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BY’ Ii-it CCJMPTROLLERGENERAL
Report To The Congress
OF THE UNITEDSTATES
6rJ1
Banks Having Problems Need Better
Identification And Disclosure
The Federal Deposit Insurance Corporation
Headquarters
focuses its attention
on banks
that are believed to pose a hi h degree of risk
to the insurance fund-prob 9em banks. Because of uncertain
criteria, identification
of
these problem
banks is largely a matter of
subjective
judgment.
In addition,
in the
absence of headquarters guidance, the Corporation’s
regions have differing
criteria
for
identifying
banks requiring special attention
at the regional level.
As a result there is no assurance that banks
posing a similar degree of risk to the fund are
being given the same supervisory
attention.
GAO recommends
that specific and objective
criteria be developed to improve indentification of problem
banks and banks requiring
regional attention.
The Corporation
publicly issues problem bank
list data as one indication
of the banking
industry’s
condition.
GAO recommends
that
the Corporation
release data classifying all the
Nation’s
federally
insured
banks--not
just
problem bank; .in order to provide more complete data on the condition
of the banking
Industry.
IllIll1
llllll
I
108456
FOD-79-1
JANUARY
24,1979
COMPTROLLER
GENERAL
WASHINGTON.
OP
D.C.
THE
UNITED
STATE8
u)U48
R-114831
To the President
of the Senate and the
Speaker of the House of Representatives
0’
iPob
w"
The Federal
Deposit
Insurance
Corporation
is to protect
depositors
against
losses
from bank failures,
maintain
confiand promote safe and sound bankdence in the banking
system,
ing practices.
The Corporation's
supervision
and examination
of State-chartered
banks which are not members of the Federal
Reserve System are an essential
part of fulfilling
its mission.
We reviewed
the Corporation's
bank supervisory
process
Particular
emphato determine
areas that need strengthening.
sis was placed
on the identification
and disclosure
of banks
having
financial
or supervisory
problems.
We are sending
copies of the report
to the Director,
of the Trea sury;
Off ice of Management and Rudg et: the Secretary
Federab Deposi t
and the Chairman of the Board of Directors,
Ins urance Corporation.
of the
United
States
COMPTPOLLER GENERAL'S
HEPOHT TO THE CONGRESS
BANKS HAVING PROBLEMS NEED
BETTER IDENTIFICATION
AND
DISCLOSURE
DIGEST
-----The Federal
Deposit
Insurance
Corporation
supervises
State-chartered
insured
banks
which are not members of the Federal
Reserve
System
and indirectly
supervises
State member and national
banks.
The Corporation
and the other
two Federal
agencies
that regulate
commercial
banks are
to be commended for adopting
a uniform
interagency rating
system to judge all the Nation's
This system
will
federally
insured
banks.
separate
all
insured
banks into five overall
rating
groups
that reflect
their
condition.
(See p. 5.)
The Corporation's
Division
of Bank Supervision
defines
its first
priority
to be effectively
supervising
and monitoring
state
nonmember
banks with problems.
As of March 31, 1978,
Corporation
headquarters
was directing
the
supervision
of 270 such banks which had been
formally
designated
as problem banks because
they posed a high degree of risk
to the insurance fund.
Under headquarters
supervision,
regional
offices
are required
to:
--Formally
meet with a bank's
board
directors
to discuss
the bank's
recognized
problem
status.
--Submit
actions.
periodic
formal
reports
--Conduct
more frequent
supervisory
visits.
examinations
of
.
on supervisory
and/or
About 779 other banks were judged by the
Corporation's
regional
offices
to present
a
sufficient
but lower
degree of risk
to the
Tear Sheet. Upon removd,
cover date should be noted
the report
hereon.
i
FOD-79-1
insurance
supervisory
fund to warrant
attention.&/
their
increased
Some of these banks exhibit
the same problems
as those formally
designated
as problem banks
and therefore
would pose a similar
risk
to the
There is a lack of specific
insurance
fund.
and objective
criteria
for judging
whether
a
bank should be designated
as a problem
bank.
We believe
some of these 779 banks should be
receiving
the same headquarters
supervisory
attention
as the 270 problem
banks.
in the absence of headquarters
In addition,
FDIC’s regions
have differing
criguidance,
teria
for indentifying
banks requiring
special
attention
a-E-EFE~egl5nal
level.
Problem bank list
one indication
of
can be
industry,
number of problem
plete
data on the
insured
banks as
ination.
(See p.
data,
which is released
as
the condition
of the banking
Releasing
the
misinterpreted.
banks does not provide
comconditions
of the Nation’s
determined
through
bank exam17.)
For the Corporation
to more efficiently
supervise
banks and to provide
more meaningful
data on the condition
of the banking
industry,
CM3w
the Chairman of the FeUefal
snu
--develop
more specific
for identifying
banks
vision-at either
the
level,
--phase
out
indicator
industry,
and objective
criteria
requiring
special
superheadquarters
or regional
the use of problem
bank data as an
of the condition
of the banking
and
----------I_
&/Headquarters
designated
problem
banks are
reterred
to in the body of this
report
as
Regional
office
financial
problem
banks.
designated
banks requiring
increased
supervision
are referred
to in the body of this
report
as supervisory
problem
banks.
ii
i,
‘3:
i.
.I
‘;
b4aC
-release
data classifying
under the newly adopted
rating
system.
all insured
banks
uniform
interagency
The Corporation
strongly
believes
it places
the
proper
amount of supervision
on all banks with
Corporation
officials
stated
that
problems.
there had been a conscious
decision
to give the
Regional
Director
the responsibility
for identifying
banks with problems
that presented
a
lesser
degree of risk
to the insurance
fund.
