the current
    regulatory structure.\29 We believe that the federal bank oversight
    structure should include

      -- consolidated and comprehensive oversight of companies owning
         federally insured banks and thrifts, with coordinated functional
         regulation and supervision of individual components;

      -- independence from undue political pressure, balanced by
         appropriate accountability and adequate congressional oversight;

      -- consistent rules, consistently applied for similar activities;
         and

      -- enhanced efficiency and as low a regulatory burden as possible
         consistent with maintaining safety and soundness.

    --------------------
    \29 Bank Oversight:  Fundamental Principles for Modernizing the U.S.
    Structure (GAO/T-GGD-96-117, May 2, 1992).

    ASPECTS OF FOREIGN BANK OVERSIGHT
    SYSTEMS MAY BE USEFUL TO CONSIDER
    IN EFFORTS TO MODERNIZE U.S.  BANK
    OVERSIGHT
    ============================================================ Chapter 3

    Aspects of bank oversight systems in Canada, France, Germany, Japan,
    and the United Kingdom (U.K.) may be useful to consider when
    addressing bank oversight modernization.  All of the foreign systems
    had fewer total entities overseeing banking institutions than did the
    U.S.  system of bank oversight--ranging from one (U.K.) to three
    (France).\1 No more than two oversight entities in the foreign
    countries were responsible for any single major oversight
    activity--chartering,\2 regulation, supervision, or enforcement.  In
    all five countries we studied, banking organizations typically were
    subject to consolidated oversight, with one oversight entity being
    legally responsible and accountable for the entire banking
    organization, including its banking and nonbanking subsidiaries.  The
    oversight systems in the countries we reviewed generally included
    roles for both central banks and finance ministries.  This reflects a
    close relationship of traditional central bank responsibilities with
    oversight of commercial banks as well as the national government's
    ultimate responsibility to maintain public confidence and stability
    in the financial system.  At the same time, most of the foreign
    countries incorporated checks and balances to guard against undue
    political influence and to ensure sound supervisory decisionmaking.
    The other countries' deposit insurers had narrower roles than that of
    FDIC and often were not government entities.  Finally, foreign
    systems incorporated a variety of mechanisms and procedures to ensure
    consistent oversight and improve efficiency.

    --------------------
    \1 The discussion in this report is limited to national-level
    oversight entities, unless otherwise noted.

    \2 Chartering is sometimes also referred to as authorization in some
    countries.

       FOREIGN SYSTEMS HAD ONE TO
       THREE OVERSIGHT ENTITIES
    ---------------------------------------------------------- Chapter 3:1

    Compared to the U.S.  bank oversight structure, with four federal
    agencies performing many of the same oversight functions, the other
    countries' structures looked less complex (see table 3.1 for a brief
    overview of the other countries' oversight systems).  The total
    number of bank oversight entities in each of the countries we studied
    ranged from one (U.K.) to three (France).  At one end of the spectrum
    was the Bank of England, which performed all bank oversight
    functions.  At the other end, in France, were the three independent
    decisionmaking committees--chartering, regulating, and
    supervising--all of which were supported by central bank staff.  The
    foreign systems also had fewer oversight entities engaged in
    chartering, regulation, supervision, and enforcement activities
    compared to the U.S.  system.  Although all four U.S.  agencies issue
    rules, conduct examinations, and take enforcement actions--OCC and
    OTS are the only federal chartering authorities in the United
    States--the foreign systems had authorized no more than two agencies
    to perform each of those functions.

                                   Table 3.1

                       Overview of Other Countries' Bank
                               Oversight Systems

    Country   Overview of system characteristics
    --------  ------------------------------------------------------------
    Canada    The system is dominated by a federal supervisor whose top
              official is appointed by the cabinet and reports directly to
              the Minister of Finance, a member of the government's
              cabinet. A federal deposit insurer plays a secondary role in
              bank oversight. Canada's central bank, the Bank of Canada,
              whose primary function is monetary policy, maintains a data
              reporting system on the financial system and individual
              institutions. It also sits on two oversight coordination
              committees with the supervisor and insurer and on the
              insurance Board of Directors with the supervisor and
              Department of Finance representatives.

    France    Three separate, independent committees are responsible for
              bank regulation, supervision, and authorization; each is
              supported primarily by staff of the central bank, the Bank
              of France. A general purpose of the three-committee system
              is to prevent an overconcentration of power by any
              individual or institution in government oversight of
              banking. The Bank of France and the French Ministry of
              Economic Affairs are the key members of all three
              committees, which also include a representative of the
              banking industry.

    Germany   The system consists of both public and private participants-
              -with two federal agencies (a supervisor and the central
              bank, the Bundesbank) sharing certain responsibilities with
              external auditors and private banking associations. De jure,
              the primary German bank regulatory and supervisory
              authority, is the federal bank supervisor, which reports to
              the Ministry of Finance and is held accountable for its
              actions to the German parliament. However, the supervisor
              and the central bank work closely together and are generally
              considered partners in the formulation of regulatory and
              supervisory policies. In addition, the central bank has the
              most active role in day-to-day supervision.

    Japan     The system involves two primary parties--the Ministry of
              Finance and the Bank of Japan, Japan's central bank. The
              Ministry of Finance has sole formal authorization to charter
              banks and issue and enforce governmental bank regulations
              and is principally responsible for collecting reports and
              financial statements from banks. Japan's central bank
              derives its authority principally from the contractual
              agreements it makes with financial institutions. It may also
              issue guidance to banks to ensure the safety and soundness
              of the financial system. Both the Ministry of Finance and
              the Bank of Japan conduct--generally on an alternating
              basis--examinations of banks.

    U.K.      The system is dominated by its central bank, the Bank of
              England, which is the primary regulator and sole supervisor
              of authorized banks in the United Kingdom. The central bank
              is formally governed by its 16-member Court of Directors but
              is managed by the Governor of the Bank, his deputy, and four
              executive directors responsible for monetary and financial
              stability. The Bank is subordinate to Her Majesty's Treasury
              and accountable to Parliament but has been accorded a high
              degree of independence in bank regulation and supervision.

    ----------------------------------------------------------------------
    Source:  The Canadian Office of the Superintendent of Financial
    Institutions, French Banking Commission, German Bank Supervisory
    Office, Japanese Ministry of Finance, and the Bank of England.

          OTHER COUNTRIES HAD ONE
          ENTITY TO CHARTER BANKING
          INSTITUTIONS
    -------------------------------------------------------- Chapter 3:1.1

    In each of the countries we studied, chartering of commercial banking
    institutions was the responsibility of only one entity.\3

    This differs markedly from the U.S.  system, in which banking
    institutions may be chartered by state banking commissions, OTS, or
    OCC.\4 As in the United States, the chartering entities in the other
    countries assessed applications on the basis of several factors.\5
    The most universal of the factors considered were the adequacy of
    capital resources and the expertise and character of financial
    institution management.

    In the United States, as noted in chapter 1, a banking institution's
    federal oversight agency is largely determined by the institution's
    charter, and under most circumstances an institution may switch its
    charter in order to come under the jurisdiction of an agency it may
    favor.  Such switching of regulators is not a possibility in the
    countries we studied.

    --------------------
    \3 In some countries, other kinds of banking institutions, such as
    trusts, were chartered at the local level.

    \4 U.S.  chartering authority is further complicated by FDIC's
    responsibility to approve federal deposit insurance for institutions
    at the time of chartering.  In effect, this gives FDIC veto power
    over chartering decisions.

    \5 The Banking Acts of 1933 and 1935 require U.S.  federal banking
    agencies to consider capital adequacy, earnings prospects, managerial
    character, and community needs before chartering a bank.

          IN MOST OTHER COUNTRIES,
          REGULATIONS WERE ISSUED BY
          ONE ENTITY
    -------------------------------------------------------- Chapter 3:1.2

    In contrast to the U.S.  system, in which each of the four banking
    institution oversight entities is generally authorized to issue its
    own regulations or regulatory guidelines, responsibility for issuing
    regulations in the countries we studied was usually limited to one
    entity.\6 In France, this responsibility was assigned to the Bank
    Regulatory Committee; in Germany, to the Federal Bank Supervisory
    Office (FBSO); in Japan, to the Ministry of Finance; and in the U.K.,
    to the Bank of England.  In Canada, however, the bank supervisor and
    the deposit insurer were both authorized to issue regulations or
    standards.  The insurer had the authority to issue standards
    pertaining to its operations and functions and those of its members.
    To guard against monolithic decisionmaking, the regulatory processes
    in all five countries were designed to include the views of other
    agencies involved in bank, securities and insurance oversight, and
    those of the regulated industry.

    The single-regulator approach in four of the foreign countries we
    studied and the coordination of regulation between the federal
    regulator and the deposit insurer in Canada meant that in all five
    countries, all banking institutions conducting the same lines of
    business were subject to the same safety and soundness standards,
    including rules related to permissible activities.  This contrasts
    with the four regulator system in the United States, as discussed in
    chapter 2.

    --------------------
    \6 Many regulations in European Union member countries--including
    France, Germany, and the U.K.--are written in response to European
    Union directives that are to be transposed into national law by the
    member countries.  Any regulations to implement such laws are the
    responsibility of the member countries' national oversight agencies.

          SUPERVISORY RESPONSIBILITIES
          WERE SHARED BY NO MORE THAN
          TWO ENTITIES, AND ONLY ONE
          HAD FORMAL ENFORCEMENT
          AUTHORITY
    -------------------------------------------------------- Chapter 3:1.3

    In the countries we studied, major supervisory activities were never
    shared by more than two entities.  For purposes of our analysis, we
    defined these activities as (1) monitoring banks' financial condition
    and operations through on-site examinations or inspections, (2)
    monitoring through the collection and analysis of data in reports
    filed by banks and through meetings with bank officials and others,
    and (3) enforcing laws and regulations through formal or informal
    actions.  In Canada, both the bank supervisor and the deposit insurer
    performed supervisory duties.  In France, the supervisory duties were
    performed by the committee called the Banking Commission; in Germany,
    by the federal bank supervisor and the central bank; in Japan, by the
    Ministry of Finance and the Bank of Japan;\7 and in the U.K., by the
    Bank of England.

    In four of the five countries we studied, the responsibility for
    taking formal enforcement actions was limited to one supervisor.\8

    For instance, in the U.K., the Bank of England was solely responsible
    for formal enforcement actions.  In Germany, the federal supervisor
    was responsible for enforcement actions; in France, the Banking
    Commission; and, in Japan, the Ministry of Finance in Japan.
    Canada's deposit insurer could take specific, narrowly defined
    enforcement actions to protect the deposit insurance fund, such as
    levying a premium surcharge on individual members or terminating an
    insured institution's deposit insurance.

    --------------------
    \7 The Bank of Japan derives its authority for such duties mostly
    from bilateral contracts with individual banks.

    \8 Formal actions can include revoking a bank's authorization;
    removing bank managers or directors; or imposing conditions on the
    bank, such as limiting deposit taking to current depositors,
    restricting the bank's scope of business, prohibiting the bank from
    entering into certain transactions, and requiring the bank to cease
    and desist particular practices or activities.

             MOST FOREIGN BANK
             SUPERVISORS SAID THEY
             CONDUCTED ON-SITE
             EXAMINATIONS LESS
             FREQUENTLY THAN DID U.S.
             SUPERVISORS
    ------------------------------------------------------ Chapter 3:1.3.1

    Most of the other countries' bank supervisors said they conducted
    on-site examinations less frequently than U.S.  bank supervisors, and
    they said that the examinations conducted were often narrower in
    scope than U.S.  examinations.  In France, on-site examinations were
    conducted on average less frequently than every 4 years, depending on
    the institutions being examined.  In Japan, examinations were
    conducted approximately every 1 to 3 years.  Canada's frequency of
    on-site examinations, like that of U.S.  supervisors', was to be once
    a year.  Supervisors in Germany and the U.K.  said they relied on
    information collected for them by external auditors rather than
    conducting their own regularly scheduled on-site examinations.\9

    In the three countries that conducted regular on-site examinations,
    the examinations were to primarily assess the safety and soundness of
    bank operations and verify the accuracy of data submitted for
    off-site monitoring purposes.  Special purpose examinations, in
    Canada and elsewhere, were also to be conducted across the industry
    to determine how specific issues--such as corporate governance--were
    being handled across the banking system.

    --------------------
    \9 The only routine examinations conducted by the central bank in
    Germany were foreign exchange examinations.

             SUPERVISORS IN OTHER
             COUNTRIES RELIED
             EXTENSIVELY ON
             INFORMATION PROVIDED IN
             PERIODIC REPORTS AND
             MEETINGS
    ------------------------------------------------------ Chapter 3:1.3.2

    In monitoring the financial conditions and operations of banks, most
    of the supervisory entities in other countries said they generally
    relied more extensively than supervisors in the United States on
    off-site information, primarily information in periodic reports
    submitted by banking institutions.  Reporting by banks included
    information on assets, liabilities, and income, as is the case in the
    United States, as well as more detailed information.  In France, for
    example, the Banking Commission had implemented a new reporting
    system for credit institutions for the purpose of collecting and
    analyzing information for prudential, monetary, and balance of
    payments purposes.  The system was intended to provide an early
    warning of potential problems in individual banks or in the banking
    system as a whole.\10 Indicators of potential safety and soundness
    problems were typically to be discussed with bank officials, whether
    in meetings or correspondence, and could trigger an on-site
    examination.  Banks in several of the countries were also required to
    submit information on their major credit exposures, which the
    regulators could analyze for excessive growth or concentrations that
    might indicate safety and soundness problems for either the
    individual bank or the banking system.

    Other important sources of information included meetings with bank
    management.  For example, supervisors said they often met with
    management to follow up on information collected through their
    off-site monitoring.  Such meetings could include questions about
    potential informational discrepancies and any business implications,
    or they could provide an opportunity for discussions about the
    institution's operations.  In three countries (Canada, Germany, and
    the U.K.), work performed by banks' external auditors also
    contributed significantly to supervisory information (see discussion
    below on the contribution of external auditors to bank supervision).

    As discussed in chapter 2, U.S.  federal bank supervisors also
    monitor the condition of banks using information contained in
    periodic reports and discussions with bank management.  However, U.S.
    regulators do not collect some of the information that is used for
    risk assessment purposes overseas, such as the reporting of large
    credit exposures.

    --------------------
    \10 The reporting could include several hundred pages of information
    on balance sheets, profit and loss statements, solvency, liquidity,
    concentration risk, large exposures, exchange rate positions, and
    other areas.  Appendixes include information on risks associated with
    activities, such as market making, trading, and derivatives.  The
    database allowed the Commission to conduct peer group comparisons,
    analyze individual banks' break-even points, and forecast trends in
    the industry.

          OTHER COUNTRIES USED
          INFORMAL ENFORCEMENT ACTIONS
          MORE THAN FORMAL ACTIONS
    -------------------------------------------------------- Chapter 3:1.4

    As has often been true in the United States, supervisors in each of
    the countries we reviewed said they preferred to rely principally on
    informal enforcement actions, such as warnings or persuasion and
    encouragement.  Informal actions generally were regarded by
    supervisors as easier and faster to put into effect and sufficiently
    flexible to ensure that the institutions took timely corrective
    actions.  Supervisors also told us that banking institutions
    understood that if they did not comply with informal actions and
    recommendations, formal actions were sure to follow.

    While authorization to take formal actions in most of the foreign
    countries was limited to the primary supervisor, informal actions
    sometimes could be taken by more than one oversight entity.  In
    Germany, for example, the central bank could suggest to banks
    remedies for perceived shortcomings and recommend enforcement actions
    to the federal supervisor.  In Japan, the Bank of Japan also could
    recommend informal enforcement actions, such as suggested remedies to
    perceived problems.  In Canada, the deposit insurer could recommend
    enforcement actions to the supervisor as well as take some limited
    enforcement actions on its own if the insurance fund was considered
    at risk.

