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F ederal Re s e r v e Ba n k DALLAS, TEXAS of Dallas 75222 C i r c u l a r No. 76-70 May 14, 1976 A m e ric a n R e v o lu tio n B ic en ten n ia l TO THE CHIEF EXECUTIVE OFFICER, EACH STATE MEMBER BANK IN THE ELEVENTH FEDERAL RESERVE DISTRICT: As y o u m ay h a v e r e a d r e c e n t l y in th e n e w s p a p e r s , a n a g r e e m e n t h a s b e e n r e a c h e d b y t h e B o a r d o f G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s t e m a n d t h e G e n e r a l A c c o u n ti n g O ffice c o n c e r n i n g a s t u d y b y t h e GAO of t h e F e d e r a l R e s e r v e ' s d i s c h a r g e of its b a n k s u p e rv is o ry re sp o n sib ilities. P r i n t e d o n t h e fo llo w in g p a g e s fo r y o u r in fo rm a tio n a r e c o p i e s of t h e B o a r d 's p r e s s r e l e a s e a n d r e l a t e d d o c u m e n ts c o n c e r n ing t h i s m a t t e r . If y o u h a v e a n y q u e s t i o n s , p l e a s e c o n t a c t J o h n C . B la k e , C h ie f E x a m i n e r , a t (214) 651-6274. S in ce rely y o u r s , T . W. P la n t F i r s t V ic e P r e s i d e n t Enclosures This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) F o r im m ediate r e l e a s e REVISED May 6, 1976 T h e B o a r d of G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s te m to d a y a n n o u n c e d a g r e e m e n t w ith t h e G e n e r a l A c c o u n ti n g O ffice o n g u i d e l i n e s fo r a s t u d y b y t h e GAO of t h e F e d e r a l R e s e r v e ' s d i s c h a r g e of its b a n k s u p e r v i s o r y r e s p o n s i b i l i t i e s . T h e e n c l o s e d M em o ran d u m of A g r e e m e n t d e f i n e s t h e s c o p e of th e s t u d y a s i n c l u d i n g t h o s e f u n c t i o n s of t h e F e d e r a l R e s e r v e S y s te m r e l a t i n g to t h e e x a m in a t io n of S ta t e m e m b e r b a n k s , t h e d e t e c t i o n in t h o s e b a n k s of e x i s t i n g o r p o te n tia l u n s a f e o r u n s o u n d c o n d i t i o n s , o r v io l a ti o n s of law o r r e g u l a t i o n s , a n d t h e p r o c e s s b y w h i c h t h e F e d e r a l R e s e r v e s e e k s to r e m e d y s u c h c o n d i t i o n s o r v io l a ti o n s a n d to p r o t e c t t h e s o l v e n c y a n d s o u n d n e s s of S ta t e m e m b e r b a n k s . T h e s t u d y b y t h e GAO will a l s o i n c l u d e t h e s u p e r v i s o r y p r a c t i c e s of th e F e d e r a l D e p o s it I n s u r a n c e C o r p o r a t i o n w ith r e s p e c t to n o n m e m b e r S ta te b a n k s a n d t h e C o m p t r o ll e r of t h e C u r r e n c y w ith r e s p e c t to n a tio n a l b a n k s . It is b e i n g u n d e r ta k e n in r e s p o n s e to a r e q u e s t la s t J a n u a r y b y t h e C h a i r m a n o f t h e S u b c o m m itte e on D om estic M o n e ta ry P o licy of t h e H ouse C om m ittee o n B a n k i n g , C u r r e n c y , a n d H o u s i n g . T h e s t u d y w ill c o v e r th e F e d e r a l b a n k r e g u l a t o r s ' s u p e r v i s o r y p r a c t i c e s d u r i n g th e p a s t fiv e y e a r s , p r i n c i p a l l y t h r o u g h t h e s e le c ti o n of b a n k s , c h o s e n b y s ta t is ti c a l s a m p l in g p r o c e d u r e s , fo r d e t a i l e d s t u d y . T h e a g r e e m e n t b e t w e e n t h e B o a rd a n d t h e GAO i n c l u d e s t h e follow ing p r o v i s i o n s : — T h e s t u d y w ill i n c l u d e b a n k e x a m in a t io n p r a c t i c e s w ith r e s p e c t to t h e com m e r c i a l , f o r e i g n o p e r a t i o n , e l e c t r o n i c d a