Although
the Corporation
prescribes
the same
examination
frequency
for banks with either
it has not developed
objective
type of problem,
criteria
to help the regions
identify
when a
problem poses a risk
to the insurance
fund.
Without
criteria,
the Corporation
cannot be
sure that all banks posing
a risk
to the insurance fund, are receiving
an appropriate
amount
of supervision.
After
GAO's review,
the Corporation
issued a
revised
bank examination
policy
that became
Under this
new
effective
on January
1, 1979.
policy,
headquarters
designated
problem bank,s
(financial
problem
banks) will
receive
at least
one full-scope
examination
every 12 months.
Banks warranting
increased
regional
office
supervision
(supervisory
problem banks) will
receive
at least
one full-scope
examination
every 18 months.
The new policy
does not
remove the need for specific
and objective
criteria
to identify
problem banks.
The Corporation
is considering
changing
the present
manner in which it reports
and
releases
data on problem
banks to provide
a
clearer
perspective
on the condition
of the
banking
industry.
Tear Sheet
iii
Contents
Page
DIGEST
i
CHAPTER
1
INTRODUCTION
Scope of review
1
2
2
BANK SUPERVISION:
AN OVERVIEW
Examination
of State-chartered
nonmember insured
banks
Monitoring
banks between examinations
Increased
supervisory
actions
3
THE TWO TYPES OF PRORLEM BANKS
Financial
risk--the
thin line
Senior managers need to be more
concerned
with some supervisory
problem banks
Conclusions
Recommendations
Agency comments
8
8
12
15
16
16
FDIC COULD BETTER COMMUNICATE THE
CONDITIONS OF THE BANKING INDUSTRY
Interpreting
the problem
bank list
Conclusions
Recommendations
Agency comments
18
20
22
22
23
Profile
of Corporation
regional
offices
visited
during
review
as of December
31, 1977
24
3
4
3
6
7
APPENDIX
I
II
III
Corporation
press release:
agency rating
system
Letter
from the Director,
Supervision,
August 11,
commenting
on our draft
uniform
Division
1978,
report
interof
25
Bank
28
ABBREVIATIONS
CAMEL
capital
adequacy, asset
earnings,
and liquidity
FDIC
Federal
Deposit
GAO
General
Accounting
JAWS
just
PPO
potential
a warning
payoff
Insurance
Office
system
quality,
management,
Corporation
CHAPTER 1
INTRODUCTION
In our December 1977 report
(FOD-77-81,
we briefly
commented on the Federal
Deposit
Insurance
Corporation's
(FDIC's)
bank supervisory
process.
In that report,
we stated
that FDIC continues
to be an effective
bank supervisor
but
could improve.
We indicated
that FDIC should develop
more
definitive
criteria
for classifying
problem banks and require
more complete
documentation
of the decisionmaking
process
for
classifying
banks.
This report
continues
our review
of FDIC's
supervision
of insured
State-chartered
banks that are not
members of the Federal
Reserve System.
FDIC exists
to protect
both private
against
losses
from bank failures,
help
and promote
safe
in the banking
system,
practices.
To do this FDIC:
and public
depositors
maintain
confidence
and sound banking
--Insures
deposits
in national,
Federal
Reserve member,
and qualified
State nonmember banks of up to $40,000
for each private
depositor
and $100,000
for individual
accounts
of Federal,
State,
and local
governments.
--Supervises
insured
State nonmember banks by monitoring
and examining
them and enforcing
regulations.
It
indirectly
supervises
national
and State member banks,
primarily
by monitoring
them but the Comptroller
of the
Currency
and the Board of Governors
of the Federal
have direct
supervisory
Reserve System,
respectively,
responsibility
over these banks.
(1) serve as receiver
FDIC has the legal
authority
to:
and liquidator
of closed
insured
banks,
(2) purchase
assets
from, make deposits
in, or extend loans to insured
banks which
have failed
or are in danger of failing,
(3) make loans,
purchase assets,
or issue a guarantee
to help one insured
bank
assume a failed
or failing
insured
bank, and (4) organize
deposit
insurance
national
banks to provide
limited
banking
services
in communities
where banks have failed.
FDIC uses two principal
methods to protect
depositors
in banks that have failed:
direct
payoff
and deposit
assumption.
The direct
payoff
method pays the net amount of insured
The deposit
assumption
deposits
directly
to depositors.
method allows
another
insured
bank to assume the liabilities,
and acceptable
assets
of a failed
or failing
bank.
deposits,
FDIC advances
to the assuming
bank an
Under this method,
amount of money equal to the assets
retained
by FDIC in case
of liquidation.
Depositors
of the failing
bank become depositors of the assuming
bank, essentially
protecting
their
deposits
in excess of insurance
limits.
FDIC's Board of Directors
authorizes
financial
assistance
in deposit
assumptions
when this will
reduce the risk of or
avert
a threatened
loss to FDIC.
Deposit
assumptions
are
generally
approved
when the assuming bank pays a premium to
FDIC.
For these reasons
FDIC has encouraged
the deposit
assumption
method in recent
years.
Of the 26 bank failures
from January
1, 1976, through
June 30, 1978, 23 were deposit
assumption
transactions.
SCOPE OF REVIEW
We conducted
our review
at FDIC headquarters
and selected
regional
offices.