    The financial services industries in the five countries have, over
    time, experienced serious failures, control problems, or other
    financial difficulties that have resulted in significant changes or
    at least the consideration of such changes to bank oversight
    structures.  These changes include a strengthened on-site examination
    capability and an increased formality in the supervisory process and
    use of enforcement actions in several countries.

       OVERSIGHT ENTITIES WERE
       TYPICALLY RESPONSIBLE AND
       ACCOUNTABLE FOR ENTIRE BANKING
       ORGANIZATIONS, INCLUDING
       SUBSIDIARIES
    ---------------------------------------------------------- Chapter 3:2

    In the five countries we studied, banking organizations typically
    were subject to consolidated oversight, with an oversight entity
    responsible and accountable for an entire banking organization,
    including banking and nonbanking subsidiaries.  For instance, if a
    bank had nonbank subsidiaries regulated by securities or insurance
    regulators, bank regulators nonetheless were responsible for
    supervisory oversight of the bank as a whole.\11 The bank regulators
    would generally rely on the nonbank regulators' expertise in
    overseeing the bank's subsidiaries.  For example, in France, the
    Banking Commission was responsible for the supervision of the parent
    bank and the consolidated entity, even though securities or insurance
    activities in bank subsidiaries were the responsibility of other
    regulators in those areas.

    In Canada, the federal supervisor was responsible for all federally
    incorporated financial institutions, such as banks, insurance
    companies, and trust companies.  Securities subsidiaries of banks
    were the responsibility of provincial securities regulators who
    shared information with the bank regulator for purposes of
    consolidated oversight.

    Regulators in the U.K.  also operated under the consolidated
    oversight approach.  For a bank that owned nonbank subsidiaries, the
    Bank of England remained the lead regulator and had responsibility
    for the entity as a whole.  However, it relied on the expertise of
    securities and insurance supervisors to provide information on
    subsidiaries conducting such activities.  If the major top-level
    entity was a securities firm that owned a bank, then the securities
    regulator was the lead regulator of the entire entity and would rely
    on the bank regulator for information about the bank.

    If banks conducted securities or other activities within the bank
    department rather than in a nonbank subsidiary, then the bank
    regulator retained supervisory responsibility.  In Germany, for
    example, where universal banks were able to conduct an array of
    activities from deposits to securities activities within the banking
    institutions, the federal supervisor was responsible for all bank and
    nonbank activities conducted within a bank.

    --------------------
    \11 The United States is unique in its bank holding company
    structure.  None of the countries we studied had multiple bank
    subsidiaries in a single company, as can be the case in the United
    States.  Further, those nonbanking activities that were not permitted
    in the bank itself were conducted in bank subsidiaries, not holding
    company subsidiaries.

       OTHER COUNTRIES' OVERSIGHT
       SYSTEMS GENERALLY INCLUDED
       ROLES FOR CENTRAL BANKS AND
       FINANCE MINISTRIES
    ---------------------------------------------------------- Chapter 3:3

    The oversight systems in the countries we reviewed generally included
    roles for both central banks and finance ministries, reflecting the
    close relationship of traditional central bank responsibilities with
    oversight of commercial banks as well as the national government's
    ultimate responsibility to maintain public confidence and stability
    in the financial system.

          CENTRAL BANKS USUALLY PLAYED
          SIGNIFICANT ROLES IN
          SUPERVISION AND REGULATORY
          DECISIONMAKING
    -------------------------------------------------------- Chapter 3:3.1

    Central banks generally played significant roles in supervision and
    regulatory decisionmaking in the countries we studied, largely based
    on the premise that central bank responsibilities for monetary policy
    and other functions, such as crisis intervention, oversight of
    clearance and settlements systems, and liquidity lending, are
    interrelated with bank oversight.  Although no two countries had
    identical structures for including central banks in bank oversight,
    they each accorded their central banks roles that ensured access to,
    and certain influence over, the banking industry.  The central bank's
    role was most direct in the U.K., where the Bank of England had sole
    responsibility for the authorization, regulation, and supervision of
    banks.

    Canada had a far less direct role for its central bank in supervision
    and regulation.  Even so, the Bank of Canada influenced supervisory
    and regulatory decisionmaking as a member of (1) the deposit
    insurance board; (2) the Financial Institutions Supervisory
    Committee, an organization established to enhance communication among
    participants in financial institution regulation and supervision; and
    (3) the Senior Advisory Committee, which was to meet to discuss major
    policy changes or legislative proposals affecting bank oversight.\12
    However, it had no direct authority over supervisory or regulatory
    decisionmaking.

    In France, Germany, and Japan the central bank was one of two
    principal oversight agencies, but the countries had different
    structures for involving the central banks in bank oversight.  In
    Germany, the primary supervisor, not the central bank, was authorized
    to issue banking regulations and, with few exceptions, issue or
    revoke bank licenses and take enforcement actions against banks.
    However, a sharp contrast existed between the legally assigned
    responsibilities of the central bank and its de facto sharing of
    oversight responsibilities with the federal bank supervisor.  The
    central bank and the federal bank supervisor worked closely together
    and were considered partners in the formulation of regulatory and
    supervisory policies.  The supervisor was to consult the central bank
    about all regulations; the central bank was substantively involved in
    the development of most of the regulations and could veto some.  It
    also had the most active role in day-to-day bank supervision of banks
    and was very influential in determining the enforcement actions to be
    taken by the federal bank supervisor.  The influence of the central
    bank in bank oversight arises from its detailed knowledge about banks
    in Germany, certain legal requirements that it be consulted before
    supervisory or regulatory action was taken, and the general
    perception that its nonoversight responsibilities were closely linked
    with bank oversight.

    The central bank of France was also very involved in bank oversight,
    but the structural basis for its involvement differed significantly
    from that in Germany.  The decisionmaking responsibilities for
    supervision and regulation of banking institutions in France were
    divided among three different but interrelated oversight committees:
    one for chartering, one for regulation, and one for supervision.  The
    Bank of France was a member of each of these committees.  Its
    influence over bank oversight stemmed from its chairmanship of two of
    the three oversight committees--the committee for chartering and the
    committee for supervision (the Banking Commission); the fact that it
    staffed all three oversight committees and the examination teams; its
    authority in financial crises; and its importance in and influence
    over French financial markets.

    The Japanese central bank also had some oversight responsibilities
    derived principally from the contractual agreements it made with
    financial institutions that opened accounts with the Bank of
    Japan--including all commercial banks.  As a result, it examined
    these banks on a rotational basis with the Ministry of Finance and
    also met regularly with bank management.  Although only the Ministry
    had the legal authority to take formal enforcement actions, the
    central bank provided guidance that banks usually interpreted as
    binding.

    --------------------
    \12 The committees' other members are the bank supervisor, the Deputy
    Minister of Finance, and the chairman of the deposit insurer.

          FINANCE MINISTRIES INCLUDED
          IN OVERSIGHT STRUCTURES,
          ALTHOUGH ROLES VARIED
    -------------------------------------------------------- Chapter 3:3.2

    In all of the countries we reviewed finance ministries were included
    in oversight structures, although their roles varied.  In some
    countries, the bank supervisors reported to the finance ministries
    and the finance ministries had final approval authority for
    regulations or enforcement actions.  In other cases, the finance
    ministry acted as the principal supervisor or a representative of the
    finance ministry participated as a member of a decisionmaking
    committee.  In most countries, the finance ministries received
    industrywide information to assist in discharging fiscal policy and
    other responsibilities.  They often did not receive bank-specific
    information unless the regulator believed an institution to be a
    potential threat to system stability.  In such situations, the
    finance ministry was to be apprised for crisis management and
    information purposes, as were the central bank and deposit insurer in
    order to ensure each could effectively carry out its respective
    responsibilities.

    In Canada and Germany, the principal bank supervisor reported to the
    Minister of Finance.  The oversight entities that reported to the
    finance ministries said that on day-to-day issues they had a
    significant amount of independence--the government was generally
    informed only of key regulatory or supervisory decisions.  However,
    the agreement of the finance ministry was usually necessary for these
    decisions to be carried out.

    In France, the Ministry of Economic Affairs was represented on each
    of the three independent oversight committees and chaired one of
    them.  According to oversight and banking officials with whom we
    spoke, its influence over bank oversight was derived primarily from
    its chairmanship of the bank regulatory committee and its membership
    on the chartering and oversight committees, as well as from its
    position of power in the French cabinet, including its powers of
    final approval with regard to bank regulations.

    In Japan, the Minister of Finance was the formal supervisor of
    banking institutions.  It was solely responsible for chartering
    banking institutions, taking formal enforcement actions, and
    developing and issuing regulations.  In addition, it also examined
    banks and conducted off-site monitoring.

    In the U.K., the Bank of England reports to the Chancellor of the
    Exchequer, who heads the Treasury.  The Treasury has no formal role
    in banking supervision, although it would expect to be consulted on
    any major regulatory or supervisory decision.  The Chancellor does
    have the power to issue directions to the Bank of England after
    consultation with the Governor of the Bank, ensuring that the
    government would have the final say in the event of a disagreement.
    Historically, the Bank of England has been accorded a high degree of
    independence in bank regulation and supervision.

          FOREIGN SYSTEMS HAD CHECKS
          AND BALANCES TO GUARD
          AGAINST UNDUE POLITICAL
          INFLUENCE AND ENSURE SOUND
          DECISIONMAKING
    -------------------------------------------------------- Chapter 3:3.3

    Other countries' systems of bank oversight incorporated various
    checks to guard against undue political influence in bank oversight
    and to ensure sound decisionmaking.  These checks included shared
    responsibilities and decisionmaking and the involvement of banking
    institutions in the development of bank oversight policies and other
    decisionmaking.

    According to Canadian officials, a degree of overlapping authority of
    the federal supervisor and the deposit insurer (whose governing board
    is to include four directors from the private sector) plays a useful
    role in ensuring integrity in bank oversight.  For example, the
    independent assessments of the deposit insurer could provide a
    constructive second look at the bank supervisor's oversight
    practices.  Similarly, the interactions of the supervisor with
    banking institutions could help the insurer assess risks of
    particular banking practices.  Finally, the federal supervisor is
    required to consult extensively with banking industry representatives
    in developing regulations and guidelines.  In Canada, the large size
    and small number of banks enabled banks to be influential players in
    the financial system, according to supervisory and central bank
    staff.  The large banks believed they had a special responsibility
    for helping to ensure the stability of the financial system, as well
    as a self-interest in that stability.  We were told by management of
    some of the major banks that they often related concerns and offered
    comments about other banks or financial institutions to the federal
    supervisor or the central bank.\13

    In France, a rationale for the committee oversight structure--with
    the Bank of France and the Ministry of Economic Affairs participating
    jointly on the committees--was to ensure that no single individual or
    agency could dominate or dictate oversight decisionmaking, according
    to Bank of France officials.  In addition, the committee structure
    ensures that the interests of banks are represented.  Each of the
    three bank oversight committees includes four members, including
    representatives of the banking industry, drawn from outside the Bank
    of France and the Ministry of Economic Affairs.

    In Germany, the decisionmaking power of the politically accountable
    federal bank supervisor was checked by the participation in bank
    oversight of the very independent central bank.  Without the central
    bank's accord, very few, if any, important supervisory or regulatory
    actions would be taken.  The central bank's express approval was
    legally required for certain regulations, such as those affecting
    liquidity and capital requirements, to take effect.  In addition, the
    federal supervisor was required by law to consult with banking
    associations when changes to banking law or regulations were being
    considered and before banking licenses were issued.

    In Japan, the Ministry of Finance typically developed policy by
    consensus, according to Ministry officials--a process that usually
    involved the input of many parties, such as the central bank, other
    government agencies, industry groups, and governmental policy
    councils.  In addition, the Japanese central bank's participation in
    bank oversight could provide a second opinion on some oversight
    issues.

    In the U.K., the Banking Act of 1987 formally established an
    independent body, known as the Board of Banking Supervision, to bring
    independent commercial banking experience to bear on banking
    supervisory decisions at the highest level.  In addition to three
    exofficio members from the Bank of England, the Board's members are
    to include six independent members who are to advise the exofficio
    members on policymaking and enforcement issues.  If the Bank decides
    not to accept the advice of the independent members of the Board,
    then the exofficio members are to give written notice of that fact to
    the Chancellor of the Exchequer.

    --------------------
    \13 However, the banks have no express legal responsibility for
    informing regulators about specific problems with individual banks.

       DEPOSIT INSURERS GENERALLY HAD
       MORE NARROW ROLES THAN THAT OF
       FDIC
    ---------------------------------------------------------- Chapter 3:4

    Deposit insurers in the countries we studied generally had more
    narrow roles than that of FDIC.  This less substantial oversight role
    may be attributable to the fact that national governments provided no
    explicit guarantees of deposit insurance and that deposit insurers
    were often industry administered.

          DEPOSIT INSURERS VIEWED
          PRIMARILY AS SOURCES OF
          FUNDS AND WERE NOT
          EXPLICITLY GUARANTEED BY
          NATIONAL GOVERNMENTS
    -------------------------------------------------------- Chapter 3:4.1

    The foreign deposit insurers we studied did not have a role in bank
    oversight as substantial as FDIC's.  As discussed in chapter 1, FDIC
    is the administrator of federal deposit insurance, the primary
    federal regulator and supervisor for state-chartered banks that are
    not members of FRS, and the entity with primary responsibility for
    determining the least costly resolution of failed banks.  In most
    countries, by contrast, deposit insurers were viewed primarily as a
    source of funds to help resolve bank failures--either by covering
    insured deposits or by helping to finance acquisitions of failed or
    failing institutions by healthy institutions.\14 Supervisory
    information was generally not shared with these deposit insurers, and
    resolution decisions for failed or failing banks were commonly made
    by the primary bank oversight entities with the insurer frequently
    involved only when its funds were needed to help finance resolutions.

    The broader role of FDIC as compared to deposit insurers in other
    countries may be attributable in part to the fact that deposit
    insurance is federally guaranteed in the United States.  For example,
    FDIC's involvement in bank resolutions--particularly its
    responsibility to determine the least costly of resolution
    methods--helps protect the interests of both the industry and
    potentially of taxpayers when a bank fails.  None of the governments
    of the other countries we studied provided such an explicit
    guarantee.\15 Four of the five deposit protection programs--Germany
    is the exception--also provide less coverage than does the U.S.
    system.\16

    --------------------
    \14 In every country we studied, as in the United States, deposit
    insurance (or protection) funds were obtained from the insured or
    protected banks in the form of deposit-based premiums or other types
    of assessment.

    \15 In Canada, the deposit insurer is a crown corporation with
    semiofficial government status.  As a result, even though the
    government provides no explicit guarantee of the deposit insurance
    fund, it is expected, by both depositors and the government itself,
    that the government would provide funding when necessary to protect
    the integrity of the fund.

    \16 Coverage in France is about $68,000; in Canada it is
    approximately $42,000; in the U.K., 75 percent of approximately
    $30,000; and in Japan, about $95,000.  Deposits in commercial banks
    in Germany are covered up to 30 percent of liable capital--defined as
    the paid-up endowment capital and the reserves plus up to 25 percent
    of tier 2 capital.  This means that a depositor in one of Germany's
    largest banks could be protected for almost $1 billion.