t a p r o c e s s i n g , a n d t r u s t f u n c t io n s of S ta te m em bers. — T h e GAO will k e e p a b s o l u t e l y c o n f id e n tia l th e i d e n tit y of all b a n k c u s t o m e r s , b a n k o ff ic ia ls , a n d d i r e c t o r s , o r of b a n k s s e l e c t e d fo r s t u d y . In a l e tte r to t h e C o m p t r o ll e r G e n e r a l r e g a r d i n g t h e s t u d y , C h a i r m a n A r t h u r F . B u r n s n o te d t h a t it is h i s u n d e r s t a n d i n g t h a t t h e g u i d e l i n e s fo r m a in ta in in g c o n f i d e n ti a li ty of p r i v a t e in fo r m a tio n w ill a p p l y a l s o to G A O 's c o m m u n ic a tio n s w ith t h e C o n g r e s s . He s a i d t h a t t h e " B o a r d is g r a t i f i e d t h a t b o th t h e GAO a n d th e Com m ittee s h a r e o u r c o n c e r n fo r m a in ta in in g t h e c o n f i d e n ti a li ty a n d i n t e g r i t y of th e e x a m in a tio n p ro c e ss." T h e M em o ran d u m of A g r e e m e n t a n d t h e r e l a t e d le t t e r s b y C h a i r m a n B u r n s a n d E lm er B . S t a a t s , t h e C o m p t r o l l e r G e n e r a l , a r e e n c l o s e d . E nclosures - 0 - May 4, 1976 MEMORANDUM OF AGREEMENT BETWEEN BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND THE COMPTROLLER GENERAL OF THE U . S . I. PURPOSE On J a n u a r y 24, 1976, t h e C h a i r m a n , S u b c o m m itte e o n D om estic M o n e ta ry P olicy o f t h e C om m ittee o n B a n k i n g , C u r r e n c y , a n d H o u s i n g , U n ite d S ta t e s H o u se of R e p r e s e n t a t i v e s , r e q u e s t e d t h e C o m p t r o ll e r G e n e r a l o f t h e U n ite d S t a t e s , t h r o u g h t h e G en e r a l A c c o u n ti n g Office (G A O ), to s t u d y a n d e v a l u a t e th e s u p e r v i s o r y r e s p o n s i b i l i t i e s r e l a t i n g to b a n k s u n d e r th e j u r i s d i c t i o n of t h e F e d e r a l R e s e r v e S y s t e m . T h i s r e q u e s t w a s r e i t e r a t e d b y le tte r of F e b r u a r y 5, 1976, from t h e C om m ittee to t h e C h a i r m a n , B o a rd of G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m . T h e B o a r d o f G o v e r n o r s h a s c o n s e n t e d to s u c h a s t u d y , e v a l u a t i o n , a n d r e p o r t so t h a t GAO m ay a s s e s s t h e e f f e c t i v e n e s s of t h e B o a r d in d i s c h a r g i n g its b a n k s u p e r v i s o r y r e s p o n s i b i l i t i e s . F o r t h e p u r p o s e of t h i s A g r e e m e n t , t h e te r m " b a n k s u p e r v i s o r y r e s p o n s i b i l i t i e s " s h a ll m e an t h o s e f u n c t io n s of t h e FRS in v o l v in g t h e e x a m i n a tio n of S ta t e m e m b e r b a n k s a n d t h e d e t e c t i o n o f u n s a f e o r u n s o u n d , o r p o t e n t i a l l y u n s a f e o r u n s o u n d c o n d i tio n s in s u c h b a n k s , o r v io l a ti o n s of law o r r e g u l a t i o n b y s u c h b a n k s , a n d th e p r o c e s s b y w h i c h t h e FRS s e e k s to r e m e d y s u c h c o n d i t i o n s o r v io l a ti o n s a n d o t h e r w i s e p r o t e c t t h e s o l v e n c y a n d s o u n d n e s s o f S ta t e m e m b e r b a n k s . II. OPERATIVE PROVISIONS T h e C o m p t r o ll e r G e n e r a l , on b e h a l f of t h e G e n e r a l A c c o u n t i n g O ffice, a n d t h e B o a rd of G o v e r n o r s , on b e h a l f of t h e F e d e r a l R e s e r v e S y s t e m ( F R S ) , t h e r e f o r e a g r e e to t h e follow ing: (1) S c o p e of S t u d y a n d E v a lu a tio n (a) GAO w ill s t u d y t h e e f f e c t i v e n e s s of t