The review
focused
on the analysis
of examination
reports
and FDIC files
on those State non-member
banks and mutual
savings
banks with supervisory
or financial
problems
through
March 1978.
We also analyzed
examination
data and FDIC files
on banks with characteristics
of present
or potential
problems.
We reviewed
3 of FDIC's 14 regional
offices'
procedures
for identifying
and monitoring
banks with supervisory
or
We sampled these problem banks for analyfinancial
problems.
sis.
The three regions--Atlanta,
New York, and Richmond-contained
1,444 (16 percent)
of the 9,071 insured
State nonmember banks and mutual
savings
banks as of December 31, 1977.
They also contained
107 (29 percent)
of the 368 designated
problem
banks as of that date.
(See app. I.)
We also
--analyzed
1977 problem
--analyzed
the reasons
and through
June 30,
--reviewed
bank
and procedures
31, 1977.
bank statistics;
for bank failures
1978; and
examination
and various
and supervision
FDIC reports
during
1977
policies
as of December
CHAPTER 2
BANK SUPERVISION:
AN OVERVIEW
The Division
of Bank Supervision
is FDIC's principal
office
for supervising
insured
State-chartered
commercial
banks and mutual
savings
banks that are not members of the
Federal
Reserve System.
The Division
regularly
examines these
banks,
monitors
them between
examinations
through
its Integraand provides
more supervision
to those
ted Monitoring
System,
These three processes
form the backbone of
banks needing
it.
In 1977, the Division
and its 14 regional
bank supervision.
offices
examined
7,169 of the 8,748 insured
State-chartered
nonmember banks and 304 of the 323 insured
mutual
savings
banks.
EXAMINATIOM OF STATE-CHARTERED
NONMEMBER INSURED BANKS
The overall
objective
of a bank examination
is to
determine
the bank's
safety,
soundness,
and compliance
with
This is done by evaluating
asset quallaws and regulations.
ity,
the nature
of liabilities,
liquidity
posture,
earnings,
capital
adequacy,
bank management and controls,
policies,
proThe examination
cedures,
accounting
practices,
and insurance.
includes,
among other
things,
a review of the bank's
loan
portfolio
and other
assets
(such as securities)
to determine
their
credit
soundness.
General
Memorandum No. 1 gives the Division's
policy
on examining
banks --which
to examine first,
when, and how extensively.
The memorandum defines
two types of examinations:
The Division
generally
full-scope
and modified
examination.
tailoring
it to the bank's
uses the full-scope
examination,
size and complexity
and designing
it to fully
use the bank's
own reporting
capabilities.
The modified
examination
uses
an abbreviated
format,
nay be of reduced
scope, and is used
only for banks fitting
certain
criteria
for size and financial
condition.
The Division
also conducts
separate
examinations,
primarily
to determine
whether
the banks operate
according
to
Separate
examinations
consumer-oriented
laws and regulations.
We looked
at
of large
trust
departments
are also conducted.
soundness
examinations,
except
where
full-scope
safety
and
indicated
otherwise.
Examination
each
schedule
All insured
State
18-month
period.
and scope
nonmember banks are to be examined
However,
a bank presenting
financial
3
in
risk to the Insurance
Fund (financial
problem
bank) must
receive
at least
1 full-scope
examination
every 12 months,
Banks warranting
increased
regional
office
supervision
(supervisory
Problem Bank) will
receive
at least
1 full-scope
examination
every 18 months,
The regional
offices
schedule
bank examinations
of State
nonmembers considering
(1) the policy
in General Memorandum
No. 1, (2) banks with potential
problems
as indicated
by the
Bank Division's
Integrated
Monitoring
System; and (3) when
State banking
authorities
schedule
their
examinations.
Bank examiners
determine
an examination’s
scope by
reviewing
a bank's
strengths
and weaknesses
indicated
by prior
examination
reports,
the Integrated
Monitoring
System, and/or
other
related
records.
Although
the examination
includes
some
FDIC does not consider
a bank examination
to be
audit
tests,
an audit,
Processing
examination
and reviewing
reports
Once the bank examination
is completed,
the bank examiner
prepares
the examination
report
and forwards
it to the reDivision
policy
gional
office
for processing
and review.
Board of Direcrequires
the examiner
to meet with the bank's
tors or a committee
which includes
some Board members for each
full-scope
examination
to discuss
the examination
results.
Bank managements'
commitments
and/or
reactions
are included
in
the examination
report.
Senior
regional
office
managers review
the report
to
identify
and assign
priority
processing
to those banks of special
interest,
including
those with known or potential
problems.
The reports
are then censored,
which is essentially
editing
and checking
mathematical
accuracy.
Next,
a regional
review
examiner
formally
reviews
the
report,
determining
supervisory
and followup
actions
and
whether
to recommend (1) classifying
the bank as a problem
and/or
(2) initiating
formal
enforcement
measures.
As part of the regional
review,
the review
examiner
prepares
a Summary analysis
of Examination
Reports
form, reexamination
data,
tI]e
It contains
ferred
to as a form 36.
and certain
key ratios
used in rating
and
bank's
rating,
Form 36 also includes
the review
exanclassifying
the bank.
iner's
comments on the bank's..condition
based on the examinaWlen a bank is not a problem,
the exarlination
tion report.
reports
and the form 96 may be looked at again only briefly
before
the Regional
Director
signs the reports
and sends them
to headquarters
the State authority,
and the bank.
(Distribution procedures
vary
in some States.)