          BANKING INDUSTRIES GENERALLY
          HAD IMPORTANT ROLES IN
          ADMINISTRATION OF DEPOSIT
          PROTECTION SYSTEMS
    -------------------------------------------------------- Chapter 3:4.2

    In Germany and France, deposit protection systems were administered
    by banking associations, with no direct government involvement.  The
    German commercial banking association administered Germany's deposit
    protection plan for commercial banks.  The association obtained
    independent information about its members through external audits
    conducted by an accounting firm affiliate.  It also could play a
    significant role in resolving troubled institutions.  It had the
    power to intervene and attempt to resolve a member bank's
    difficulties and could be pressured by the central bank or bank
    supervisor to do so.\17 Thus, the German banking industry generally
    resolved its own problems.  In France, the deposit protection
    system--a loss-sharing agreement among member banks--was administered
    by the French Bank Association.  The French Bank Association itself
    played a relatively minor role in resolving bank problems.  Instead,
    the Banking Commission was responsible for resolving troubled
    institutions.\18

    In the U.K.  and Japan, the responsibility for the administration of
    deposit insurance was shared by government and the banking industry.
    Deposit insurers were independent bodies whose boards of directors
    were headed by government officials and included members from the
    banking industries.  In these countries, the government, not the
    banking associations, resolved banking institutions' problems.\19

    Canada's oversight system was most similar to that of the United
    States.  The Canadian deposit insurer did not act as a primary
    supervisor for any banking institutions; however, like FDIC, it had
    examination and rulemaking authority--although its powers were more
    limited than those of FDIC's.  It could take limited enforcement
    action and was represented on two of Canada's oversight-related
    committees.  The Canadian deposit insurer generally relied on the
    primary banking supervisor for examination information it needed to
    safeguard insurance funds.  Until a financially troubled institution
    was declared insolvent and was placed in liquidation, the bank
    supervisor had the lead role in resolving that institution.  However,
    the supervisor was to continuously inform the deposit insurer of the
    institution's status.  The deposit insurer could order a special
    examination to determine its exposure and possible resolution options
    if the institution failed.  In the case of a failure, the deposit
    insurer was responsible for developing resolution alternatives and
    for implementing the chosen resolution plan.

    --------------------
    \17 The central bank and the bank supervisor are to work together to
    resolve potential bank failures that could have systemwide
    ramifications.  In the past, for example, the central bank has played
    influential roles in persuading creditor banks to forgive some of
    their debts and to delay repayment of other debts, thereby giving
    institutions an opportunity to dissolve in an orderly fashion.

    \18 Once it became clear that an institution could not be rescued,
    the Banking Commission was responsible for withdrawing an
    institution's authorization, appointing an acting manager, and, in
    most cases, helping the institution develop a self-liquidation plan.

    \19 In Japan, the Ministry of Finance and the Bank of Japan are to
    work together to assist troubled financial institutions.  The
    Ministry of Finance usually is to take the lead by establishing
    policy and providing directions for a resolution, and the Bank of
    Japan usually finances loans as necessary.  In the U.K., the Bank of
    England was the driving force in determining if, when, and how a bank
    would be closed or acquired by a merger partner, even though the
    courts officially had the responsibility for deciding whether a
    troubled institution should be placed into administration,
    receivership, or liquidation.

       FOREIGN STRUCTURES INCORPORATED
       MECHANISMS AND PROCEDURES TO
       ENSURE CONSISTENT OVERSIGHT AND
       EFFICIENCY
    ---------------------------------------------------------- Chapter 3:5

    Most of the foreign structures with multiple oversight entities
    incorporated mechanisms and procedures that could ensure consistent
    and efficient oversight.  Some countries relied on the work of
    external auditors, at least in part, for purposes of efficiency.
    Unlike in the United States, bank oversight in these countries
    generally did not include consumer protection or social policy
    issues.

          FOREIGN OVERSIGHT ENTITIES
          OFTEN SHARED STAFF,
          INFORMATION, AND COMMITTEE
          ASSIGNMENTS
    -------------------------------------------------------- Chapter 3:5.1

    Coordination mechanisms designed to ensure consistency and efficiency
    in oversight in the countries we studied included oversight
    committees or commissions with interlocking boards, shared staff, and
    mandates or mechanisms to share information and avoid duplication of
    effort.

    In Canada, the federal bank supervisor, central bank, and finance
    ministry each had a seat on the deposit insurer's board of directors
    and participated with the deposit insurer on various advisory
    committees.  Also, the Canadian deposit insurer, which had backup
    supervisory authority to request or undertake special examinations of
    high-risk institutions, was required to rely for much of its
    information on the primary supervisor, whose examiners conducted all
    routine bank examinations and engaged in other data collection
    activities.

    In France, central bank employees staffed all three committees
    charged with oversight responsibilities for chartering, rulemaking,
    and supervision.  In addition, the central bank and the Ministry of
    Economic Affairs were represented on each of the three oversight
    committees.

    In Germany, the central bank and the federal bank supervisor used the
    same data collection instruments.  They were also legally required to
    share information that could be significant in the performance of
    their duties.

          THREE OF THE FOREIGN
          COUNTRIES' SUPERVISORS USED
          EXTERNAL AUDITORS' WORK TO
          ENHANCE EFFICIENCY
    -------------------------------------------------------- Chapter 3:5.2

    Bank supervisors in three of the five countries whose systems we
    reviewed used the work of the banks' external auditors as an
    important source of supervisory information.  In the most striking
    contrast with the United States' system, supervisors in Germany and
    the U.K.  used external auditors as the primary source of monitoring
    information.  In Canada, as in the United States, the primary
    supervisor conducted examinations; information from the banks'
    external auditors was to be used to supplement and guide these
    examinations.  Supervisors in all three countries recognized that
    auditors' objectives for reviewing a bank's activities could differ
    from those of a supervisor, and they also recognized that a degree of
    conflict could exist between the external auditors' responsibilities
    to report to both their bank clients and to the bank supervisory
    authorities.  However, they generally believed that their authority
    over auditors' engagements was sufficient to ensure that the external
    auditors properly discharged their responsibilities and openly
    communicated with both their bank clients and the oversight
    authorities.

    In both Germany and the U.K., supervisors' use of external auditors'
    work was adopted at least in part for purposes of efficiency.  In
    Germany, the use was part of an explicit plan to minimize agency
    staffing and duplication of effort between examiners and auditors.
    In the U.K., the use was seen as the most efficient way of
    introducing the necessary checks on systems controls and as a method
    compatible with the Bank of England's traditional approach of
    supervising banks "based on dialogue, prudential returns, and trust,"
    according to Bank of England officials.

    Canada, Germany, and the U.K.  differed from the United States in
    three other important ways:

      -- All banking institutions in the three foreign countries were
         required to have external audits.  As discussed in chapter 2,
         large U.S.  banks are required by U.S.  oversight agencies to
         have external audits, and others are encouraged to do so.

      -- Bank supervisors in the three foreign countries had more control
         than U.S.  bank supervisors over the work performed by external
         auditors.  In Germany and the U.K., external audits were
         conducted using specific guidelines developed by the bank
         regulators, and the scope of individual audits could be expanded
         by all three regulators, or special audits ordered, to address
         issues of regulatory concern.  By contrast, U.S.  supervisors
         have more limited authority over the scope of external
         audits.\20

      -- External auditors in the three foreign countries had affirmative
         obligations to report findings of concern to supervisors.  In
         Canada, external auditors are required to report simultaneously
         to the institution's CEO and the bank supervisor anything
         discovered that might affect the viability of the

    financial institution.  In Germany, external auditors are required by
    law to immediately report to the bank supervisor information that
    might result in qualification of the report or a finding of a
    significant problem.  In the U.K., external auditors are required to
    report to the central bank any breaches in the minimum authorization
    criteria as well as expectations of a qualified or adverse report.
    In the United States, however, external auditors are required merely
    to notify the appropriate banking agency if they withdraw from an
    engagement.\21 External auditors are required to withdraw from an
    audit engagement if identified problems are not resolved or if bank
    management refuses to accept their audit report.

    Further detail about the role of external audits in U.S.  bank
    supervision is provided in appendix II.

    --------------------
    \20 Under FDICIA, the banking agencies in the United States have some
    authority to set standards for external auditors.  For example,
    external auditors have been directed by FDIC to provide information
    on large banks' compliance with safety and soundness regulations
    related to loans to insiders and dividend restrictions.  The primary
    standards that certified public accountants follow in auditing U.S.
    financial institutions are promulgated by the American Institute of
    Certified Public Accountants.

    \21 A recent amendment to the Securities Exchange Act requires
    independent public accountants to report to SEC certain illegal acts
    they detect if the audited company does not take appropriate remedial
    action.

          SUPERVISORS IN OTHER
          COUNTRIES GENERALLY DID NOT
          FOCUS ON CONSUMER PROTECTION
          OR SOCIAL POLICY ISSUES
    -------------------------------------------------------- Chapter 3:5.3

    Bank oversight in the countries we studied, was focused almost
    exclusively on ensuring the safety and soundness of banking
    institutions and the stability of financial markets and generally did
    not include consumer protection or social policy issues.  The
    national governments of the countries we studied used other
    mechanisms to address these issues or to promote these goals.

    Consumer protection and antidiscrimination concerns were addressed in
    many of the other countries by industry associations and government
    entities other than bank regulators and supervisors.  In addition,
    some of the policy mechanisms used to encourage credit and other
    services in low- and moderate-income areas in these countries
    included the chartering of specialized financial institutions and
    direct government subsidies for programs to benefit such areas.  In
    Canada, for example, the banking industry developed voluntary
    guidelines related to consumer and small business lending, partly to
    prevent the need for legislated solutions to perceived problems.
    Similarly, the banking industries in France and the U.K.  also
    developed industry guidelines on issues such as consumer protection.
    Bank supervisors in Canada and the U.K.  were not responsible for
    enforcing compliance with these guidelines and best practices, but
    the bank supervisor in France did have such responsibility.  In
    addition, bank supervisors in the countries we studied were not
    expressly responsible for assessing compliance with other consumer
    protection laws, like those involving discrimination or antitrust;
    but they were responsible, in some countries, for advising their
    Justice Department equivalents of potential violations identified in
    carrying out their bank oversight duties.  Officials in these
    countries suggested that concern and attention to various consumer
    issues were increasing, but they did not anticipate bank regulators
    would assume any new responsibilities in this area.

    CONCLUSIONS, RECOMMENDATIONS, AND
    AGENCY COMMENTS
    ============================================================ Chapter 4

       CONCLUSIONS
    ---------------------------------------------------------- Chapter 4:1

    The division of responsibilities among the four federal bank
    oversight agencies in the United States--FDIC, FRS, OCC, and OTS--is
    not based on specific areas of expertise, functions or activities,
    either of the regulator or the banks for which they are responsible,
    but based on institution type--bank or thrift, bank charter
    type--national or state, and whether banks are members of the FRS.
    Consequently, the four oversight agencies share responsibility for
    developing and implementing regulations, taking enforcement actions,
    and conducting examinations and off-site monitoring.

    Analysts, legislators, banking institution officials, and numerous
    past and present agency officials have identified weaknesses and
    strengths in this oversight structure.  Some representatives of these
    groups have broadly characterized the federal system as redundant,
    inconsistent, and inefficient.  Some banking institution officials
    have also raised concerns about negative effects of the structure on
    supervisory effectiveness.  Some regulators, banking institutions,
    and analysts alike have asserted that the multiplicity of regulators
    has resulted in inconsistent treatment of banking institutions in
    examinations, enforcement actions, and regulatory decisions, despite
    interagency efforts at coordination.  We have cited significant
    inconsistencies in examination policies and practices among FDIC,
    OCC, OTS, and FRS, including differences in examination scope,
    frequency, documentation, loan quality and loss reserve evaluations,
    bank and thrift rating systems, and examination guidance and
    regulations.  At the same time, some agency and institution officials
    have credited the current structure with encouraging financial
    innovations and providing checks and balances to guard against
    arbitrary oversight decisions or actions.

    As a result of concerns about the current oversight structure, many
    proposals have been made to restructure the multiagency system of
    bank regulation and supervision.  These proposals have not been
    implemented, partly as a result of assertions by FRS and FDIC
    officials that they rely on information obtained under their
    respective supervisory authorities to fulfill their nonoversight
    duties:  monetary policy development and implementation, liquidity
    lending, and operation and oversight of the nation's payment and
    clearance systems for FRS; administration of the deposit insurance
    funds, resolution of failing or failed banks, and disposition of
    failed bank assets for FDIC.  As we have pointed out in the past, the
    extent to which FRS needs to be a formal supervisor of financial
    institutions to obtain the requisite knowledge and influence for
    carrying out its role is an important question that involves policy
    judgments that only Congress and the President can make.\1
    Nevertheless, past experience, as well as evidence from the five
    foreign oversight structures we studied (see below for further
    discussion) provides support for the need for FRS to obtain direct
    access to supervisory information.  We have also favored a strong,
    independent deposit insurance function to protect the taxpayers'
    interest in insuring more than $2.5 trillion in deposits.\2

    Nonetheless, previous work we have done suggests that a strong
    deposit insurance function can be ensured by providing FDIC with (1)
    the ability to go into any problem institution on its own, without
    having to obtain prior approval from another regulatory agency; (2)
    the capability to assess the quality of bank and thrift examinations,
    generally; and (3) backup enforcement authority.\3

    Treasury also has several responsibilities related to bank oversight,
    including being the final decisionmaker in approving an exception to
    FDIC's least-cost rule.  In addition, Treasury plays a major role in
    developing legislative and other policy initiatives with regard to
    financial institutions.  Such responsibilities require that Treasury
    regularly obtain information about the financial and banking
    industries and, at certain times, institution-specific information.
    According to Treasury officials, Treasury's current level of
    involvement, through its housing of OCC and OTS and their involvement
    on the FDIC Board of Directors, and the information it receives from
    the other agencies as needed, is sufficient for it to carry out these
    responsibilities.

    On the basis of the work we have done in areas such as bank
    supervision, enforcement, failure resolution, and innovative
    financial activities--such as derivatives--we have previously
    identified four fundamental principles that we believe Congress could
    use when considering the best approach for modernizing the current
    regulatory structure.  We believe that the federal bank oversight
    structure should include:  (1) clearly defined responsibility for
    consolidated and comprehensive oversight of entire banking
    organizations, with coordinated functional regulation and supervision
    of individual components; (2) independence from undue political
    pressure, balanced by appropriate accountability and adequate
    congressional oversight; (3) consistent rules, consistently applied
    for similar activities; and (4) enhanced efficiency and reduced
    regulatory burden, consistent with maintaining safety and soundness.

    In five recent reports, we reviewed the structure and operations of
    bank regulation and supervision activities in Canada, France,
    Germany, Japan, and the U.K.  Each of the oversight structures of
    these five countries reflects a unique history, culture, and banking
    industry, and, as a result, no two of the five oversight structures
    are identical.  Also, all of the countries we reviewed had more
    concentrated banking industries than does the United States, and all
    but Japan had authorized their banks to conduct broad securities and
    insurance activities in some manner.  Nevertheless, certain aspects
    of these structures may be useful to consider in future efforts to
    modernize banking oversight in the United States, even though no
    structure as a whole likely would be appropriate to adopt in the
    United States.

    In the five countries we studied, banking organizations typically
    were subject to consolidated oversight, with an oversight entity
    being legally responsible and accountable for the entire banking
    organization, including its subsidiaries.  If securities, insurance,
    or other nontraditional banking activities were permissible in bank
    subsidiaries, functional regulation of those subsidiaries was
    generally to be provided by the supervisory authority with the
    requisite expertise.  Bank supervisors generally relied on those
    functional regulators for information but remained responsible for
    ascertaining the safety and soundness of the consolidated banking
    organization as a whole.