h e B o a r d of G o v e r n o r s in d i s c h a r g in g its b a n k s u p e r v i s i o n r e s p o n s i b i l i t i e s d u r i n g t h e p a s t fiv e y e a r s . T h i s s t u d y w ill i n c l u d e t h e p r o c e d u r e s u s e d b y FRS b a n k e x a m i n e r s in t h e i r p e r i o d i c o n - s i t e e x a m i n a t io n s o f S ta t e m e m b e r b a n k s , t h e m a n n e r in w h i c h th e f i n d i n g s a n d c o n c l u s i o n s of b a n k e x a m i n e r s a r e r e p o r t e d , t h e m a n n e r in w h i c h f in a n c ia l d a t a is c o lle c t e d from S ta te m e m b e r b a n k s b y t h e FRS for b a n k s u p e r v i s o r y p u r p o s e s , t h e s y s t e m s e m p lo y e d b y t h e FRS to id e n tif y a n d a t te m p t to a c h i e v e c o r r e c t i o n of p r o b l e m s o c c u r r i n g a t p a r t i c u l a r S ta te m e m b e r b a n k s , th e r e c r u i t i n g a n d t r a i n i n g of b a n k e x a m i n e r s , th e m e th o d s b y w h ic h t h e FRS r e v i e w s its ow n b a n k s u p e r v i s o r y p e r f o r m a n c e a n d p l a n s for its f u t u r e n e e d s in t h a t a r e a , a n d o t h e r s u b j e c t s d i r e c t l y a n d c l e a r l y r e l a t e d to th e b a n k s u p e r v i s o r y p r o c e s s . T h e GAO s t u d y will b e c o n d u c t e d p r i n c i p a l l y t h r o u g h t h e s e l e c t i o n of o n e o r m o re s ta t i s t i c a l s a m p l e s o f S ta t e m e m b e r b a n k s for d e t a i l e d s t u d y . T o t h e - 2 - e x t e n t n e c e s s a r y to e v a l u a t e t h e m a n n e r in w h i c h t h e FRS h a s d e a l t w ith u n s a f e o r u n s o u n d c o n d i t i o n s , o r p o t e n t i a l l y u n s a f e o r u n s o u n d c o n d i t i o n s , o r v io l a ti o n s of law o r r e g u l a t i o n s , d e t e c t e d in t h e b a n k s u p e r v i s o r y p r o c e s s w ith r e s p e c t to a n y b a n k s e l e c t e d for s t u d y in a n y s u c h s a m p l e , GAO m ay i n q u i r e in to th e m a n n e r in w h ic h th e FRS h a s d e a l t w ith a p p l i c a t i o n s from a p a r e n t b a n k h o ld i n g c o m p a n y of s u c h b a n k , o r a p p l i c a t i o n s from t h e b a n k fo r t h e e s t a b l i s h m e n t of b r a n c h e s o r fo r m e m b e r s h i p in t h e F ed eral R e s e rv e S ystem . (b) T h e GAO s t u d y w ill i n c l u d e t h e follow ing t y p e s of b a n k e x a m in a tio n p e r f o r m e d b y FRS: c o m m e r c i a l, f o r e i g n o p e r a t i o n s , e l e c t r o n i c d a ta p r o c e s s i n g , a n d tru s t. (c) E x c e p t in s o f a r a s r e g u l a t o r y a c t io n s of th e FRS a r e d i r e c t l y r e l a t e d to b a n k s s e l e c t e d fo r s t u d y in a s a m p l e , a s p r o v i d e d in s u b s e c t i o n (a) a b o v e , t h e GAO s t u d y s h a l l n o t in c lu d e ^ a n e v a l u a t i o n of t h e p e r f o r m a n c e b y FRS of its r e g u l a t o r y f u n c tio n s g e n e r a l l y , s u c h a s its p o li c ie s a n d p r o c e d u r e s fo r im p le m e n tin g th e B a n k H olding C o m p a n y A c t, t h e B a n k M e r g e r A c t, c o n s u m e r p r o t e c t i o n s t a t u t e s , t h e s e c u r i t i e s la w s , o r law s o r r e g u l a t i o n s r e l a t i n g to b a n k r e s e r v e s , p a y m e n t of i n t e r e s t on d e p o s i t s , o r s e c u r i t i e s c r e d i t . In no e v e n t s h a ll t h e s t u d y b e d e e m e d to i n c l u d e in a n y r e s p e c t th e m o n e t a r y p o lic y f u n c t io n s of th e FRS o r t h e o p e r a t i o n s of th e FRS r e l a