As discussed
in
chapter
3, banks with problems
receive
additional
regional
review,
with memorandums recommending
formal
problem disignation prepared
as needed before
sending
the report
to
headquarters.
The first
headquarters
review
step is to input the
examination
report's
and form 96's data into its data processing system.
This data is then compared with 14 charaoteristics
indicative
of problem or potential
problem banks.
Only
commercial
banks meeting
one or more of these selection
criteria
or banks recommended for addition
to or removal
from the
problem
bank list
receive
further
review.
The headquarters
commercial
bank and/or
problem
bank review
sections
review
these banks to formally
identify
problem
banks.
Due to the
small number, all mutual
savings
bank examinations
receive
headquarters
review.
The Problem Bank Review Section
receives
and reviews
examination
reports,
forms 96, and, where appropriate,
the regions'
memorandums describing
the problem
and action
being
taken for all recommended and previously
designated
problem
banks,
those banks meeting
selection
criteria
1 or 2 (the most
serious
indicators),
and those referred
from other
review
sections.
New bank
rating
system
In May 1978 the Comptroller
of the Currency,
the Board
of Governors
of the Federal
Reserve System,
and FDIC adopted
a uniform
interagency
bank rating
system--CAMEL
(capital
adequacy,
asset quality,
management,
earnings,
and liquidity).
This system is designed
to provide
the three agencies
a basis
for making comparable
judgments
about the Nation's
federally
insured
banks.
This rating
system replaces'individual
rating
systems from the three
Federal
bank supervisory
agencies.
First,
the
The new rating
system has two main steps.
bank examiner
assesses
a bank's
capital,
assets,
management,
and liquidity.
Each factor
is rated with a number
earnings,
Secondly,
the 5 factors
from 1 through
5, with 1 as the best.
are combined
to get an overall
bank rating,
also on a l-to-5
scale.
The overall
rating
may not equal the arithmetical
average of the 5 individual
rating
factors
because the examiIf the
ner can emphasize
any one or combination
of factors.
regional
office
does not agree with the examiner's
rating,
it
determines
and assigns
the bank's
official
rating.
5
(See
The agencieo
have agreed on the 5 rating
groups.
app. II.)
Banks sound in almost every aspect rate a one,
those with excessive
weaknesses
requiring
urgent
aid rate a
*' 5.
The agencies
are gaining
experience
with the bank rating
new or additional
system and may consider
developing
guidelines
as more experience
is achieved.
MONITORING BANKS BETWEEN EXAMINATIONS
On November 1, 1977, the Division
implemented
its
integrated
monitoring
system to monitor
banks between examinations.
The idea is to alert
the Division
of a deteriorating
situation
before
it becomes serious
so that it can be quickly
corrected.
At present,
only State nonmember banks, excluding
mutual
savings
banks,
are monitored
by this
system.
The essence of the Integrated
Monitoring
Systems is JAWS
JAWS uses eight
tests
to measure the
(Just A Warning System).
adequacy of the bank's
capital,
liquidity,
profitability,
and
Banks
the combination
and growth of assets
and liabilities.
submit data to FDIC in their
Reports
of Condition
and Income.
FDIC then enters
this data into a computer
system which provides detailed
analyses
directly
to the regional
offices
for
banks failing
one or more of the eight
JAWS tests.
Also,
the regions
receive
quarterly
reports
from Division
The
headquarters
on each bank failing
one or more JAWS tests.
This report
regions
must then prepare
a formal
action
report.
outlines
a bank's
problems
or adverse
trends,
their
causes,
The regions
submit
and the corrective
methods to be applied.
which is responsible
for controlling
the
it to headquarters,
report
and ascertaining
that regional
office
actions
are
appropriate.
In addition
to the JAWS analysis,
the regional
office
staff
makes a thorough
financial
analysis
of each State nonmember bank with the Annual Review Report.
"h-is report
shows
examination
information
for the three most current
reports
of examination
and shows ratios
evaluating
earnings,
liquidity,
growth,
and capital
for the past 3 years.
Ratios
of a
bank's
peer group are also compared for the most recent
year.
After
the regional
office
has analyzed
an Annual Review
Report,
it forwards
an Annual Review Memorandum to headquarters for review.
This memorandum describes
any apparent
adverse trends
or conditions
and compares these results
with
the peer group data in the Annual Review Report.‘
On May 30, 1978, the Division's
Projects
and Planning
Branch began a detailed
evaluation
of the Integrated
MonitorThis evaluation
was not complete
when we finished
ing System.
our review
in July 1978.
6
INCREASED SUPERVISORY ACTIONS
The regional
offices
can attempt
to correct
bank problems
These
through
supervisory
methods other
than examinations.
include
requiring
periodic
progress
reports
from the bank,
with bank directors
and the
visits
to the bank, conferences
or letters
confirming
correction
programs
State authority,
In addition,
ayreed upon by the bank's
board of directors.
General
Memorandum 6 requires
the Regional
Director
to provide the Division
Director
an updated quarterly
or semi-annual
analysis
Of each financial
problem bank.
Section
8 of the Federal
Deposit
Insurance
Act authorizes
These
FDIC to take formal
enforcement
action
against
banks.
actions
include
initiating
(1) cease and desist
proceedings
against
banks engaging
in unsafe or unsound practices
or vioor written
agreement
with the
lating
a law, rule,
regulation,
Corporation
and (2) proceedings
to terminate
a bank's
deposit
the bank is in an unsafe or
insurance
if,
among other
things,
unsound condition.
