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ANNUAL BANK EXAMINATIONS -REDUCE LOSSES TO THE BANK -INSURANCE FUND

FOR INFORMATION CONTACT:
Susan McCollum, 314-444-8688

93-42

FOR RELEASE May 14. 1993
ST. LOUIS --Annual bank examinations, which are required by a
controversial provision of the .Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICI_A ), reduce losses to the Bank I~surance Fund
(B::fF), according to a study released today by the Federal Reserve Bank of

Ip the article-:. "Implications of Annual Examinations for the Bank Insurance
Fund," which appears in the January/February issue of the Review, the
Federal: Reserve Bank of St. Louis' bimonthly research journal, ·E conomist
R. Alton Gilbert studies the value of annual bank examinations and finds
them effective in limiting losses to the BIF.

!lis ~tudy is particularly timely.
come under . fire by Congress.

Annual bank examinations have recently

In January 1993, Sen. Richard Shelby

(D-Ala.) introduced legislation that would permit sup_~ #:Visor,s to . examine
some banks less .freque~tly than currently required under FDICIA.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Post Office Box 442

• St. Louis, Missouri 63166

• 314/444-8444

ANNUAL BANK EXAMS/2

Gilbert's research provides evidence that annual bank examinations are a
crucial element in the effort to limit BIF losses.

Through annual exams,

supervisors are better able to distinguish between sound and troubled
banks.

More than 90 percent of the failed banks in Gilbert's study were

rated as problem banks on their last examination, indicating that
examiners are able to identify troubled banks.

Gilbert's study also confirms that supervisors discover information
through annual examinations not previously disclosed through "call
reports," the financial information, such as balance sheets and income
statements, that banks must file quarterly with their regulators.

For

example, examiners found problems with asset quality at some banks that
had not been revealed in their call reports.

Frequent examinations,

therefore, are important in ensuring the accuracy of call report
information and in providing information not otherwise available on a
bank's condition.

Moreover, supervisors have been effective in modifying the behavior of
problem banks.

According to Gilbert, banks sharply reduced both asset

growth rates and dividends after being downgraded to problem status
following their examination.

Finally, Gilbert's study finds that the

BIF's losses were smaller at banks that had been examined in the last 12
months before failing than at those that had not.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(more)

ANNUAL BANK EXAMS/3

"Annual bank examinations are a proven tool for bank supervisors to use in
limiting losses to the nation's deposit insurance funds,"

says Gilbert.

"Any modification to the FDICIA requirement for annual bank examinations
must be made on the grounds that the cost of conducting and complying with
annual bank examinations is greater than their measurable benefits."

Gilbert studied examination reports on more than 800 banks that failed
between 1985 and 1990.

To contact him about his research, please call

the Federal Reserve Bank of St. Louis Public Information Office at
(314) 444-8310.

Other articles in this issue of the Review include "The Government's Role
in Deposit Insurance," a collection of six essays on deposit insurance and
the federal government's role in providing it and "On the Macroeconomics
of Private Debt," an examination of the role of private nonfinancial debt
in the U.S. economy.

The Federal Reserve Bank of St. Louis has branches in Little Rock,
Louisville and Memphis.

It serves the Eighth Federal Reserve District

which includes all of Arkansas, eastern Missouri, southern Indiana and
Illinois, western Kentucky and Tennessee, and northern Mississippi.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

***