t i n g to t h e p a y m e n ts m e c h a n is m , s u c h a s c h e c k c l e a r i n g o r e l e c t r o n i c f u n d s t r a n s f e r , o r to th e h a n d l i n g of c u r r e n c y o r s e c u r i t i e s . (2) A c c e s s to R e c o r d s FRS w ill a ff o r d a u t h o r i z e d GAO p e r s o n n e l a c c e s s to , a n d p e r m i s s i o n to e x a m i n e , all FRS r e c o r d s , b o o k s , a n d d o c u m e n ts a n d o t h e r m a te r ia l r e l a t i n g to th e b a n k s u p e r v i s o r y f u n c t io n s of F R S . FRS e x a m in a t io n r e p o r t s of S ta te m e m b e r b a n k s w ill b e i n c l u d e d in s u c h d o c u m e n ts to t h e e x t e n t s u c h b a n k s a r e s e l e c t e d for s t u d y in t h e s a m p l e ( s ) r e f e r r e d to in p a r a g r a p h (5) ( b ) , t o g e t h e r w ith w o r k p a p e r s a n d c o r r e s p o n d e n c e files r e l a t e d to s u c h r e p o r t s , w h e t h e r o r n o t a p a r t of t h e r e p o r t , a n d all w itho ut any deletio n s. T h e GAO s t u d y will b e c o n d u c t e d in s u c h a m a n n e r a s to c a u s e a m inim um o f d i s r u p t i o n in t h e n o rm a l o p e r a t i o n s of t h e B o a r d of G o v e r n o r s a n d t h e F e d e r a l R e s e r v e B a n k s . R e c o g n iz i n g t h a t FRS m ay in c e r t a i n c a s e s r e q u i r e p r i o r i t y u s e o f its r e c o r d s , m u t u a ll y a g r e e a b l e a r r a n g e m e n t s w ill b e m a d e w ith r e s p e c t to a v a i l a b i l i t y o f t h o s e r e c o r d s in c u r r e n t , a c t iv e u s e . S i m i l a r a r r a n g e m e n t s w ill b e m a d e r e g a r d ing t h e a v a i l a b i l i t y of a g e n c y o fficials fo r i n t e r v i e w s . A u t h o r i z e d GAO p e r s o n n e l will b e p e r m i t t e d to m a k e w h a t e v e r n o te s o r w h a t e v e r c o p i e s th e y deem n e c e s s a r y d u r i n g t h e s t u d y , all to b e c o n t a in e d in t h e GAO w o r k p a p e r s . T h e s e w o r k p a p e r s w ill b e s a f e g u a r d e d in a c c o r d a n c e w ith p a r a g r a p h (6) of th i s A g r e e m e n t . (3) A u t h o r i z e d GAO P e r s o n n e l (a) T h e C o m p t r o ll e r G e n e r a l w ill h a v e so le a u t h o r i t y fo r a s s i g n i n g th e GAO p e r s o n n e l to b e e n g a g e d in th e s t u d y . - 3 - (b) GAO will p r o v i d e FRS w ith a lis t of its p e r s o n n e l a u t h o r i z e d to h a v e a c c e s s to FRS r e c o r d s in c o n n e c tio n w ith t h i s s t u d y a n d e v a l u a t i o n a t t h e tim e th i s a g r e e m e n t is e x e c u t e d , w ith th e lis t u p d a t e d a s c h a n g e s o c c u r . A s s i g n e d GAO p e r s o n n e l w ill o b ta in n e c e s s a r y c r e d e n t i a l s fo r e n t e r i n g FRS f a c ilitie s a n d w ill c a r r y official GAO c r e d e n t i a l s th a t w ill b e p r e s e n t e d to FRS p e r s o n n e l on r e q u e s t . (c) To th e e x t e n t p o s s i b l e , GAO w ill u s e p e r s o n n e l w ith e x p e r i e n c e in r e v i e w i n g r e p o r t s of d e p o s i t a r y i n s t i t u t i o n s . (4) FRS L ia is o n Official; F a c i lit ie s (a) FRS will d e s i g n a t e a lia is o n official to f a c ilita te t h e GAO a c c e s s to FRS r e c o r d s a n d p e r s o n n e l fo r t h e p u r p o s e of th i s s t u d y . GAO w ill c l e a r all r e q u e s t s fo r d o c u m e n ts a n d i n t e r v i e w s t h r o u g h t h e lia is o n o fficial. (b) FRS will p r o v i d e GAO w ith s u i t a b l e , lo c k a b le office s p a c e a n d f u r n i t u r e , t e