In 1977, FDIC's Roard of Directors
authorized
45 cease
of which 39 resulted
in final
cease
and desist
proceedings,
A total
of 65 cease and desist
orders
were
and desist
orders.
in force at the end of 1977.
to revoke three banks'
During
1977, FDIC held proceedings
One bank's
financial
condition
improved
deposit
insurance.
enough to warrant
stopping
the proceedings,
while
the other
Three other
two proceedings
were pending
at the end of 1977.
proceedings
remained
pending
from prior
years,
making a total
of five proceedings
outstanding
at year end.
During
1977, FDIC did not act to remove an officer,
or other
bank manager for violation
of law, rule,
director,
or final
cease and desist
order,
unsafe or
rec7illation,
or breach
of fiduciary
duty.
unsound bankins
practices,
Federal
district
court
ruled
In 1976, a 3-judge
unconstitutional
FDIC's authority
to suspend officers,
direcand
other
people
participating
in
the
affairs
of
an intors,
sured State bank when those people were indicted
for a felony
involving
dishonesty
or breach of trust
(Feinberg
v. FDIC,
According
to FDIC, the con420 F. Supp. 109 (D.D.C.
1976)).
stitutional
defect
has been remedied
by Section
111 of
by the President
on NovemPub. L. No. 95-630 that was signed
ber 10, 1978.
This law provides
for a hearing
in the event
of a proposed
suspension.
7
CHAPTER 3
THE TWO TYPES OF PROBLEM BANKS
The Division
of Bank Supervision
policy
recognizes
two
types of problem
banks-- financial
and supervisory.
The Division identifies
and classifies
financial
problem
banks by
determining
the degree of financial
risk
they pose to the deposit
insurance
fund.
Supervisory
problem banks have similar
types of deficiencies;
however,
in the Division's
opinion,
their
risk
to the insurance
fund is less than that of the
financial
problem
banks.
The Division
formally
recognizes
a financial
problem
and provides
it with increased
headquarters
supervision.
Under this
supervision,
regional
offices
are required
to
--formally
discuss
meet
the
with
bank's
periodic
--submit
a bank's
Board of Director's
recognized
problem status,
formal
reports
on supervisory
bank
to
actions,
and
--conduct
visits.
more
frequent
examinations
and/or
supervisory
The Division
informally
recognizes
supervisory
problem
banks and allows
the regional
offices
to classify
these banks.
The regional
offices
then provide
increased
supervision
to
these banks.
Some of the supervisory
problem banks exhibit
the same problems
as those formally
designated
as problem
would pose a similar
risk
to the insurbanks and, therefore,
ance fund.
We believe
some of the supervisory
problem
banks
should be receiving
the same headquarters
supervisory
attention
as those classified
as problem banks.
FINANCIAL
RISK--THE
THIN LINE
Determining
financial
risk
is often
based on decisions
The Division's
three
where reasonable
people
may differ.
categories
for problem
banks indicate
the severity
of their
problems
and the possibility
of insurance
payments from the
fund.
The categories
are:
--Serious
problem
requiring
an advanced serious
problem --potential
payoff:
bank which has a SO-percent
or more chance of
financial
assistance
in the near future.
--Serious
problem --a
require
occur.
ultimately
changes
serious
insurance
problem bank threatens
to
payments
unless
drastic
--Other
problem --an other problem bank which has definite
weaknesses
but less financial
risk and requires
more
than ordinary
concern
and agressive
supervison.
The Division
will
continue
to identify
problem
in addition
to the overall
rating
given banks under
adopted
uniform
interagency
rating
system discussed
banks
the newly
in chapter
2.
Indicators
of
problem
banks
The Division
uses several
indicators
and classify
problem banks,
including:
--A
nominal
or negative
--A
management
rating
--Excessive
loan
--Violations
of
--A
rapid
rate
net
of
capital
unsatisfactory
to help
it
identify
and reserves
figure.
or poor.
deficiencies.
law or regulations.
of asset
deterioration.
--An unusually
low adjusted
capital
position
(book
capital
and reserves
less all assets
classified
as losses
and 50 percent
of all assets
classified
doubtful).
--An
undesirable
liquidity
as
position.
These factors
do not have specific
values
which
Judgment
and experiautomatically
indicate
a problem bank.
,
particularly
in the other
ence are used in assessing
problems
problem category.
In our prior
report
more definitive
criteria
require
review
examiners
reasons
for classifying
dence shows that review
menting
their
reasons,
and objective
criteria
we continue
to
of this,
What is a problem bank?
Identifying
problem
we recommended that FDIC (1) develop
for classifying
problem
banks and (2)
to document more completely
their
While
some evia bank as nonproblem.
examiners
are more completely
docuthe Division
has not developed
specific
Because
for identifying
problem
banks.
have the same problem
as last
year:
banks
Although
a problem
bank is generally
first
identified
the regions
or headquarters
can initiate
when it is examined,
the problem
designation
whenever
they become aware of problems
which may affect
the bank's
solvency.
9
In the region,
the examiner
be put on the problem
bank list.
prepares
a memorandum to initiate
can recommend that the bank
However,
the review
examiner
the Regional
Director's
problem bank recommendation.
This memorandum contains
statistical data from the current
and past two examination
reports
and a narrative
portion
that explains
the problem,
corrective
and other general
information
about the
action
being taken,
bank.
The report
and the review
examiner's
memorandum generally
are reviewed
by a senior
or head review
examiner
or an Assistant Regional
Director
before
the Regional
Director
reviews
them. If the Regional
Director
agrees with the recommendation, he signs the memorandum and forwards
it and the report
to Division
headquarters,
Examination
reports
are distributed
to the State authority
and the bank at the same time they are
sent to headquarters.