    The number of national bank oversight entities in the countries we
    studied was fewer than in the United States, ranging from one in the
    U.K.  to three in France.  Furthermore, in all five countries no more
    than two national agencies were ever significantly involved in any
    one major aspect of bank oversight, such as chartering, regulation,
    supervision, or enforcement.  Commercial bank chartering, for
    example, was the direct responsibility of only one entity in each
    country.  In those countries where two entities were involved in the
    same aspect of oversight, the division of oversight responsibilities
    generally was based on whichever entity had the required expertise.

    The central banks in the countries we studied generally had
    significant roles in supervisory and regulatory decisionmaking; that
    is, with the exception of the Canadian central bank, their staffs
    were directly involved in aspects of bank oversight, and all central
    banks had the ability to formally or informally influence bank
    behavior.  In large part, central bank involvement was based on the
    premise that traditional central bank responsibilities for monetary
    policy, payment systems, liquidity lending, and crisis intervention
    are closely interrelated with oversight of commercial banks.  While
    no two countries had identical oversight roles for their central
    banks, each country had an oversight structure that ensured that its
    central bank had access to information about, and certain influence
    over, the banking industry.

    In each of the five countries, the national government recognized
    that it had the ultimate responsibility to maintain public confidence
    and stability in the financial system.  Thus, each of the bank
    oversight structures that we reviewed also provided the Ministry of
    Finance, or its equivalent, with some degree of influence over bank
    oversight and access to information.  Although each country included
    its finance ministry in some capacity in its oversight structure,
    most also recognized the need to guard against undue political
    influence by incorporating checks and balances unique to each
    country.

    While central banks and finance ministries generally had substantial
    roles in bank oversight, deposit insurers, with the exception of the
    Canada Deposit Insurance Corporation, did not.  Their less
    substantial oversight role may be attributable to the fact that
    national governments provided no explicit guarantees of deposit
    insurance and that deposit insurers were often industry-administered.
    Thus, in most of these countries, deposit insurers were viewed
    primarily as a source of funds to help resolve bank failures--either
    by covering insured deposits or by helping to finance acquisitions of
    failed or failing institutions by healthy institutions.  Supervisory
    information was generally not shared with these deposit insurers, and
    resolution decisions for failed or failing banks were commonly made
    by the primary bank oversight entities.

    Most of the foreign structures with multiple oversight entities
    incorporated mechanisms and procedures that could ensure consistent
    and efficient oversight.  As a result, banking institutions that were
    conducting the same lines of business were generally subject to a
    single set of rules, standards, or guidelines.  Coordination
    mechanisms included having oversight committees or commissions with
    interlocking boards, shared staff, or mandates to share information.
    Some countries relied on the work of external auditors, at least in
    part, for purposes of efficiency.  Bank oversight in these countries
    generally did not include consumer protection or social policy
    issues.

    There are many practical problems associated with creating a new
    agency or consolidating existing functions.  Although such issues
    were beyond the scope of this report, it remains important that
    transition and implementation issues be thoroughly considered in
    deliberations about any modernization of bank oversight.

    --------------------
    \1 Bank Regulation:  Consolidation of the Regulatory Agencies
    (GAO/T-GGD-94-106, Mar.  4, 1994).

    \2 GAO/T-GGD-94-106.

    \3 GAO/T-GGD-94-106.

       RECOMMENDATIONS
    ---------------------------------------------------------- Chapter 4:2

    GAO's work on the five foreign oversight systems showed that there
    are a number of different ways to simplify bank oversight in the
    United States in accordance with the four principles of consolidated
    oversight, independence, consistency, and enhanced efficiency and
    reduced burden.  GAO recognizes that only Congress can make the
    ultimate policy judgments in deciding whether, and how, to
    restructure the existing system.  If Congress does decide to
    modernize the U.S.  system, GAO recommends that Congress:

      -- Reduce the number of federal agencies with primary
         responsibilities for bank oversight.  GAO believes that a
         logical step would be to consolidate OTS, OCC, and FDIC's
         primary supervisory responsibilities into a new, independent
         federal banking agency or commission.  Congress could provide
         for this new agency's independence in a variety of ways,
         including making it organizationally independent like FDIC or
         FRS.  This new independent agency, together with FRS, could be
         assigned responsibility for consolidated, comprehensive
         supervision of those banking organizations under its purview,
         with appropriate functional supervision of individual
         components.

      -- Continue to include both FRS and Treasury in bank oversight.  To
         carry out its primary responsibilities effectively, FRS should
         have direct access to supervisory information as well as
         influence over supervisory decisionmaking and the banking
         industry.  The foreign oversight structures GAO viewed showed
         that this could be accomplished by having FRS be either a direct
         or indirect participant in bank oversight.  For example, FRS
         could maintain its current direct oversight responsibilities for
         state chartered member banks or be given new responsibility for
         some segment of the banking industry, such as the largest
         banking organizations.  Alternatively, FRS could be represented
         on the board of directors of a new consolidated banking agency
         or on FDIC's board of directors.  Under this alternative, FRS'
         staff could help support some of the examination or other
         activities of a consolidated banking agency to better ensure
         that FRS receives first hand information about, and access to,
         the banking industry.

    To carry out its mission effectively, Treasury also needs access to
    supervisory information about the condition of the banking industry
    as well as the safety and soundness of banking institutions that
    could affect the stability of the financial system.  GAO's reviews of
    foreign regulatory structures provided several examples of how
    Treasury might obtain access to such information, such as having
    Treasury represented on the board of the new banking agency or
    commission and perhaps on the board of FDIC as well.

      -- Continue to provide FDIC with the necessary authority to protect
         the deposit insurance funds.  Under any restructuring, GAO
         believes FDIC should still have an explicit backup supervisory
         authority to enable it to effectively discharge its
         responsibility for protecting the deposit insurance funds.  Such
         authority should require coordination with other responsible
         regulators, but should also allow FDIC to go into any problem
         institution on its own without the prior approval of any other
         regulatory agency.  FDIC also needs backup enforcement power,
         access to bank examinations, and the capability to independently
         assess the quality of those examinations.

      -- Incorporate mechanisms to help ensure consistent oversight and
         reduce regulatory burden.  Reducing the number of federal bank
         oversight agencies from the current four should help improve the
         consistency of oversight and reduce regulatory burden.  Should
         Congress decide to continue having more than one primary federal
         bank regulator, GAO believes that Congress should incorporate
         mechanisms into the oversight system to enhance cooperation and
         coordination between the regulators and reduce regulatory
         burden.

    Although GAO does not recommend any particular action, such
    mechanisms--which could be adopted even if Congress decides not to
    restructure the existing system--could include

      -- expanding the current mandate of FFIEC to help ensure
         consistency in rulemaking for similar activities in addition to
         consistency in examinations;

      -- assigning specific rulemaking authority in statute to a single
         agency, as has been done in the past when Congress gave FRS
         statutory authority to issue rules for several consumer
         protection laws that are enforced by all of the bank regulators;

      -- requiring enhanced cooperation between examiners and banks'
         external auditors; (While GAO strongly supports requirements for
         annual full-scope, on-site examinations for large banks, GAO
         believes that examiners could take better advantage of the work
         already being done by external auditors to better plan and
         target their examinations.)

      -- requiring enhanced off-site monitoring to better plan and target
         examinations as well as to identify and raise supervisory
         concerns at an earlier stage.

       AGENCY COMMENTS AND OUR
       EVALUATION
    ---------------------------------------------------------- Chapter 4:3

    FRS, FDIC, OCC, and OTS provided written comments on a draft of this
    report, which are described below and reprinted in appendixes IV
    through VII.  Treasury also reviewed a draft and provided oral
    technical comments, which we incorporated where appropriate.

    FRS agreed that it is useful to consider the experience of other
    countries in making policy determinations.  It also agreed that there
    are different ways to accommodate the policy goal of modernizing the
    U.S.  supervisory structure.  FRS reiterated its opinion that the
    purpose of bank supervision is to enhance the capability of the
    banking system to contribute to long-term national economic growth
    and stability.  FRS agreed with our description of the direct
    involvement of central bank staff in bank oversight in the countries
    we studied and our recommendation that FRS continue to be included in
    bank oversight.  However, it felt that we should be more specific in
    stating that FRS needs "active supervisory involvement in the largest
    U.S.  banking organizations and a cross-section of other banking
    institutions" to carry out its key central banking functions.  To
    clarify what was meant by this statement, a senior FRS official
    advised us that FRS' present regulatory authority gives it the access
    and influence it needs.  But if the regulatory structure were changed
    so that there is only one federal regulator for each banking
    organization--holding company and all bank subsidiaries--then FRS
    feels that it would have to be the regulator for the largest banking
    organizations and a cross-section of others in order to carry out its
    key central banking functions.

    We agree that FRS needs to have direct access to supervisory
    information as well as the ability to influence supervisory
    decisionmaking and the banking industry if the oversight structure is
    changed.  However, in our studies of foreign oversight structures we
    found that direct central bank involvement in bank oversight, and
    access to and influence over the banking industry, could be
    accomplished in several ways.  These could include giving the central
    bank a formal role as bank supervisor, participating on oversight
    boards with staff involvement in examination and other areas of
    supervision, and serving in informal yet influential roles that
    included participation in oversight by central bank staff.

    FRS also noted that 88 percent of U.S.  banks are part of banking
    organizations that are actively supervised by no more than two
    oversight agencies.  The portion of activities supervised by the
    third or fourth agency in holding companies where more than two
    agencies are involved in oversight is generally small.  We
    acknowledge that most U.S.  banks are supervised by no more than two
    federal banking supervisory agencies.  Nevertheless, as the table
    provided by FRS shows (see app.  IV), more than 50 percent of bank
    assets are held in companies that are supervised by three or four of
    these agencies.  Furthermore, it is the larger, more complex banking
    institutions--whose failure could pose the greatest danger to the
    financial system--that are likely to be subject to oversight by more
    than two agencies, with the potential attendant oversight problems
    described in our report.  In addition, the percentage of assets
    supervised by additional agencies--which may be relatively
    small--does not indicate their importance or potential risk to the
    banking organization.

    FDIC provided four fundamental principles for an effective bank
    regulatory structure, which are generally consistent with the
    principles and recommendations that we advocate.  These principles
    include providing FDIC with an explicit backup supervisory authority,
    backup enforcement power, and the capability to assess the quality of
    bank and thrift examinations.  We also support providing FDIC with
    such backup authority.  FDIC also noted that the broader regulatory
    responsibilities related to the role of the deposit insurer require
    current and sufficient information on the ongoing health and
    operations of financial institutions.  In FDIC's judgment, periodic
    on-site examination remains one of the essential tools by which such
    information may be obtained.

    FDIC commented on the mechanisms we described that Congress might
    consider to enhance regulators' cooperation and coordination and
    reduce regulatory burden, noting that the current processes for
    coordinating regulation allow for the consideration of the unique
    regulatory perspectives of each agency.  We agree that the present
    practice of cooperation, coordination, and communication among the
    agencies in rulemaking allows the unique viewpoints of each of the
    oversight agencies to be considered.  The assignment of rulemaking
    authority to a single agency would not preclude incorporating other
    viewpoints, as evidenced by the current rulemaking process with
    regard to some consumer protection regulations, where a single agency
    has been assigned such authority.  We believe assigning rulemaking
    authority for safety and soundness regulations could be one way to
    attain a more efficient regulatory process.

    OCC described our report as comprehensive and conveying more about
    the foreign regulatory structures than has been available to the
    public, albeit not exhaustive.  OCC agreed with us that the foreign
    structures are not readily adaptable to the United States and
    described some of its observations about the differences among the
    five countries' regulatory structures.  Consequently, OCC suggested
    that Congress consider our suggestions very carefully in making any
    changes to the oversight structure in the United States.  We agree
    that Congress should be cautious in any consideration it gives to
    changing the regulatory structure.

    OTS generally concurred with our principal recommendations and
    restated its position that consolidation will make the bank oversight
    system more efficient and effective.  It added that reducing the
    number of federal oversight agencies should be done in a way that
    preserves a strong and stable regulatory environment and protects
    agency employees.  We agree that the consolidation of any oversight
    agencies should be done in a way that preserves a strong and stable
    regulatory environment that is effective, efficient, and responsive
    to the needs and risks of the supervised institutions.

    FRS, FDIC, and OTS also noted several regulatory actions and other
    initiatives underway that are designed to improve
    coordination--including joint or coordinated examinations--and reduce
    regulatory and supervisory redundancy and overlap.  We believe such
    efforts are important to the consistency and efficiency of the
    regulatory structure and have incorporated this information into our
    report where appropriate.

    The comment letters from FRS, FDIC, and OTS attest to the unique
    perspectives of each of the oversight agencies, which we believe
    provide valuable insights to Congress.  As we describe in our report,
    there is a range of ways to address our recommendations and to
    capture these perspectives in any congressional consideration of
    changing the current U.S.  bank oversight structure.  Therefore, we
    have incorporated the agencies' insights in the report where
    appropriate.  In addition, we have included descriptions of the
    interagency efforts discussed in the agencies' responses to improve
    coordination and cooperation and reduce regulatory burden.

    HISTORY OF U.S.  BANK AND THRIFT
    OVERSIGHT
    =========================================================== Appendix I

    The U.S.  bank oversight structure was subject to significant change
    from its early years through 1933.  After 1933, the four-agency
    structure of bank oversight was to change little.  Instead, changes
    in the bank and thrift industries were addressed principally through
    additions to and revisions of banking law.

       HISTORICAL DEVELOPMENT OF U.S.
       BANK AND THRIFT OVERSIGHT
    --------------------------------------------------------- Appendix I:1

    The role of the U.S.  federal government in the banking industry and
    the structure of federal oversight of banking institutions has been
    significantly shaped by congressional efforts to promote public
    confidence in the nation's financial system--often following
    financial crises.  The federal government has sought over time to
    address difficulties related to paper currency, the financing of
    government operations, the money supply, inflation, and unsafe and
    unsound practices of banking institutions that can lead to financial
    system disruptions.  The federal agencies that oversee banking
    institutions today were created piecemeal, largely in response to
    these difficulties.

          PRE-1863:  BEGINNING OF THE
          U.S.  BANKING INDUSTRY
    ------------------------------------------------------- Appendix I:1.1

    During the late 1700s, the first commercial banks were chartered by
    special acts of some state legislatures.\1 At that time, limited and
    varied governmental oversight was provided by the states.\2

    Sporadic state efforts to prescribe rules for state banks were often
    ineffective.  Bankers in some jurisdictions refused to provide any
    information about the conditions of their banks, contending that
    running a bank was a private affair.  The federal government first
    became involved in bank oversight in 1791, when Congress created the
    Bank of the United States.  The U.S.  government was the major
    stockholder, owning one-fifth of the bank's $10 million in capital.
    The bank earned most of its income by operating as a commercial bank,
    but it also assumed some of the functions of a central bank.  For
    example, it was to provide a first-rate convertible currency, serve
    as a lender to the Department of the Treasury, and act as a fiscal
    agent for the federal government.  The federal government's oversight
    of the bank was limited.  The bank was required to furnish statements
    of condition to the Secretary of the Treasury, but the Secretary did
    not make the reports public, nor did he make them available to
    Congress unless a Member asked for specific information.

    The Bank of the United States was not rechartered in 1811.  However,
    problems financing the War of 1812 and a deterioration of paper
    currency in the United States led to renewed support for a federal
    bank.  Consequently, Congress chartered a second Bank of the United
    States in 1816.  The U.S.  government was again a major stockholder
    in this bank, owning one-fifth of the bank's $35 million in capital.
    The bank was required to furnish statements of condition to the
    Secretary of the Treasury, and Congress reserved the right to inspect
    the bank's records.