l e p h o n e , a n d a c c e s s to c o p y i n g f a c i l i t i e s . T h e s e w o r k i n g f a c ilitie s will b e a d e q u a t e fo r u p to 10 GAO r e p r e s e n t a t i v e s , t h e e x a c t n u m b e r to b e d e t e r m i n e d l a t e r . (5) P r o c e d u r e s (a) T h i s s t u d y a n d e v a l u a ti o n w ill b e c o n d u c t e d in a c c o r d a n c e w ith p r o c e d u r e s a n d s t a n d a r d s p r e s c r i b e d b y th e C o m p t r o ll e r G e n e r a l , s u b j e c t to th e t e r m s of th i s A g r e e m e n t . (b) T h e s e le c ti o n of e x a m in a t io n r e p o r t s for s ta t is ti c a l s a m p l in g b a s i s d e t e r m i n e d b y t h e GAO to b e s t u d y , a f t e r c o n s u lt a ti o n w ith th e B o a r d of G o v e r n o r s . th e s t u d y , it m ay b e n e c e s s a r y to s e l e c t m o re t h a n o n e GAO s t u d y w ill b e m a d e o n a a d e q u a t e f o r t h e p u r p o s e s of t h e D e p e n d in g on t h e p u r p o s e of sam ple. (c) In m a k in g its s t u d y , t h e GAO w ill i n t e r v i e w FRS p e r s o n n e l , i n c l u d i n g b a n k e x a m i n e r s a n d F e d e r a l R e s e r v e B a n k o f f ic e r s a n d s taff, in o r d e r to o b ta in a n a d e q u a t e u n d e r s t a n d i n g of all p h a s e s of FRS b a n k s u p e r v i s o r y r e s p o n s i b i l i t i e s . GAO will not e v a l u a t e t h e a c c u r a c y of t h e e x a m i n e r s ' fa c tu a l f i n d i n g s o r m a k e s e p a r a t e e x a m in a tio n s of th e b a n k s i n v o l v e d . (d) T h e GAO w ill p r e p a r e a r e p o r t to t h e C o n g r e s s w ith its c o n c l u s i o n s a s to t h e m a t t e r s s p e c i f i e d in p a r a g r a p h (1) . A n a d v a n c e d r a f t o f t h e GAO r e p o r t w ill b e m a d e a v a i l a b l e to th e B o a rd of G o v e r n o r s , w h o w ill b e a f f o r d e d a n a d e q u a t e o p p o r t u n i t y to co m m en t on t h e c o n t e n ts of th e p r o p o s e d r e p o r t . T h e final r e p o r t will in c l u d e a s an a d d e n d u m a n y w r i t t e n co m m e n ts s u b m it te d b y t h e B o a r d of G o v e r n o r s . (6) S a f e g u a r d i n g t h e I d e n t ity of B a n k s a n d C u s t o m e r s In m a k in g its s t u d y , s t r i c t c o n f i d e n ti a li ty s h a l l b e m a in ta in e d b y GAO a n d all GAO p e r s o n n e l p a r t i c i p a t i n g in t h e s t u d y . GAO w ill s a f e g u a r d th e i d e n tit y of b a n k s , b a n k o ff ic ia ls , a n d b a n k c u s t o m e r s a s follow s: - H ’ - (a) All GAO w o r k p a p e r s , a n d w h a t e v e r FRS d o c u m e n t s o r r e c o r d s co m e into GAO p o s s e s s i o n d u r i n g t h e s t u d y w ill r e m a in on th e p r e m i s e s of F R S . S u c h m a te r ia l will b e m a in ta in e d in s u c h a w a y a s to p r e v e n t u n a u t h o r i z e d a c c e s s . W hen n o t in u s e , s u c h m a te r i a l w ill b e k e p t in s e c u r e , lo c k e d file c a b i n e t s . (b) GAO, in its r e p o r t a n d o t h e r w i s e o u t s i d e of GAO, will n o t (i) id e n tify b a n k c u s t o m e r s ; (ii) id e n tif y a n y b a n k o r b a n k o f f i c e r s , d i r e c t o r s , o r s t o c k h o l d e r s ; o r (iii) p r o v i d e d e ta il t h a t c a n lead to id e n tif i c a t io n of a n y b a n k , b a n k c u s t o m e r , b a n k o f f ic e r , d i r e c t o r , o r s t o c k h o l d e r . W ithin t h e s e li m i ta t io n s , GAO, in its r e p o r t a n d o t h e r w is e o u t s i d e of GAO, m ay d i s c u s s t h e c o n d i tio n o r o p e