In January
1978, FDIC adopted
a previously
experimental
policy
of formally
notifying
a bank's
board of directors
that
the region
recommended their
institution
as a problem
bank.
The regional
office
notifies
the bank's
directors
by letter
at
Division
policy
the same time the report
goes to the bank.
for a formally
designated
or recommended
also requires
that,
problem
bank, the Regional
Director
or designated
representative attend
the board meeting
held during
the examination
or a
meeting
of the entire
board convened at the Regional
Director's
request
after
the examination.
Problem Bank
As discussed
in chapter
2, the headquarters
Review Section
reviews
all regional
problem bank recommendations.
It also reviews
recommendations
to remove banks from
the problem
list
and banks with problem
characteristics
not
recommended by the region
for problem
classification.
the headquarters
review
examiner
As part of this
review,
can contact
the regional
office
for futher
information
or
If the review
examiner
agrees with the Reclarification.
gional
Director
that a bank is a problem and that the proposed
the region's
memorandum is signed
corrective
action
is needed,
When the headquarters
review
unto indicate
concurrence.
covers
a problem
bank not recommended by the region,
the Problem Bank Review Section
or the Regional
Director
prepares
the
memorandum to designate
the bank a problem.
Differences
of opinion
on problem
classification
corrective
action
between the Problem Bank Review
the Regional
Director
are usually
resolved
through
However,
if agreement
with the Regional
Director.
reached,
the matter
can go as high as the Division
for the final
decision.
10
or
Section
and
discussions
cannot be
Director
Although
the Division
does not keep formal
records
on the
number of changes it makes to the Regional
Director's
recommendations,
informal
records
indicate
that such changes are
made.
The following
exanple
illustrates
of identifying
problem banks at both
regional
levels.
Case study--bank
the subjective
the Headquarters
nature
and
A
Regional
examination
of March 1, 1976--The
examination
found the bank's
condition
unacceptable.
Problems
included:
adverse
loan and other
asset classifications,
resulting
in
a slightly
negative
net capital
position;
poor liquidity;
negative
net earnings,
primarily
due to loan chargeoffs;
and
management weaknesses,
reflected
in a "fair"
management
rating.
The bank indicated
that a future
sale of new capital
would improve
its capital
position.
The region
recognized
the
bank as a supervisory
problem
bank and requested
progress
reports
on the classified
assets
and the liquidity
problem
but
did not recommend formally
designating
it a financial
problem
bank.
The region
also assigned
the bank priority
consideration
when scheduling
future
examinations.
The headquarters
review of this
examination
recognized
the bank as a borderline
problem,
but felt
that the indicated
future
sale of additional
capital
would "diminish
the risk
to
the Corporation
to the point
that a problem designation
is not
warranted
at this
time."
Regional
examination
of May 27, 1977--After
a 15-month
this
examination
found
more
classified
assets,
57
interval,
Numerous
classified.
percent
of which were not previously
other problems
cited
included
extremely
poor earnings,
with
a slightly
negative
capital
ratio;
little
hope of improvement;
The sale of adand weak management,
rated
"unsatisfactory."
ditional
capital
stock had faltered,
with only approximately
The region
contin3,000 of an authorized
25,000 shares sold.
ued to regard
the bank as a supervisory
problem
and continued
the progress
report
requirement.
The headquarters
review
comments stated
that,
overall,
the bank seemed to be a problem
but that management was believed
to be "stronger
than the report
indicates
and capable
Putting
the bank on the
of bringing
about desired
changes."
problem list
was not thought
necessary.
report,
FDIC's
In the September
30, 1977, quarterly
Integrated
Monitoring
System indicated
a 7.5-percent
decline
The March
in equity
capital
due to continuing
loan chargeoffs.
11
197u, comments to this
report
indicated
sale of new capital
wd-1~still
meeting
with little
success.
The comments also
clicated
that the region
was making periodic
visits
to the
bank.
?he bank still
does not appear on the problem bank
list.
in-
The decisions
not to add this bank to the problem
list
were subjective.
The headquarters
review of the March 1,
1976, examination
did not list
the bank as problem
because
of potential
new capital.
In our opinion,
the sale of new
capital
is an example of a future
event which may have unpreclictable
results.
The headquarters
review of the region's
May 27, 1977,
examination
second guessed the region
on the ability
of the
bank's
management to bring
about desired
changes.
Again,
the
decision
not to designate
the bank a problem was subjective
because it was based on an unproven
future
condition.
Corporation
officials
informed
us that subsequent
to our
review
the capital
infusion
in the bank had been completed
and
the latest
examination
report
showed that the volume of adThey
versely
classified
assets
had significantly
decreased.
further
stated
that the adjusted
capital
of the bank had risen
We duly
to 8.9 percent
and the net capital
to 4.7 percent.
note the improvements
but would like
to suggest
that
infusion
of new capital
may only be a temporary
solution
to a long term
problem.
SENIOR MANAGERS NEED TO BE MORE CONCERNED
WITH SOME SUPERVISORY PROBLEM BANKS
FDIC's failure
to develop
specific
and objective
criteria
for classifying
problem
banks prevents
it from knowing whether
We found
all problem
banks are receiving
proper
supervision.
some supervisory
problem
banks that exhibit
the sane problems
as those formally
designated
as problem banks-and,
therefore,
would pose a similar
risk
to the insurance
fund.