    This bank played a greater role in central banking than had the first
    Bank of the United States.  It acted as a lender-of-last-resort to
    commercial banks, while also acting as a commercial bank itself, and
    took actions to offset swings in economic activity.  Its notes
    circulated without a discount, and it had branches in many areas of
    the country.  State bankers and agrarian interests opposed the bank
    because they believed it unduly restricted the money supply.  For
    this reason, among others, the bank's charter was not renewed in
    1836.

    During the first half of the 19th century, particularly after the
    public recognized that the second Bank of the United States would not
    be rechartered, state banks increased in number.  At the same time,
    bank note problems and bank failures increased.  In response to the
    increasing bank note problems and failures, states gradually began to
    assume more oversight responsibilities.  Some states required
    statements of financial condition reports, either on a regular or
    as-requested basis.  Most states requiring reports were stockholders
    in the banks and therefore entitled to statements of condition.  Some
    states also issued regulations limiting the total face value of notes
    that a bank could issue to some multiple of the bank's capital.
    Other states' regulations required minimum denominations for notes.
    Some states that were bank stockholders also began to examine banks.
    Another development that contributed to more vigilant bank oversight
    was the development in the mid-1800s of state self-insurance systems
    to protect depositors.\3

    Stricter state government oversight helped to limit the liability of
    participants in the insurance system.

    By 1860, more than 1,500 state-chartered banks operated in the United
    States.  These banks had, on average, 6 denominations of notes; more
    than 9,000 different kinds of paper bills were therefore in
    circulation.  Some of these bills were traded at face value, some
    were traded at discounts, and some might have been worthless because
    they were counterfeit or had been issued by banks that had failed.
    Judging the authenticity of notes and determining their discount
    rates became complicated and expensive for businesses and households.
    It was decided that a uniform national currency was needed to solve
    these problems.

    --------------------
    \1 The first bank chartered in the United States was the Bank of
    Pennsylvania, formed in 1781 under a resolution by the Continental
    Congress.  It was replaced in 1784 by the Bank of North America,
    which was chartered by both the federal government and the state
    government of Pennsylvania.  In 1784, two other states chartered
    banks.  These were the only commercial banks in existence until 1790.
    However, by 1811, there were 88 state-chartered banks in the country.

    \2 It was a common procedure at the time for state legislatures to
    grant all corporate charters.  Eventually, states passed laws
    permitting incorporation of other companies without a special
    legislative act, although charters were still required for banks.  As
    the requests for bank charters increased, state legislatures became
    flooded with requests for charters and a movement toward "free"
    banking began.  "Free" banking meant that anyone could start a bank
    if they complied with certain procedural steps prescribed in statute.
    By the 1850s, about one-half of the states had free banking laws that
    provided for readily available charters but also required
    bond-secured note issues and other constraints.

    \3 The first of these insurance systems was established by the New
    York legislature in 1829, with five other states following.  These
    insurance systems generally required each bank in the insurance
    system to contribute annually into an insurance fund up to a certain
    maximum percentage of its capital.

          1863-1929:  CREATION OF THE
          OFFICE OF THE COMPTROLLER OF
          THE CURRENCY AND THE FEDERAL
          RESERVE SYSTEM
    ------------------------------------------------------- Appendix I:1.2

    The National Currency Act of 1863 and the National Bank Act of 1864,
    which recodified and strengthened the 1863 act, provided for a
    national currency and a national banking system.  These acts
    authorized national charters for commercial banks and allowed these
    banks to issue notes in standardized denominations that were
    collateralized by Treasury bonds.\4 To discourage state-chartered
    banks from issuing competing notes, the acts required notes issued by
    state-chartered banks to be taxed.  This effectively discouraged
    state banks from issuing notes and ultimately left only national bank
    notes in circulation.

    The National Bank Act also created OCC and gave it responsibility for
    chartering, regulating, supervising, and examining all national
    banks.  This was the beginning of federal government oversight of
    commercial banks--with the exception of the very limited oversight by
    the Department of the Treasury of the first and second Banks of the
    United States.  Since the National Bank Act was essentially a
    currency measure, the aim of bank supervision was, through
    examinations, to make sure that banks would be able to redeem their
    notes when presented.  Over time, the scope and quality of national
    bank oversight broadened and improved.

    Between 1864 and the early 1900s, financial panics and bank runs
    continued to occur, even though supervision increased.  The banking
    system was not always successful in meeting the demand for currency.
    Banks supported only a fraction of their demand deposits with cash
    reserves, and the banking system as a whole had no outside source of
    liquid reserves.  Disruptions in the monetary system and lending
    activities caused by financial panics eventually curtailed commercial
    activity.  Industry observers expressed the belief that such
    downturns were likely to continue until the public gained enough
    confidence to return funds to the banking system and banks were again
    willing to expand their lending.

    To help correct for these financial panics and curtailments in
    commercial activity, Congress established FRS in 1913.  Among other
    things, the primary function of FRS was to provide an outside source
    of reserves for the banking system.\5 Banks that were members of FRS
    could borrow from FRS reserves to obtain funds needed to meet a
    temporary cash drain or a rapid increase in the demand for credit.
    This helped correct for the fixed supply of currency and thereby
    decreased financial panics.  All national banks were required to
    become members of FRS, and state banks were given the option to join.

    The organization of FRS represented a compromise among diverse and,
    at times, conflicting forces.  The urban business community favored a
    highly centralized organization, independent of the federal
    government and dedicated to stabilizing the purchasing power of the
    dollar.  Rural agricultural interests favored a decentralized,
    government-owned system oriented toward providing credit on liberal
    terms.  The compromise achieved decentralization through the
    establishment of 12 regional or district banks.  These banks were
    owned by the member commercial banks, which also elected the majority
    of the directors.  A degree of centralization was achieved by the
    creation of a Board of Governors in Washington, D.C., whose members
    were appointed by the President and confirmed by the Senate and
    shared the responsibility for determining and executing FRS policies
    with the regional banks.  The Board was also given a significant
    degree of independence by providing its members with 14-year terms
    and FRS with independent sources of operating revenue.\6

    The Federal Reserve Act gave both OCC and FRS authority to regulate
    and supervise all national and state-chartered member banks.  The act
    provided that OCC was to examine each member bank at least twice a
    year.  But it also authorized the Federal Reserve Board to examine
    member banks at its discretion, and another provision gave further
    authority to the 12 Federal Reserve Banks to make special
    examinations of member banks.  Thus, OCC, the board, and the Federal
    Reserve Banks could each look into the affairs of member banks.  In
    addition, state authorities maintained their supervisory authority of
    state-chartered banks within their jurisdictions and examined those
    banks at their discretion.  The federal and state banking chartering
    and corresponding supervisory authorities are often referred to as
    the dual banking system.

    After the enactment of the Federal Reserve Act, conflicts arose
    between FRS and OCC over the Federal Reserve's right to the
    examination reports of national banks.  Conflicts also arose about
    the Federal Reserve's participation in examinations and OCC
    supervision of state member banks.  State member banks objected to
    the expense of OCC examinations and were also unwilling to subject
    themselves to OCC's more rigorous examination procedures.  FRS
    officials argued that OCC examination was deterring state-chartered
    banks from joining FRS, and, in June 1917, the Federal Reserve Act
    was amended to exempt state banks from OCC examination.  Since that
    time, OCC has supervised and examined national banks and provided
    their examination reports to FRS, and FRS has supervised state member
    banks.  At the time, state-chartered nonmember banks were supervised
    only by the states.

    During the 1920s, no major shifts in responsibility relative to bank
    supervision occurred.  Although many small, particularly rural, banks
    failed or merged with other banks, high business profits during that
    time spurred many banks to increase their commercial lending and
    securities activities.  Additionally, many large banks began
    expanding their branch networks to the extent allowable by law.

    --------------------
    \4 National bank notes were gradually replaced with Federal Reserve
    notes following the creation of FRS in 1913.  By 1935, the last
    national bank notes were withdrawn from circulation.

    \5 The Federal Reserve Act also gave FRS the authority to hold a
    portion of its member banks' deposits in reserve and to make
    open-market purchases and sales of government securities.

    \6 FRS generates income from a variety of sources, including interest
    on U.S.  government securities it has acquired through open-market
    operations; interest on loans to depository institutions; and fees
    received for services provided to depository institutions, such as
    check clearing, funds transfers, and automated clearinghouse
    operations.  FRS revenues in excess of expenses are turned over to
    the U.S.  Treasury.  For additional information see Federal Reserve
    System:  Current and Future Challenges Require Systemwide Attention
    (GAO/GGD-96-128, June 17, 1996).

          1930S:  FINANCIAL CRISIS AND
          REFORM
    ------------------------------------------------------- Appendix I:1.3

    During the 1930s, the most dramatic financial decline in U.S.
    history occurred.  In the 3 years after the stock market crash of
    1929, many banks failed.  In 1933, President Roosevelt ordered all
    banks closed from March 6 to March 13, and banks opened again only
    after state and federal regulators had examined their condition and
    issued a license to reopen.  Many banks never reopened.  By the end
    of 1933, over 4,000 banks were closed or absorbed by other banks.
    This left about 14,500 banks--less than half the number of banks that
    had existed in 1921, when the number of banks had peaked at about
    30,000.

    After this financial crisis, many reform measures were proposed to
    help the banking system avoid another such calamity.  The banking
    acts of 1933 and 1935 required many reforms.  One of the most
    important was the creation of federal deposit insurance and the
    administrator of the insurance, FDIC.\7 All FRS member banks, which
    included all national banks, were required to be insured, and
    nonmember banks were given the option to be insured, on approval of
    FDIC.  By the end of 1935, a few months after the permanent plan of
    federal deposit insurance was introduced, more than 90 percent of all
    U.S.  commercial banks were insured.  Once the insurance system was
    established and began to prove itself, bank panics and the loss of
    public confidence became much less of a threat to the banking system.

    These banking acts gave FDIC the authority to examine all insured
    banks.  The acts also required that insured banks ultimately become
    members of FRS, and membership implied that FRS would have oversight
    responsibility.  But legislative pressures of nonmember banks led to
    the removal of the membership requirement in 1939.  To avoid
    regulatory duplication, OCC, FRS, and FDIC agreed to a formal
    division of responsibility for the bank examination function that
    still exists today:  OCC would be responsible for national banks, FRS
    for state-member banks, and FDIC for state-nonmember banks.

    The stock market crash of 1929 was also the impetus for the 1932
    creation of a Federal Home Loan Bank System (FHLBS) as a regulatory
    and support structure for the savings and loan associations.  FHLBB
    was empowered to charter and regulate federal savings and loan
    associations.  Previously, all savings and loan associations were
    chartered by the states.  Savings and loan associations were
    initially organized in the mid-1800s by groups who wanted to buy
    their own homes but did not have enough savings to finance the
    purchase.  At that time, neither commercial banks nor life insurance
    companies lent money for residential mortgages.  The members of the
    groups pooled their savings and lent them back to a few members to
    finance their home purchases.  As loans were repaid, funds could be
    lent to other members of the group.

    The purposes of FHLBS were in some ways parallel to those of FRS.
    The primary objectives of FHLBS were to (1) provide secondary
    liquidity to mortgage lending institutions that had temporary cash
    flow problems, (2) transfer loanable funds from areas where there was
    excess saving and little demand for loans to areas where the demand
    for loans was higher than the funds available, and (3) attempt to
    stabilize the residential construction and financing industries.
    Federal deposit insurance for savings and loan associations was
    created in 1934 when the Federal Savings and Loan Insurance
    Corporation (FSLIC) was established under FHLBB.  Although FHLBB
    purposes were similar to those of FRS relative to money supply and
    similar to those of FDIC relative to deposit insurance, FHLBB
    structure included both functions; the bank regulatory structure had
    FDIC as a separate independent insurer.

    --------------------
    \7 The banking acts of 1933 and 1935 also (1) prohibited banks from
    paying interest on demand deposits; (2) provided for limitations on
    the interest banks could pay on time deposits; (3) prohibited
    investment banks from receiving deposits; (4) restricted banks to a
    limited range of investment banking activities, including a
    prohibition on bank underwriting of corporate securities; (5)
    required federal banking agencies to consider capital adequacy,
    earnings prospects, managerial character, and community needs before
    chartering a bank; (6) gave the Federal Reserve Board the authority
    to change the reserve requirements for member banks; and (7) allowed
    national banks to form branch offices to the same extent as state
    banks.

          THE LATE 1980S:  THE THRIFT
          CRISIS AND CHANGES IN THRIFT
          OVERSIGHT AND DEPOSIT
          INSURANCE
    ------------------------------------------------------- Appendix I:1.4

    From 1980 through 1990, 1,020 thrifts failed at a cost of about $100
    billion to the federal deposit insurance funds.\8 Despite a doubling
    of premiums and a special $10.8 billion recapitalization program,
    sharply mounting thrift losses in the 1980s bankrupted FSLIC.
    Observers have recognized many factors as contributing causes of the
    thrift failures, including increasing competition from nondepository
    institutions, such as money-market funds and mortgage banks, as well
    as periods of inflation, recession, and fluctuating interest rates.
    The high interest rates and increased competition for deposits
    created a mismatch between the interest revenues from the fixed-rate
    mortgages that constituted the bulk of the thrift industry's assets
    and the cost of borrowing funds in the marketplace.  Increased powers
    granted to thrifts in a period during which FHLBB supervision was
    scaled back has also been cited as a contributing cause of problems
    in the industry.

    The Financial Institution Reform, Recovery, and Enforcement Act of
    1989 (FIRREA)\9 was enacted primarily in response to the immediate
    problems surrounding FSLIC's bankruptcy and troubles in the thrift
    industry.  Among other actions mandated by FIRREA, a new regulator
    was created for the thrift industry--OTS, a bureau of the Department
    of the Treasury.  A new insurance fund, the Savings Association
    Insurance Fund (SAIF), was also established to replace the bankrupt
    FSLIC.  SAIF was to be administered by FDIC.

    --------------------
    \8 For more specific information on the costs of resolving the thrift
    crisis, see Financial Audit:  Resolution Trust Corporation's 1995 and
    1994 Financial Statements (July 2, 1996, GAO/AIMD-96-123).

    \9 FIRREA, P.L.  101-73, became effective on Aug.  9, 1989.

       MAJOR BANKING LEGISLATION
    --------------------------------------------------------- Appendix I:2

    Congress has passed many laws over the last 70 years that affect the
    banking industry.  These laws address many issues, including the
    types of activities banking institutions and their holding companies
    may engage in, how these institutions may expand their operations,
    how consumers are to be protected and served, and how agency
    oversight is to be exercised.  Some of these laws are described
    below.

          SEPARATION OF COMMERCIAL AND
          INVESTMENT BANKING
    ------------------------------------------------------- Appendix I:2.1

    A significant development in financial regulation during the 1930s
    was the separation of the commercial and investment banking
    industries.  After the stock market crash of 1929, Congress examined
    the mixing of the commercial and investment banking industries that
    occurred during the 1920s.  Congressional hearings revealed alleged
    conflicts of interest and fraud in some banking institutions'
    securities activities.  Changes legislated in the resulting Banking
    Act of 1933 forced the separation of the banking and securities
    businesses.  These changes, found in sections 16, 20, 21, and 32 of
    the Banking Act of 1933, are known as the Glass-Steagall Act.\10

    --------------------
    \10 Section 16 of the Glass-Steagall Act limits the securities
    activities of national banks essentially to brokerage services.
    Section 20 prohibits member banks from affiliating with organizations
    engaged principally in securities activities, although with FRS
    approval a bank holding company may engage in limited securities
    activities through a subsidiary--called a section 20 subsidiary.
    Section 21 makes it a crime for any person engaged in the securities
    business to engage at the same time in the business of receiving
    deposits, except that it permits state-chartered banks or trust
    companies, if authorized by state law, to engage in the securities
    business to the extent permitted national banks in section 16.
    Section 32 prohibits interlocking directorates between member banks
    and persons engaged primarily in the securities business, with waiver
    discretion granted to the Federal Reserve Board.