r a t i o n s of a p a r t i c u l a r b a n k . GAO s h a ll m a k e n o d i s c l o s u r e w h a t s o e v e r o u t s i d e of GAO o r th e F e d e r a l R e s e r v e of t h e i d e n tit y of a n y b a n k s e l e c t e d a s a s a m p l e b a n k for p u r p o s e s of t h e s t u d y , w h e t h e r to t h e b a n k b e i n g s t u d i e d o r o t h e r w i s e . (c) T h e lim ita tio n s o f t h i s p a r a g r a p h s h a l l n o t p r o h i b i t GAO o r its e m p lo y e e s from d i s c u s s i n g p a r t i c u l a r b a n k s , b a n k o f f ic i a ls , o r b a n k c u s t o m e r s : (i) w ith officials of th e O ffice of th e C o m p t r o ll e r o f th e C u r r e n c y o r of t h e F e d e r a l D e p o s it I n s u r a n c e C o r p o r a t i o n if th o s e a g e n c i e s w e r e in v o l v e d in t r a n s a c t i o n s o r s u p e r v i s o r y p r o c e d u r e s r e l a t e d to s u c h b a n k o r b a n k c u s t o m e r s ; o r (ii) w ith o fficials of FRS. (d) T h e n o n - d i s c l o s u r e p r o v i s i o n of t h i s p a r a g r a p h s h a ll a p p l y w ith r e s p e c t to a n y a ffilia te of a b a n k c o v e r e d b y t h e s t u d y . (e) U pon c o m p le tio n of t h e s t u d y a n d i s s u a n c e o f t h e r e p o r t , a ll GAO file s a n d w o r k p a p e r s w ill b e r e t a i n e d f o r a p e r i o d of 10 y e a r s . T h e y w ill b e k e p t on t h e p r e m i s e s of t h e B o a r d of G o v e r n o r s f o r o n e y e a r from t h e d a t e of i s s u a n c e of t h e r e p o r t , p r o v i d e d , h o w e v e r , t h a t a u t h o r i z e d GAO p e r s o n n e l s h a ll h a v e t h e c o n t i n u e d r i g h t of a c c e s s to s u c h m a te r ia l d u r i n g t h a t tim e p e r i o d . A fte r o n e y e a r from t h e d a t e of i s s u a n c e of t h e GAO R e p o r t , FRS m ay s e n d th e GAO file s a n d w o r k p a p e r s to t h e F e d e r a l R e c o r d s C e n t e r fo r s t o r a g e fo r a n a d d i tio n a l n i n e y e a r s , p r o v i d e d , h o w e v e r , t h a t FRS w ill r e c a ll s u c h files a n d w o r k p a p e r s from s t o r a g e a t GAO r e q u e s t so t h a t GAO p e r s o n n e l m a y h a v e a c c e s s to them o n t h e p r e m i s e s of F R S . O n o r a f t e r 10 y e a r s from t h e d a t e of i s s u a n c e of t h e GAO r e p o r t , FRS m ay d i r e c t d e s t r u c t i o n o f t h e file s a n d w o r k p a p e r s u n l e s s n o tified to t h e c o n tra ry by GAO. (7) F ie ld A c ti v iti e s T o t h e e x t e n t th e c o n d u c t of t h e s t u d y w ill b e o u t s i d e o f t h e W a s h i n g to n , D . C . , a r e a , m u t u a ll y a g r e e a b l e p r o c e d u r e s , c o n s o n a n t w ith t h e A g r e e m e n t , w ill b e d e v e l o p e d c o n c e r n i n g a c c e s s to a n d s e c u r i t y of r e c o r d s . C h a irm a n , B oard of G o v e rn o rs F e d e r a l R e s e r v e S y s te m C o m p t r o l l e r G e n e ra l o f t h e U n ite d S ta te s D ate Date C H A IR M A N O F TH E FEDERAL BOARD R ESER VE OF G O VERN O R S SYSTEM W A S H I N G T O N , D. C . 