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
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


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


Report to the 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. ***