          BANK HOLDING COMPANIES
    ------------------------------------------------------- Appendix I:2.2

    The Bank Holding Company Act of 1956, as amended, restricts bank
    holding companies' activities to the management and control of banks
    consistent with the public interest.  Among other things, the act
    requires that bank holding companies register with the Board of
    Governors of FRS and gives FRS regulatory and supervisory authority
    over those corporations.  The act provides that bank holding
    companies may not own or control nonbanking companies or engage in
    nonbanking activities unless the Board determines that the activities
    are closely related to banking and expected to produce net benefits
    to the public if performed by a bank holding company.  As mentioned
    earlier, existing nonbank subsidiaries of bank holding companies
    include businesses engaged in consumer finance, trust services,
    leasing, mortgage, electronic data processing, securities
    underwriting and brokerage, management consulting services, and
    futures trading.

          INTERSTATE BRANCHING AND
          BANKING
    ------------------------------------------------------- Appendix I:2.3

    Until Congress enacted the Interstate Banking and Branching
    Efficiency Act of 1994 (Interstate Banking Act), the degree of inter-
    and intrastate branching and banking allowable was largely determined
    by state laws.\11 Under the McFadden Act of 1927 and the Banking Act
    of 1933, state laws determined how banks, including national banks,
    could branch within each state.  The McFadden Act also prohibited
    interstate branching for all banks except state-chartered, nonmember
    banks.  State laws governed the ability of these banks to branch
    interstate, but few states took advantage of this provision to permit
    interstate branching.  However, as of June 1, 1997, the Interstate
    Banking Act will allow interstate branching through consolidation of
    existing banks or branches.  The act gives states the ability to
    "opt-out," or choose not to allow branching, before June 1, 1997.
    They can also "opt-in," or authorize branching earlier.  De novo
    branching--branching other than by merger with an existing bank--must
    be specifically authorized by individual states.

    Until 1995, section 3(d) of the Bank Holding Company Act of 1956,
    commonly known as the Douglas Amendment, prohibited bank holding
    companies from acquiring a bank in another state unless the state the
    bank holding company wanted to enter specifically permitted such
    entry.  However, as of September 29, 1995, the Interstate Banking Act
    allows nationwide interstate banking through the bank holding
    company, so long as certain safety and soundness and community
    reinvestment conditions are met and specified concentration levels
    are not exceeded.

    --------------------
    \11 Branches are bank offices and are regulated as integral parts of
    the bank.  As a result, they do not have separate capital
    requirements, and transfers of assets and liabilities among branches
    and between branches and the headquarters bank are not restricted.

          ANTITRUST
    ------------------------------------------------------- Appendix I:2.4

    The primary purpose of antitrust laws is to prevent anticompetitive
    behavior and preserve and promote competition.  The Sherman Act and
    the Clayton Act are the linchpins of federal antitrust enforcement.
    In general, they--and several state antitrust statutes that mirror
    their provisions--prohibit mergers that would result in or tend to
    create a monopoly or may substantially lessen competition.  The
    Department of Justice is charged by these acts to enforce the
    antitrust statutes in all industries, including banking.

    Until the Bank Merger Act of 1960 was enacted, it was not clear
    whether federal bank regulators had the authority to deny bank
    mergers that were anticompetitive.  The Bank Merger Act clarified
    this uncertainty by mandating that bank regulators with
    responsibility over the surviving bank consider the competitive
    effects of bank mergers.  Congress further strengthened bank merger
    enforcement efforts by amending both the Bank Merger Act and the Bank
    Holding Company Act in 1966 and by passing the Change in Bank Control
    Act in 1978.  These amendments and the Change in Bank Control Act
    introduced the principles of the Sherman and Clayton antitrust acts
    into the banking laws.  As a result, federal bank regulators and the
    Department of Justice generally enforce similar antitrust statutes
    when addressing the competitive concerns arising from bank mergers.

          CONSUMER PROTECTION
    ------------------------------------------------------- Appendix I:2.5

    Since the late 1960s, over 20 laws have been passed to provide
    various consumer protections.  These laws were created to deal with
    all aspects of consumer banking services and transactions and can
    generally be grouped into three categories:  civil rights laws,
    disclosure laws, and safeguards against specific abuses.  The banking
    civil rights laws are aimed at eliminating the consideration of
    factors unrelated to creditworthiness when banks make judgments about
    whether to extend credit.  These civil rights laws are directed at
    both intentional acts of discrimination and practices that have the
    effect of discrimination.  With respect to banking activities, the
    term "civil rights laws" generally includes the Equal Credit
    Opportunity Act of 1974, the Fair Housing Act of 1968, and the Home
    Mortgage Disclosure Act of 1975.  Additionally, the Community
    Reinvestment Act of 1977, although not a civil rights law, is
    intended to encourage depository institutions to help meet the credit
    needs of their communities, including low- and moderate-income
    neighborhoods.

    The second category of consumer protection laws--disclosure laws--is
    generally intended to provide consumers with adequate information to
    make better financial choices.  These laws include, among others, the
    Truth in Lending Act of 1968, the Real Estate Settlement Procedures
    Act of 1974, and the Truth in Savings Act of 1991.

    Finally, the third category of consumer protection laws can generally
    be labeled as laws designed to provide specific safeguards against
    specific abuses, such as the inappropriate use of or access to credit
    information.  These laws include, among others, the Fair Credit
    Reporting Act of 1970 and the Right to Financial Privacy Act of 1978.

          INDUSTRY DEREGULATION
    ------------------------------------------------------- Appendix I:2.6

    Legislation enacted in the late 1970s and early 1980s was aimed at
    creating a more open competitive banking environment and a more equal
    treatment of different types of financial institutions.  For example,
    the Depository Institutions Deregulation and Monetary Control Act of
    1980 provided for, among other things, the phase-out of interest rate
    ceilings on time and savings deposits.  It also broadened the
    investment and lending powers of savings and loan associations and
    savings banks.  The Garn-St Germain Depository Institutions Act of
    1982, among other things, effectively eliminated the deposit interest
    rate ceilings, permitted savings and loan associations to hold
    assets--up to certain specified percentages--in certain types of
    commercial and consumer loans, and eliminated statutorily imposed
    loan-to-value ratios for savings and loan associations.

          BANKING PROBLEMS
    ------------------------------------------------------- Appendix I:2.7

    Much of the legislation in the late 1980s and 1990s has focused on
    dealing with troubled institutions and strengthening the regulatory
    framework.  This legislation included FIRREA, mentioned earlier,
    which provided $50 billion in funding for resolving failing thrifts
    and established more stringent capital and regulatory standards.  The
    Federal Deposit Insurance Corporation Improvement Act of 1991
    (FDICIA) is another law that was enacted to deal with banking
    problems of the 1980s.  FDICIA instituted changes intended to improve
    the supervision of banks; enhance safety and soundness; reduce the
    cost of resolving failing or failed banks; and provide additional
    resources to the Bank Insurance Fund, among other things.

    EXTERNAL AUDITS OF BANKING
    INSTITUTIONS
    ========================================================== Appendix II

    This appendix supplements the chapter 2 discussion of U.S.
    examiners' cooperation with external auditors and the use of external
    auditors' work.  In the United States, examiners' cooperation with
    external auditors and use of the work and expertise of external
    auditors has generally been more limited than in the countries we
    studied, and any cooperation or reliance that takes place has varied
    significantly across agencies as well as among individual examiners
    and auditors.  Improving cooperation between external auditors and
    examiners can be a challenge, primarily because of the different
    roles auditors and examiners play.  Yet, some of the regulatory
    agencies have recently initiated programs to improve cooperation and
    identify possible areas where examiners could use the work of
    external auditors.  Such programs have the potential to improve
    examinations, enhance the efficiency of examinations, and reduce
    regulatory burden on banking institutions.

       REQUIREMENTS FOR EXTERNAL
       AUDITS
    -------------------------------------------------------- Appendix II:1

    As we mentioned in chapter 2, banks and thrifts in the United States
    are either required or strongly encouraged to have annual external
    audits of their financial statements.  Large banks--with total assets
    in excess of $500 million--are required to have annual independent
    audits of their financial condition.  Smaller banks are generally
    required to have such external audits for the first 3 years after
    obtaining FDIC insurance.  Others are strongly encouraged to have
    such annual external audits.  OTS also requires large thrifts to have
    annual external financial audits, encourages all thrifts to have such
    annual audits, and has the explicit authority to require financial
    audits of any thrifts it has determined present safety and soundness
    concerns.  Some state banking regulators also require such external
    audits for institutions chartered in their states.  Additionally, the
    Federal Reserve requires bank holding companies with total
    consolidated assets of $150 million or more to have annual,
    independent financial audits; and OTS requires annual audits of
    holding companies whose subsidiary savings associations have
    aggregate assets of $500 million or more.\1 SEC also has a financial
    audit requirement for all public companies, including bank holding
    companies that are SEC-registrants and all banking institutions that
    are subject to SEC reporting requirements.  In practice, regulators
    told us that most banking institutions have annual independent
    financial audits.

    The scope of banking institutions' external audit requirements varies
    by the size of the institution and the type of activities it engages
    in.  Small institutions are encouraged to have an external audit that
    is designed to test and evaluate the high-risk areas of an
    institution's business.  Such external audits are to be performed by
    an independent auditor who may or may not be a certified public
    accountant (CPA).\2

    For large banking institutions, the requirements for the scope of
    audits are more specific.  Large institutions--those with total
    assets in excess of $500 million--are required, among other things,
    to annually engage an independent public accountant to

      -- audit and report on the institution's annual financial
         statements in accordance with generally accepted auditing
         standards;

      -- examine, attest to, and report separately on the assertions of
         management concerning the institution's internal control
         structure and the procedures for financial reporting; and

      -- determine compliance by the institution with designated laws and
         regulations.\3

    Unlike other countries we studied, external auditors in the United
    States are not required to immediately report problems they identify
    to the banking agencies.  However, external auditors do have the
    responsibility to withdraw from an audit engagement if identified
    problems are not resolved or if bank management refuses to accept
    their audit report.  Auditors must also notify the banking agencies
    if they withdraw from an engagement, which serves as a flag to the
    supervisors to look into the reasons for the withdrawal.
    Additionally, a recent amendment to the Securities Exchange Act
    requires independent public accountants to report to SEC certain
    illegal acts they detect if the audited firm does not take
    appropriate remedial action and inform SEC of the auditors' report.

    --------------------
    \1 OTS selected the $500 million asset threshold to achieve
    comparability with the approach used by FDIC for banks.  Setting a
    lower-asset threshold, as the Federal Reserve has, in effect requires
    certain insured subsidiary institutions to obtain an audit that
    otherwise would not have been required by FDIC.

    \2 Independence has traditionally been defined as the ability to act
    with integrity and objectivity.  Banking regulators may test the
    independence of the CPA through reviews of loan listings, contracts,
    stockholder listings, or other measures.

    \3 The regulations implementing FDICIA require external auditors to
    follow a detailed set of procedures to test compliance with safety
    and soundness regulations related to specific areas (i.e., loans to
    insiders and dividend restrictions).

       U.S.  EXAMINERS' PAST
       COOPERATION WITH AND USE OF
       EXTERNAL AUDITORS HAS BEEN
       LIMITED
    -------------------------------------------------------- Appendix II:2

    U.S.  examiners' cooperation with external auditors and use of the
    work of external auditors has generally been more limited than in
    most of the countries we studied.  Banking supervisors in the United
    States are required by examination guidelines to use audit
    reports--and sometimes audit workpapers--to help plan examinations
    and identify potential safety and soundness problems.  The banking
    regulators generally require that any institution that has an
    external audit, regardless of the scope of the audit, provide them
    with copies of any audit reports or management letters.  Institutions
    are required to submit their audit reports, including management
    letters and certain other correspondence, to the examiners within 15
    days of receipt of the report.  When these audit reports are
    provided, examination guidelines require staff at each agency to
    review them to determine whether there are any issues that need to be
    followed up on immediately or during the next examination.\4
    Generally, audit reports are to be used to assist in the financial
    analysis of institutions, to identify areas of supervisory concern or
    accounting complexity, and to detect trends and information not
    otherwise revealed through regulators' off-site monitoring.

    Examiners also are to review auditor's reports, management letters,
    and other information, including correspondence and memorandums
    between the bank and its auditor for areas of particular concern when
    planning examinations.  As a result of these preexamination reviews,
    regulatory officials said examiners may decide to place greater
    emphasis during the examination on specific areas--such as reviewing
    more thoroughly certain aspects of an institution's internal control
    system or ensuring problems identified by the auditors have been
    addressed.  Some regulatory officials also said examiners may be able
    to use external auditors' work to eliminate certain examination
    procedures from their examinations--such as verifications or
    confirmations of the existence and valuation of institution assets
    like loans, derivative transactions, and accounts receivable.
    External auditors perform these verifications or confirmations
    routinely as a part of their financial statement audits; but such
    verifications have rarely been done by examiners because they are
    costly and time consuming.

    Beyond these examination procedures, regulatory officials said they
    generally do not use the work of external auditors to reduce the
    scope of their examinations, although the extent to which officials
    at each agency said they would consider altering the scope of their
    examinations varied.  Officials at FDIC, for example, told us that
    examiners do not have the authority to rely exclusively on the work
    of external auditors.  However, officials at OTS, which has had a
    longstanding history of working with external auditors, said there
    are a broad range of areas where auditors' work can be used to adjust
    the scope of their examinations.

    In July 1992, the federal bank and thrift oversight agencies issued a
    joint policy statement that promotes coordination and cooperation
    between examiners and external auditors.  In the statement, federal
    bank and thrift regulators encourage auditors to attend examination
    exit conferences or other meetings between examiners and bank
    management at which examination findings relevant to the scope of the
    audit are discussed.  The statement also says that auditors may
    request meetings with the federal bank and thrift regulators.
    Furthermore, this statement provided guidelines concerning
    information that institutions should give to their external auditors,
    such as condition and examination reports, correspondence received
    from the regulators, any supervisory "memorandum of understanding" or
    other written agreement, or any other enforcement action.

    --------------------
    \4 Specifically, examiners look for (1) information pertaining to the
    scope of the audit; (2) the type of opinion issued by the CPA on the
    financial statement audit; (3) findings, recommendations, and
    conclusions stated in the report, paying particular attention to any
    unusual transactions or noted weaknesses or issues in the report or
    footnotes; and (4) compliance with required reporting standards.

       GREATER COOPERATION AND
       RELIANCE COULD IMPROVE
       EXAMINATIONS, ENHANCE
       EFFICIENCY, AND REDUCE
       REGULATORY BURDEN
    -------------------------------------------------------- Appendix II:3

    Improving cooperation between external auditors and examiners and
    identifying areas where examiners could use the work of external
    auditors has the potential to improve examinations, enhance the
    efficiency of examinations, and reduce regulatory burden on banking
    institutions, according to many of the regulatory officials we
    interviewed.  For example, external auditors' work may help examiners
    identify those high-risk areas in a banking institution in which
    examiners should focus their review and may consequently improve the
    quality of examinations.  Increasing use of external auditors' work
    may also help examiners determine areas in which sufficient work was
    performed by the external auditor, thereby allowing the examiners to
    limit their work in the area.  Examiners could then focus their
    efforts on other areas or other institutions, thereby improving the
    efficiency of examinations.  Banking institutions could also benefit
    from such cooperation if it resulted in a more narrow scope of
    examination or if information requests by auditors or examiners were
    reduced by coordinating requests and sharing information.