2 0 5 5 1 'M . R^>. May 5, 1976 The Honorable Elmer B. Staats Comptroller General of the United States Washington, D. C. 20548 Dear Mr. Staats: I am enclosing an executed copy of a Memorandum of Agreement between the Board of Governors and the Comptroller General relating to the study of the Board’s performance of its bank supervisory responsibilities requested by the House Committee on Banking, Currency and Housing. This form of the Agreement has been approved by the Board of Governors. I should point out that the Board has discussed the Agreement at great length. All of the Board members were profoundly concerned about violating our long tradition of maintaining rigid confidentiality of bank examination reports. Moreover, some members felt so strongly about breaching this tradition — particularly with respect to those portions of the report dealing with names of bank customers — that they could not accept even the carefully circumscribed disclosure to GAO provided for in the Agreement. Two factors weighed heavily in the Board's decision to approve the Agreement: First, we believe that the pro visions of the Agreement that prevent removal of documents and work papers from the Board’s premises, and that categorically prohibit disclosure outside of GAO of the identity of the banks being studied or their officials or customers, offer reasonable assurance that confidentiality will be maintained. I cannot emphasize too strongly the need for strict adherence to these provisions of the Agreement. Second, we understand that you will have an under standing with the House Committee on Banking, Currency and The Honorable Elmer B. Staats - 2 - Housing that the Committee will not require GAO to breach its obligations of confidentiality under this Agreement or otherwise make available to the Committee or its staff information con cerning the identities of banks or individuals covered by the GAO study. The Board is gratified that both GAO and the Com mittee share our concern Tor maintaining the confidentiality and integrity of the bank examination process. You have asked for an expression of our willingness to discuss providing access to additional records of the Federal Reserve System if, during the study, you determine that such access is necessary. While the access provisions of the Agree ment are already quite broad we will, of course, give serious consideration to any request you may make for access to addi tional records that are within the scope of the study and as to which a showing of need is made. In the same spirit, we would hope that if it appears that the access to examination reports we have granted is greater than is necessary for your purposes — for example, with respect to the identities of bank customers — you might consider agreeing to limitations, such as the masking of names, that would alleviate the concerns of Board members about disclosing information of a private nature. In considering the request from the House Banking Committee that the Board voluntarily consent to such a study by GAO, the Board was concerned about the possibility that such consent on its part might be viewed by some as being inconsistent with the Board's position on legislative proposals to subject the Federal Reserve to periodic audit by GAO. However, we do not consiccr this study to be an "audit" in any sense of that tern, nor do we understand it to be an inquiry that will be repeated on a regular periodic basis. I have stated on several occasions that the Board would welcome a meaningful inquiry by the Congress into our performance of our bank supervisory responsibilities, and I believe that the guidelines we have agreed to reasonably delineate the scope of an inquiry that will serve this purpose. We appreciate your cooperative attitude and that of your staff in developing these guidelines, and we shall follow the progress of the study with interest. Sincerely yours, C O M P T R O L L E R G E N E R A L O F T H E U N IT E D S T A T E S W A S H I N G T O N , D .C . 