Yet these
banks weren't
receiving
the increased
headquarters
supervision.
In FDIC's Atlanta,
New York,
supervisory
problem banks received
--progress
--periodic
board
--more
reports
from
the
and Richmond
the following
bank
to the
regions,
supervision
regional
office,
visits
and/or
conferences
with the bank's
of directors
or some designated
conmittee,
and
frequent
examinations
12
than
nonproblem
banks.
However,
if a bank has been designated
as a problem bank,
headquarters'
the regional
office
to
supervision
requires
(1) formally
meet with
only
the Eank’s
Board of Directors,
(2) submit ~?eriorlic
formal
reports
on supervisory
actions,
and
(3) conduct
more frequent
examinations
and/or
supervisory
visits.
Generally,
supervisory
problem banks exhibit
similar
types of deficiencies
as financial
problem banks.
Since
the
Division
has not spelled
out
for the regions
the specific
guidelines
needed
to identify
supervisory
problem banks the
regional
offices
have developed
their
own criteria.
Of the
all had different
methods for
three regions
visited,
identifying
supervisory
problem
banks.
The Atlanta
Regional
Office
uses a list
of guidelines
covering
all aspects
of the bank, including
management,
asset
liquidity,
capital
adequacy,
earnings,
and superviquality,
These guidelines
apsion (such as cease and desist
orders).
pear to he a particularly
systematic
approach
in identifying
supervisory
problem
banks.
the Richmond Regional
Office
identifies
all
In contrast,
banks with management ratings
of fair,
unsatisfactory,
or poor
The New York Regional
Office
as supervisory
problem
banks.
identifies
its banks by judgment
and experience
concerning
the
These two regions
may well consider
all
severity
of problems.
E!owthe factors
considered
by the Atlanta
Regional
Office.
ever,
the wide variation
in numbers of supervisory
problem
banks reported
by these
and all
other
regions
as compared to
formally
recognized
financial
problem banks could point
to the
differences
in criteria
used in identifying
supervisory
problem
banks.
had reported
779
As of March 31, 1978, the regions
identified
supervisory
problem
banks,
as compared to 270
financial
problem
banks designated
by FDIC at the same date.
The examples
below show the similarities
between
supervisory
and financial
problem
banks and the need for
specific
and objective
criteria.
Case study--bank
R
State authority's
Regional
examination
June 16, 1977--The
examination
revealed
adverse
loan classifications
eqlial
to
179 percent
of capital
and reserves,
resulting
in a-mostly
Ilost substandard
classificanegative
net capital
position.
tions
were nonperforming
agricultural
loans with
assigned
collateral,
apparently
protecting
the bank from ultimate
Liquidity
was cited
as a potential
problem
and
loss.
13
The region
participated
with the
Inana(Jement was rated
"fair."
board of directors
at the
State in a meeting
with the bank's
con(ylusion
of the examination
and planned
to participate
in
The State also requested
progress
thth Stat.c’s
GO-day visits.
t-e[Y)r ts . The region
did not recomnend putting
the bank on the
I)rot)lehl
list.
The Problem Rank Review Section
did not review
the bank
l:ntil
I?c?cel7t)er 1977.
JXlrinq the interiT,
the region
visited
Accordinq
to the regional
office,
but
t.iltt t)ank in November.
riot included
in the form 96 comments we reviewed,
the Problem
fi;ink
Review Section
contacted
the reqional
office
to determine
the bank was not reconwt1J', 1)a:ecl on the State examination,
The region
said the aqri~~c?ncled for the problem
bank list.
(.ult:ural
nature
of the hank's.husiness
precluded
a forecast
This income could affect
the volume
of I)ossihle
crop income.
0 1. rlt! 1.inquent
loans.
Regional
office
visitation
November 5, 1977--Rased
on the
Plovc?nL&r-?ZZE,
the Regional
DiFector
recomr?ende~i pllttinq
the
1)ank in the Other Problem category.
Classified
assets
were
reduce<l sliqhtly
(to 158 percent
of capital
reserves),
but
with a large
increase
in the loss classifications
formerly
Liquidit
was il?proved,
but was reclassifiefl
substandard.
Management remained
fair.
cjartled as potentially
dangerous.
%c? Wqional
Director's
nemorandum indicated
a planned
FebruFDIC
examination
and
stated
that
the
Serious
Problem
ary 1978,
clesiqnation
might be in order
following
this
examination.
The region
had not examined
the
late April
1978.
However,
the region
visit
to the bank in February
1978.
dr?siqnation
was retained.
Case study--bank
-.--
bank as of our visit
in
part.icipaterl
in another
The Other Problem
C
The Division
designated
bank C as a Serious
Problem based
on a Wccmber
17, 1974, examination
and retained
this desiqnaThese designations
tion after
a June 2, 1975, examination.
were clue to the larqe volume of classified
loans and other
assets
resulting
in-largely
negative
net capital
position.
A November 3, 1375, examination
found that the capital
position had improved
slightly
by a reduction
in classified
assets,
and the problem desiqnation
was lessened
to Other
Problem.
Regional
examination
May 14, 1976--Bank
C had obtained
S355,OOO more capital
since the last
examination
which,
combinctl with a redbction
in loan classifications,
created
a
Problems
in loan
slight ly positive
net capital
pos ition.
14
management
inadequate
list.
continued,
collateral.
including
poor credit
The bank was taken
risks
and
off the problem
Reqional
examination
June 21, 1977--The
regional
review
examiner
noted that the overall
condition
of the bank had deteriorated
with large
increases
in classified
loans,
43 percent being new credit
extensions
not previously
criticized.