       NUMEROUS BARRIERS TO
       COOPERATION AND RELIANCE EXIST
    -------------------------------------------------------- Appendix II:4

    Regulatory officials said that the extent of coordination with
    external auditors varies significantly, has been sporadic, and past
    efforts to achieve improved coordination have often achieved
    lackluster results, even after the issuance of the 1992 guidelines.
    In most cases, the degree of cooperation seemed to depend on the
    attitude of the banking clients toward auditor/examiner coordination
    and on the willingness of examiners and auditors to work together.
    For example, some auditors are not interested in attending
    examination exit conferences, according to regulatory officials,
    while auditors said that examiners do not always inform them of such
    conferences.  Regulatory officials also said that they get few
    requests by auditors to meet with examiners or to review examiner
    workpapers, reflecting a statement by one audit industry executive
    that examiner workpapers would be of little use to auditors because
    of the differing missions of auditors and examiners.

    Improving cooperation between external auditors and examiners can be
    a challenge, primarily because of these differing missions.  External
    auditors are generally engaged by a banking institution to attest to
    the fairness of the presentation of the institutions' financial
    statements and, in the case of large institutions, to managements'
    assertions about the institutions' financial reporting controls and
    compliance with laws and regulations.  Banking institutions'
    examiners, however, conduct periodic on-site examinations to address
    broader regulatory and supervisory issues, such as the safety and
    soundness of institutions operations and activities as well as
    compliance with all banking laws and regulations, not just insiders
    lending and dividend requirements.  Although external auditors have
    responsibility for assessing an institution as a going concern, they
    are primarily concerned with the accuracy of the information provided
    to the institution's shareholders about their investments at a
    particular point in time.  Examiners, however, have a responsibility
    to protect depositors, taxpayers, and the financial system, and are
    consequently concerned about the future viability of the institution.

    In performing their functions, external auditors and examiners may
    review much of the same information.  However, both audit and exam
    officials told us they are expected to apply different standards in
    preparing their separate reports.  Officials said that different
    methodologies, assumptions, and the passage of time between audits
    and regulatory examinations can lead to different results and
    different assessments of the financial health of a banking
    institution.  For example, an auditor may issue an unqualified
    opinion on an institution after determining that its transactions and
    balances are reported in accordance with generally accepted
    accounting principles (GAAP).  This does not necessarily mean,
    however, that the transactions reflect sound business judgment, that
    the associated risks were managed in a safe or sound manner, or that
    the asset balances could be recovered upon disposition or
    liquidation.  These are all issues that examiners must consider in
    safety and soundness examinations.  Different results between
    external audits and examinations might also occur if the audits and
    examinations are based on different periods.  All banks must operate
    on a calendar year basis (i.e., having fiscal years ending December
    31).  Audits are performed in close proximity to the end of an
    institution's fiscal year, whereas examinations are scheduled
    year-round and based on the financial condition as of the end of a
    specific month or quarter.\5 Examiners told us that the differences
    in "as-of" dates makes it difficult for them to use the work of
    external auditors, because the auditors' work may not be in close
    proximity to the period they examined and the institutions'
    activities and conditions may have changed significantly since the
    audit.

    Such different assessments between examiners and auditors have often
    led them to be skeptical about the purpose of each others' work and
    the assumptions and methodologies used.  Regulatory and accounting
    industry officials both told us that this skepticism often resulted
    from a lack of understanding and education about each others' work.
    Officials also said this lack of understanding, along with problems
    in the banking industry and regulators' professional liability
    lawsuits against accounting firms, have contributed to the failure of
    past efforts to improve cooperation between auditors and examiners.
    They said these various circumstances remain a significant barrier
    today.

    --------------------
    \5 Thrifts are not required to have calendar year-ends for their
    fiscal years; therefore, auditors and examiners can more easily
    coordinate their respective assessments to a period in closer
    proximity to one another.

       RECENT INITIATIVES MAY IDENTIFY
       SPECIFIC AREAS OF OVERLAP AND
       HELP IMPROVE COOPERATION
       BETWEEN EXAMINERS AND EXTERNAL
       AUDITORS
    -------------------------------------------------------- Appendix II:5

    As we discussed in chapter 2, some of the regulatory agencies have
    recently initiated programs to improve cooperation between external
    auditors and examiners and potentially to identify areas where
    examiners could better use the work of external auditors.  Although,
    as we discussed above, past efforts to promote cooperation between
    examiners and external auditors were often unsuccessful, both
    regulatory officials and officials from the accounting industry said
    they were more optimistic about recent initiatives to promote
    cooperation.  Regulatory officials said current initiatives are more
    likely to be successful because the condition of the industry is
    better than it was when past efforts were made.  Also, they said the
    current focus on reducing regulatory burden will help new efforts.
    Furthermore, since the enactment of FDICIA, regulators have had
    additional information and leverage--including the auditors'
    attestations and authority to review external auditors
    workpapers--that could help these efforts be more successful.

    DESCRIPTION OF THREE RECENT BANK
    OVERSIGHT REFORM PROPOSALS
    ========================================================= Appendix III

    Three plans to reform the federal system of oversight of depository
    institutions that have been proposed in the past 3 years include a
    proposal put forward by the U.S.  Department of Treasury (the
    administration's proposal),\1 a proposal of Representative James A.
    Leach (the Leach proposal),\2 and an informal proposal of a former
    member of the Federal Reserve Board (the LaWare proposal).\3 Each
    proposal sought to reduce the number of agencies with rulemaking and
    supervisory authority over banking organizations and reduce possible
    overlap and duplication in regulation and supervision.  None would
    change the current system of regulating credit unions.\4

    --------------------
    \1 This proposal was outlined in the statement of the Honorable Lloyd
    Bentsen, Secretary of the Treasury, before the Committee on Banking,
    Housing, and Urban Affairs of the U.S.  Senate (Mar.  1, 1994).

    \2 H.R.  1227:  The Bank Regulatory Consolidation and Reform Act of
    1993 (Mar.  4, 1993).

    \3 This proposal was outlined in the statement of Alan Greenspan,
    Chairman, Board of Governors of the Federal Reserve System before the
    Committee on Banking, Housing, and Urban Affairs of the U.S.  Senate
    (Mar.  2, 1994).

    \4 The Leach proposal leaves the regulation of credit unions with the
    National Credit Union Administration but calls for regulations
    comparable to those imposed on banks and thrifts.

       THE ADMINISTRATION'S PROPOSAL
    ------------------------------------------------------- Appendix III:1

    Of the three proposals, the administration's would result in the most
    comprehensive change.  It would realign the federal banking agencies
    by core policy functions--that is, the bank supervision and
    regulation function, central bank function, and deposit insurance
    function.  Generally, this proposal would combine most regulatory and
    supervisory duties of OCC, FRS, FDIC, and OTS into a new independent
    agency, the Federal Banking Commission (FBC).  Under this proposal,
    FDIC would continue to be responsible for administering federal
    deposit insurance, and FRS would retain central bank responsibilities
    for monetary policy, liquidity lending, and the payments system.
    Although FDIC and FRS would lose most bank supervisory rulemaking
    powers, each would be allowed access to all information of FBC as
    well as limited secondary or backup enforcement authority.\5 In
    addition, FRS would be authorized to examine a cross-section of large
    and small banking organizations jointly with FBC.  FDIC would
    continue to oversee activities of state banks and thrifts that could
    pose risks to the insurance funds and maintain responsibility for
    resolving failures of banking organizations at the least cost to
    those funds.

    The governing board of the commission would consist of

      -- a chairperson appointed by the President and confirmed by the
         Senate, serving a 4-year term (both as a member and as
         chairperson) expiring on the last day of March following a
         Presidential election;

      -- The Secretary of the Treasury (or the Secretary's designee);

      -- a member of the Federal Reserve Board, designated by the Federal
         Reserve; and

      -- two members appointed by the President and confirmed by the
         Senate, serving staggered 5-year terms.

                                  Table III.1

                    Basic Structure in the Proposed Plan of
                               the Administration

    Agency    Responsibilities
    --------  ------------------------------------------------------------
    FBC       Supervises, regulates, and examines all federally insured
              banks and thrifts and their holding companies, U.S. banks'
              foreign operations, and foreign banks' U.S. operations.

    FRS       Examines a cross-section of large and small banking
              organizations jointly with FBC.

    FDIC      Oversees activities of troubled state banks and thrifts; has
              backup enforcement authority over all insured institutions.
    ----------------------------------------------------------------------
    Source:  GAO analysis.

    --------------------
    \5 The Federal Reserve would receive backup enforcement authority to
    correct safety and soundness problems at the nation's 20 largest
    banking organizations, and FDIC would also retain backup enforcement
    authority over all insured institutions.

       THE LEACH PROPOSAL
    ------------------------------------------------------- Appendix III:2

    The Leach proposal would consolidate OCC and OTS in an independent
    Federal Bank Agency (FBA) and align responsibilities among the new
    and the other existing agencies.  This would reduce the multiplicity
    of regulators to which a single banking organization could be
    subject, while avoiding the concentration of regulatory power of a
    single federal agency.  The role of FFIEC would be strengthened
    whereby it would see to the uniformity of examination, regulation,
    and supervision among the three agencies.

    According to an analysis performed by the Congressional Research
    Service, the Leach proposal would put FRS in charge of more than 40
    percent of banking organization assets, with the rest divided between
    the FBA and the reorganized FDIC.\6 Thus, each of the three agencies
    would be important regulators.

    The proposed realignment of responsibilities is shown in table III.2.

                                  Table III.2

                       Alignment of Responsibilities for
                     Federal Agencies Overseeing Banks and
                        Thrifts Under the Leach Proposal

    Agency    Responsibilities
    --------  ------------------------------------------------------------
    FBA       Federally chartered banks and savings institutions, unless
              otherwise regulated.

              Bank holding companies and affiliates whose lead bank is
              federally chartered, except for those with assets over $25
              billion.\a

              Savings and loan holding companies and affiliates whose
              principal depository institution subsidiary is a federal
              savings association, regardless of asset size.

    FDIC      State banks and their holding companies except for those
              with assets over $25 billion and state-chartered savings
              institutions and their holding companies, regardless of
              asset size.

    FRS       Bank holding companies with assets over $25 billion.\a
    ----------------------------------------------------------------------
    \a International banking regulation is split among the three
    agencies; see text of H.R.  1277 for details.

    Source:  Congressional Research Service, March 1994.

    The FBA would be led by an Administrator assisted by two deputy
    administrators, one of whom would be specific for savings
    institutions.  The Administrator would be appointed for a 5-year
    term.  All three administrators would be appointed by the President
    with the advice and consent of the Senate.

    --------------------
    \6 CRS Report for Congress:  Bank Regulatory Agency Consolidation
    Proposals:  A Structural Analysis (Mar.  18, 1994).

       THE LAWARE PROPOSAL
    ------------------------------------------------------- Appendix III:3

    The LaWare proposal was outlined in testimony to the Congress but
    never presented as a formal legislative proposal, according to
    Federal Reserve Board officials.  It called for a division of
    responsibilities defined by charter class, and, as in the other
    plans, a merging of OCC and OTS responsibilities.  As outlined in
    table III.3, the two primary agencies under the proposal are an
    independent Federal Banking Commission (FBC)--whose structure the
    LaWare proposal did not address--and FRS.  FRS would supervise all
    independent state banks and all depository institutions in any
    holding company whose lead institution was a state-chartered bank.
    FBC would supervise all independent national banks and thrifts and
    all depository institutions in any banking organization whose lead
    institution is a national bank or thrift.  As with domestic bank
    holding companies, all U.S.  banks, branches and agencies of foreign
    banks would be supervised and regulated according to the charter
    class of the largest depository institution.  FDIC would not examine
    financially healthy institutions, but would be authorized to join in
    examination of problem banking institutions.  Based on estimates of
    assets of commercial banks and thrifts performed by the Congressional
    Research Service, the LaWare proposal would have nominally put FBC in
    charge of somewhat more commercial bank assets than FRS.

                                  Table III.3

                       Alignment of Responsibilities for
                    Oversight of Banks and Thrifts Under the
                                LaWare Proposal

    Agency    Supervisory Responsibilities\a
    --------  ------------------------------------------------------------
    FBC       All independent national banks and thrifts and all
              depository institutions in any banking organization whose
              lead depository institution is a national bank or thrift.

    FRS       All independent state banks and all depository institutions
              in any banking organization whose lead depository
              institution is a state-chartered bank.
    ----------------------------------------------------------------------
    \a The supervisor would examine, take enforcement actions, establish
    operational rules, and act on applications for all the depository
    institutions under its jurisdiction, regardless of the banks' charter
    class.

    Source:  GAO analysis.

    The LaWare proposal included two options for the regulation of bank
    holding companies.  The first option would retain FRS jurisdiction
    over all holding companies and their nonbank affiliates.\7 The second
    option would divide the jurisdiction of virtually all holding
    companies between FRS and FBC on the basis of charter class of the
    lead bank.  However, for systemic risk reasons, jurisdiction over
    those holding companies and nonbank affiliates of banking
    organizations that meet certain criteria--such as size and payments
    and foreign activity--would be retained by FRS, even if the lead bank
    of the organization had a national charter.\8

    A variant of the second option that the proposal discussed was to
    retain FRS authority over permissible activities of all holding
    companies, with all other authority being exercised by the regulator
    of the lead bank, except for the 25 or 30 large organizations with
    lead national banks.\9

    The Congressional Research Service estimated regulatory power in
    terms of assets of institutions supervised under each of these
    options.  Under the second holding company option, the balance of
    regulatory power could well go to FRS, although less so than under
    the first option, according to the estimates.

    Under both of the holding company options, FRS would retain
    supervision and regulation of (1) all foreign banks that operate a
    bank, branch, agency, or commercial lending affiliate in the United
    States and (2) all U.S.  nonbanking operations of these foreign
    banks.  As with domestic bank holding companies, all U.S.  banks,
    branches and agencies of foreign banks would be supervised and
    regulated according to the charter of the largest depository
    operations.

    --------------------
    \7 The first option would result in two regulators for about 1,650
    banking organizations, because the lead bank has a national charter,
    of which 92 percent would be subject to very light FRS supervision
    because the latter entities have no nonbank activities.

    \8 Under this approach, only about 25 to 30 organizations with lead
    national banks would have two supervisors, depending on the criteria
    established.  All other organizations would have only one
    supervisor/regulator for the entire organization.

    \9 According to the proposal, this variant of the second option would
    retain some of the benefits of the first option.

       THE NUMBER OF FEDERAL AGENCIES
       PROPOSED DIFFERED
    ------------------------------------------------------- Appendix III:4

    Although each of the proposals would have reduced the number of
    federal agencies authorized to perform various oversight functions,
    the extent of the proposed reductions differed.  The variances in the
    number of proposed agencies reflect differences of view regarding,
    among other things, the number of federal agencies best suited to
    meet society's goals for a financial system.

                                  Table III.4

                    Comparison of the Number of Federal Bank
                     Agencies in the Three Reform Proposals

                                    Number of agencies
                                      with examination  Number of agencies
                                       and enforcement     with rulemaking
                                             authority           authority
    ------------------------------  ------------------  ------------------
    Current system                                   4                   4
    Three reform proposals
    Administration's proposal                        3                   1
    Leach proposal                                   3                   3
    LaWare proposal                                  2                   2
    ----------------------------------------------------------------------
    Source:  GAO analysis.