20548 B-118535 May 1976 The Honorable Arthur Burns Chairman, Board of Governors Federal Reserve System Washington, D.C. Dear M r . Burns: On January 24, 1976, the Chairman, Subcommittee on Domestic Monetary Policy of the Committee on Banking, Currency and Housing, U.S. House of Representatives, requested that we undertake a comprehensive study of the bank regulatory functions of the Federal Reserve System. My representa tives met on several occasions with senior Federal Reserve System officials to prepare a Memorandum of Agreement providing for our access to pertinent Federal Reserve System records and for necessary arrangements to protect the confidentiality of information obtained during the study. These meetings culminated in a draft Memorandum of Agreement between our respective Offices dated April 28, 1976. I understand that this draft was presented to the Board of Governors for its review on Wednesday, April 28, 1976, and was approved subject to our acceptance of certain changes in the text. The Board reviewed the draft in the context of the Subcommittee's January 24, 1976 letter to the Board. The Subcommittee asked the Board to cooperate with us in a study of the bank supervisory functions of the Federal Reserve System. In meeting with your representatives to discuss the changes proposed by the Board, it became evident that the Board viewed its bank regulatory and supervisory functions as quite distinct and different. In discussions with the other bank supervisory agencies, they had not made such a dis tinction, and our draft had reflected this broader definition of super visory and regulatory functions. We understand that the Board does not feel that a study of bank super vision should encompass a general evaluation of how the Board has carried out its regulatory functions. B—118535 Because we are still in the earliest phase of this unique study, we are uncertain what effect the Board's distinction between its regulatory and supervisory functions may have on the conduct of the study. We think it is possible that our study of bank supervision may touch on certain regulatory aspects; however, I want to assure you that we do not envision any need to inquire into the Board's responsibilities for monetary policy or for central banking activities. The enclosed draft, dated May 4, 1976, now reflects what we under stand are the Board's views as to the appropriate scope of the study and the records to which we will be afforded access. Although the distinction made between supervisory and regulatory functions may affect the scope of our study and the extent to which Federal Reserve System records will be available to us, I believe our differences are relatively minor in relation to the major agreement we have reached in principle. In order not to postpone the study, 1 am willing to enter into the enclosed Agreement if the Board finds its terms acceptable. I think that the Agreement will prove to be adequate for our purposes. Since we are just beginning the study, we cannot be sure that the access to records afforded us under the proposed Agreement will provide us with all the information we might need. I would appreciate your expression of willingness to discuss the matter further with us if, during the course of the study, we determine that access to additional Federal Reserve System records is needed to complete the study of the bank supervisory functions of the Federal Reserve System as we have now defined them. I want you to know that I greatly appreciate the cooperation given us by the Board and by the Federal Reserve System staff in striving to reach agreement in this matter of vital importance to your agency and the Congress. Comptroller General of the United States
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