    Federal Reserve Board officials have opposed the creation of a single
    federal bank agency as adverse to three principles that the Federal
    Reserve Board believes to be basic to any bank regulatory structure:

      -- To avoid the risks associated with the undue concentration of
         regulatory power, there should be at least two federal
         regulators, one of which should have macroeconomic
         responsibilities, because a single regulator without such
         responsibilities would have a tendency to inhibit prudent
         risk-taking by banks, thus limiting economic growth.

      -- The dual banking system--in which banks can be chartered by
         either the states or the federal government--should be preserved
         because choice of both charter and federal regulator facilitates
         the diversity of approach that has made the U.S.  banking system
         the most innovative in the world.

      -- As the nation's central bank, FRS should continue to have
         direct, hands-on involvement in supervision and regulation of a
         broad cross-section of banking organizations in order to carry
         out its core central bank responsibilities to insure the
         stability of the financial system, manage the payment system,
         act as a lender of last resort, and formulate and implement a
         sound monetary policy.

    The Secretary of the Treasury, however, has said that

      -- regulatory power is not restrained by creating additional
         agencies to perform duplicate functions; rather, an agency acts
         responsibly because it is subject to congressional oversight,
         the courts, the press, and market pressures--particularly from
         the nonbank financial services sector and foreign bank
         regulators.

      -- nothing in the administration's proposal would prevent an
         institution from seeking a state, rather than a Federal,
         charter.  Moreover, the Secretary of the Treasury has said,
         arguments that preservation of the dual banking system requires
         a choice between two or more federal regulators are really
         arguments for retaining the ability for institutions to
         arbitrage federal supervision.  With regard to innovation, the
         Secretary of the Treasury said competition among bank agencies
         is not needed to promote financial product innovation, which is
         initiated in the marketplace--particularly by nonbank financial
         service providers, foreign banks, and state banking
         industries--and not by bank regulatory agencies.

      -- under the administration's proposal, FRS would have ample bank
         supervisory powers to perform its central bank functions, full
         authority to manage the payments system and operate the discount
         window, and abundant bank supervisory powers to guard against
         systemic risk.

          THE PROPOSALS DIFFERED IN
          CHECKS AND BALANCES
    ----------------------------------------------------- Appendix III:4.1

    The proposals differed in their provision of checks and balances to
    ensure that banks are treated fairly.  FRS officials recognized risks
    associated with "undue concentration of regulatory power," such as an
    increased likelihood of sudden changes in policy that would add
    uncertainties and instability to the banking system or actions that
    might inhibit prudent risk-taking by banks, thus limiting economic
    growth.  Both the LaWare and the Leach proposals provide for multiple
    federal oversight agencies to avoid concentration of regulatory
    power.  Because the administration's proposal would put banking
    regulation in the hands of one agency, the administration's proposal
    would create the greatest concentration of regulatory power, compared
    with the other proposals.  However, the Secretary of the Treasury has
    said that congressional oversight, the courts, the press, and market
    pressures serve to ensure that agencies act responsibly.  Other
    mechanisms that would help ensure responsible actions by the proposed
    single regulator, according to the Secretary of the Treasury, are the
    composition of the FBC Board--with five members, including a
    representative of FRS--and a requirement that there be a political
    mix on the FBC Board.\10

    --------------------
    \10 The three appointed members of the commission would include the
    chairperson (specifically appointed and confirmed as such), and two
    other appointed members.  According to testimony presented by the
    Secretary of the Treasury on March 1, 1994, "One of these two members
    must be from another political party."

          THE PROPOSALS DIFFERED IN
          THE MEANS USED TO BALANCE
          INDEPENDENCE AND
          ACCOUNTABILITY
    ----------------------------------------------------- Appendix III:4.2

    The three proposals differed in mechanisms related to the goal of
    balancing the need for independence in regulatory action with
    accountability to the electorate.  The administration's proposal
    would establish FBC as an independent agency whose board would
    include a representative of the Treasury Department.  According to
    the Secretary of the Treasury, the 5-member board would be of a
    manageable size that would allow individual board members to be held
    accountable for their decisions.  In the Leach proposal, the
    executive branch would continue to have a major regulatory agency
    housed in one of its departments, but FBA would have to coordinate
    with the independent FRS and FDIC.  The LaWare proposal--which, as
    mentioned earlier, was outlined in congressional testimony but never
    presented as a formal legislative proposal--did not discuss details
    about the independence of the new Federal Banking Commission or the
    composition or manner of determination of its leadership.  However,
    FRS is independent in its policymaking, and the members of the Board
    of Governors are appointed by the President and confirmed by the
    Senate.

          THE PROPOSALS DIFFERED IN
          THE SUPERVISORY/
          RULEMAKING ROLE GIVEN
          TO THE CENTRAL BANK
    ----------------------------------------------------- Appendix III:4.3

    The proposals also differed in the roles that they assigned to FRS.
    Two of the three proposals--the Leach proposal and the LaWare
    proposal--gave FRS a primary supervisory and rulemaking role for the
    institutions under FRS jurisdiction.  The administration's proposal
    provided FRS with representation on the FBC board and opportunities
    to participate in various bank examinations and backup enforcement
    authority.

    The Chairman of the Federal Reserve Board has said that FRS must
    continue to have hands-on involvement in supervision and regulation
    to effectively carry out its macroeconomic responsibilities.
    Removing FRS from supervision and regulation would greatly reduce its
    ability to forestall financial crises and to manage a crisis once it
    occurs, according to the Chairman.  FRS has also said that a central
    bank brings a unique and invaluable perspective to regulation and it
    is far better situated than a narrowly focused regulatory agency to
    see how bank regulation and supervision relate to the strength of the
    payment system, the stability of financial markets, and the health of
    the economy.

    The Secretary of the Treasury has said that the contention that sound
    monetary policy rests on FRS's continued direct supervision of banks
    is not credible because FRS already relies on other federal banking
    agencies for much of the information it obtains.  The Secretary also
    said that potential conflicts exist between monetary policy and
    supervisory functions of FRS.  According to the Secretary of the
    Treasury, the administration's plan would satisfy the needs
    articulated by FRS for a significant supervisory role and, at the
    same time, dramatically reduce the duplication and eliminate the
    inconsistency inherent in the current supervisory system.

          THE PROPOSALS DIFFERED IN
          THE SUPERVISORY ROLE OF THE
          DEPOSIT INSURER
    ----------------------------------------------------- Appendix III:4.4

    Under two of the three proposals (the administration's proposal and
    the LaWare proposal) FDIC's supervisory role would be substantially
    reduced.  Under the administration's proposal, FDIC would be relieved
    of its role as a primary supervisor.  However, FDIC would be able to
    conduct its own special examinations of insured institutions where
    necessary to protect the deposit insurance fund and take "backup"
    enforcement action to stop unsafe practices if FBC does not do so.
    It also would retain its responsibility as deposit insurer for
    overseeing activities of state banks and thrifts that could pose
    risks to the insurance funds and resolving bank and thrift failures
    at the least cost to the insurance funds.  Under the Leach proposal,
    FDIC was one of three supervisory and regulatory agencies.  Under the
    LaWare proposal, FDIC would be removed from examining financially
    healthy institutions but authorized to join in examination of problem
    institutions.

    (See figure in printed edition.)Appendix IV
    COMMENTS FROM THE BOARD OF
    GOVERNORS OF THE FEDERAL RESERVE
    SYSTEM
    ========================================================= Appendix III

    (See figure in printed edition.)

    (See figure in printed edition.)

    See comment 1.

    (See figure in printed edition.)

    The following are GAO's comments on the Board of Governors of the
    Federal Reserve System's letter dated August 21, 1996.

    GAO COMMENTS

    1.  FRS described steps that the oversight agencies have taken to
    promote consistency and strengthen coordination among the agencies.
    We have added additional information on recent agency efforts to make
    uniform regulations and guidelines to our discussion of interagency
    coordination activities on pages 49 and 51 of our report.

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

    (See figure in printed edition.)

    See comment 1.

    (See figure in printed edition.)

    See comment 2.

    See comment 3.

    (See figure in printed edition.)

    See comment 4.

    (See figure in printed edition.)

    The following are GAO's comments on the Federal Deposit Insurance
    Corporation's letter dated September 4, 1996.

       GAO COMMENTS
    ------------------------------------------------------- Appendix III:5

    1.  We agree with FDIC's comments that coordination occurs among the
    oversight agencies outside of the scope of FFIEC, and we described
    such coordination mechanisms on page 51 of our report.  Nevertheless,
    as noted in our discussion of the agencies' coordination, there
    remains the opportunity for some inconsistency among regulators in
    examinations as well as in interpreting, implementing, and enforcing
    regulations, which could potentially be reduced with an expanded role
    for FFIEC.

    2.  We previously described FDIC's efforts to improve communications
    and coordination between examiners and external auditors in appendix
    II.  We also discussed examiners use of audit reports on page 97.
    Finally, we discussed FDIC's current requirement that examiners
    review selected workpapers on page 44 of our report.

    3.  We have incorporated the information provided by FDIC on planned
    efforts by FDIC to further improve cooperation with external auditors
    into our discussion of FDIC's initiatives on page 44 of our report.

    4.  We have included a summary of the information on off-site
    monitoring provided by FDIC on page 41 of our report.

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

    (See figure in printed edition.)

    See comment 1.

    (See figure in printed edition.)

    See comment 2.

    The following are GAO's comments on the Office of the Comptroller of
    the Currency's letter dated September 17, 1996.

       GAO COMMENTS
    ------------------------------------------------------- Appendix III:6

    1.  We agree with OCC that supervisory methods contribute to the
    overall effectiveness of oversight structures and that the approach
    to supervision is significantly different in each of the countries we
    studied.  Although Canada, France, Japan, and the U.K.  all conduct
    on-site examinations to some degree, the scope of their examinations
    differs from that in the United States.  Generally, the examinations
    done in the United States are more transaction oriented.  However, in
    Germany, the U.K., and to a lesser degree in Canada, the work of
    external auditors provides a significant amount of supervisory
    information that is generally received through examinations in the
    United States.  Additional detail on supervisory practices in the
    five countries we studied can be found in the individual country
    reports.\1

    2.  OCC observed that our report is limited to the oversight
    structure as it affects "banks" in the United States, which we have
    defined on pages 20 to 21 to include commercial banks and thrifts.
    OCC also observed that we do not treat similar institutions in other
    countries as banks.  Such institutions were included in our
    discussions of the oversight structures in Canada, France, Germany,
    and Japan.  We did not include the supervision of building
    societies--institutions that lend predominantly for house
    purchases--in our discussion of the oversight structure in the U.K.
    because (1) we considered these institutions to be significantly
    different from banks in their activities and (2) building societies
    held a relatively small percentage of depository institution assets.

    OCC also observed that other providers of financial services such as
    credit unions should be included in any consideration of changes to
    the oversight structure.  We agree that credit unions are classified
    as depository institutions.  However, as we noted on pages 4 and 34
    of our report, because credit unions hold only a small percentage of
    all depository institution assets--about 5.5 percent--and the
    services they provide are somewhat unique, we did not include them in
    our definition of "banks" for the purposes of this report.

    (See figure in printed edition.)Appendix VII

    --------------------
    \1 See Bank Regulatory Structure:  The Federal Republic of Germany
    (GAO/GGD-94-134BR, May 9, 1991); Bank Regulatory Structure:  The
    United Kingdom (GAO/GGD-95-38, Dec.  29, 1994); Bank Regulatory
    Structure:  France (GAO/GGD-95-152, Aug.  31, 1995); Bank Regulatory
    Structure:  Canada (GAO/GGD-95-223, Sept.  28, 1995); and Bank
    Regulatory Structure:  Japan, which is currently a draft report.

    COMMENTS FROM THE OFFICE OF THRIFT
    SUPERVISION
    ========================================================= Appendix III

    (See figure in printed edition.)

    See comment 1.

    See comment 2.

    The following are GAO's comments on the Office of Thrift
    Supervision's letter dated August 26, 1996.

       GAO COMMENTS
    ------------------------------------------------------- Appendix III:7

    1.  OTS provided examples of efforts by oversight agencies to promote
    consistency in federal examinations and federal banking agency
    supervision.  We have added information on the conduct of joint
    examinations and additional coordination of examinations on page 49
    of our report.

    2.  OTS noted that the federal banking agencies have collaborated on
    many initiatives to enhance consistency among the oversight agencies.
    We have added information on such efforts on page 51 of our report.

    MAJOR CONTRIBUTORS TO THIS REPORT
    ======================================================== Appendix VIII

       GENERAL GOVERNMENT DIVISION,
       WASHINGTON, D.C.
    ------------------------------------------------------ Appendix VIII:1

    Maja Wessels, Evaluator-in-Charge
    Tamara Cross, Evaluator
    Kristi Peterson, Evaluator
    Desiree Whipple, Reports Analyst
    Hazel Bailey, Writer-Editor

       OFFICE OF GENERAL COUNSEL,
       WASHINGTON, D.C.
    ------------------------------------------------------ Appendix VIII:2

    Paul Thompson, Attorney

    RELATED GAO PRODUCTS
    ============================================================ Chapter 1

    Bank Regulatory Structure:  Canada (GAO/GGD-95-223, Sept.  28, 1995).

    Bank Regulatory Structure:  France (GAO/GGD-95-152, Aug.  31, 1995).

    Bank Regulatory Structure:  The United Kingdom (GAO/GGD-95-38, Dec.
    29, 1994).

    Bank Regulatory Structure:  The Federal Republic of Germany
    (GAO/GGD-94-134BR, May 9, 1994).

    Financial Derivatives:  Actions Needed to Protect the Financial
    System (GAO/GGD-94-133, May 18, 1994).

    Financial Regulation:  Modernization of the Financial Services
    Regulatory System (GAO/T-GGD-95-121, Mar.  15, 1995).  Bank
    Regulation:  Consolidation of the Regulatory Agencies
    (GAO/T-GGD-94-106, Mar.  4, 1994).

    Bank and Thrift Regulation:  FDICIA Safety and Soundness Reforms Need
    to Be Maintained (GAO/T-AIMD-93-5, Sept.  23, 1993).

    Bank Regulation:  Regulatory Impediments to Small Business Lending
    Should Be Removed (GAO/GGD-93-121, Sept.  7, 1993).

    Bank Examination Quality:  OCC Examinations Do Not Fully Assess Bank
    Safety and Soundness (GAO/AFMD-93-14, Feb.  16, 1993).

    Bank and Thrift Regulation:  Improvements Needed in Examination
    Quality and Regulatory Structure (GAO/AFMD-93-15, Feb.  16, 1993).

    Bank Examination Quality:  FDIC Examinations Do Not Fully Assess Bank
    Safety and Soundness (GAO/AFMD-93-12, Feb.  16, 1993).

    Bank Examination Quality:  FRB Examinations and Inspections Do Not
    Fully Assess Bank Safety and Soundness (GAO/AFMD-93-13, Feb.  16,
    1993).

    Thrift Examination Quality:  OTS Examinations Do Not Fully Assess
    Thrift Safety and Soundness (GAO/AFMD-93-11, Feb.  16, 1993).

    Banks and Thrifts:  Safety and Soundness Reforms Need to Be
    Maintained (GAO/T-GGD-93-3, Jan.  27, 1993).

    Bank Supervision:  OCC's Supervision of the Bank of New England Was
    Not Timely or Forceful (GAO/GGD-91-128, Sept.  16, 1991).

    *** End of document. ***