The Division,
after
receiving
a recommendation
from the Region
designated
the bank a Serious
Problem and instituted
cease and
desist
action
to reduce classifications
to a more acceptable
level.
These examples
show situations
where senior
Division
managers would not be informed
unless
the bank were formally
the status
of
In addition,
designated
a financial
problem.
these banks or the effect
of FDIC supervisory
action
would
also be unknown, because without
specific
and objective
criteria
it is not known whether
all banks have been properly
identified.
The thin line
between a financial
problem
and a
supervisory
problem bank is a matter
of subjective
judgment.
Yet the above examples
show the similarity
between the two
types of problem
banks.
New capital
may change a bank's
financial
position,
but
it does not insure
correction
of the deficiencies
that create
In all the examples,
the formal
probthe problem
situation.
lem designation
was withheld
or removed,
based on events which
These
might or might not have corrected
the bank's
problems.
events would only delay a more severe financial
risk
unless
the underlying
deficiencies
are corrected.
CONCLUSIONS
The Corporation's
Division
of Bank Supervision
defines
its first
priority
to be effectively
supervising
and monitorAs of March 31,
ing state
nonmember banks with problems.
1978, Corporation
headquarters
was directing
the supervision
of 270 such hanks which had been formally
designated
as problem banks because they posed a high degree
of risk
to the
insurance
fund.
About 779 other banks
regional
offices
to present
risk
to the insurance
fund
supervisory
attention.
were judged by the Corporation's
a sufficient
but lower degree
to warrant
their
increased
15
of
'
Some of these
banks exhibit
the same problems
as those
f'ormally
designated
as problem
banks and therefore
would pose
a :;imilar
risk
to the insurance
fund.
There is a lack of
sljecific
and objective
criteria
for judging
whether
a bank
:;11oult3 be designated
as a problem bank.
We believe
some of
tllese 779 banks should be receiving
the same headquarters
:;upervisory
attention
as the 270 problem banks.
RECOMMENDATIONS
- - _-...--.-For the Corporation
to more efficiently
supervise
banks,
GAO recomrlends
that the Chairman of the Federal
Deposit
Insur;lnce Corporation
develop
specific
and objective
criteria
to
improve
itlentification
of problem banks and banks requiring
regional
attention.
AGENCY
COMMENTS
.--~^ ..--~
FDIC officials
stated
that a conscious
decision
was made
(1) to allow
the regions
to identify
banks of special
supervisory
concern
and (2) to tailor
the characteristics
of such
banks to the geographic
regions
in which the banks are
located.
As discussed
in this
chapter,
without
providing
the
regions
criteria
for identifyinq
supervisory
problem banks,
Division
senior
managers cannot be sure all such banks are
identified
and receive
proper
supervision.
FDIC officials
also
banks do not exhibit
the
ceive the same degree of
banks.
commented that supervisory
problem
same deficiencies,
nor do they resupervision
as financial
problem
We believe
the case studies
in this chapter
demonstrate
the difficulty
of classifying
supervisory
and financial
problem banks.
We also believe
disagreements
between the regions
and the Division
on problem
classifications
indicate
the
similarity
of deficiencies
between supervisory
and financial
problem
banks.
In addition,
the regions
determine
necessary
supervisory
action
depending
on the condition
of the bank, not the formal
The region
may not change the superproblem
classification.
vision
even if Division
headquarters
disagrees
with the
region's
recommended problem
classification
for the bank.
We
believe
this
further
indicates
the confusion
that can exist
in defining
a financial
problem
and a supervisory
problem
bank.
After
examination
our review,
the Corporation
policy
that became effective
16
issued
a revised
bank
on January
1, 1979.
headquarters
designated
problem
banks
Under this
new policy,
at least
one full-scope
(financial
problem banks) will
receive
Banks warranting
increased
reexamination
every 12 months.
gional
office
supervision
(supervisory
problem bank) will
receive at least
one full-scope
examination
every 18 months.
The new policy
does not remove the need for specific
and
objective
criteria
to identify
problem banks.
Number
1977
of
banks
Estimated
1976
1977
problem
Problem
Other
omitted)
banks:
Serious
Problem-Potential
Payoff
(PPO)
Serious
deposits
--1976
(000
All
insured
Problem
Total
394,355
12
24
100
91
5,363,352
4,960,192
256
264
20,521,021
18,781,290
368
379
$26,580,632
$24,135,837
$
696,259
$
$
Nonmember:
Problem--PPO
10
19
Serious
Problem
82
72
4,277,851
3,715,936
194
210
5,013,698
6,842,976
286
301
$ 9,8561815
$10,909,257
$
$
Other
Problem
Total
State
565,266
350,345
Serious
$
member:
3,767
Serious
Problem--PPO
1
1
Serious
Problem
3
3
18
15
8r094,103
4,095,470
- 22
- 19
$ 8,183,671
$ 4,154,635
1
4
15
16
1,002,265
1,188,858
44
39
7,413,220
7,842,844
--- 60
59
$ &540,146
$ 91071,945
Other
Problem
Total
6,332
83,236
55,398
National:
Serious
Problem--PPO
Serious
Problem
Other
Problem
Total
$
19
124,661
$
40,243
The se 368 problem
banks represent
only about 2 percent
of all
insured
banks.
As of June 30, 1978, the number of
problem banks had decreased
to 354, continuing
a gradual
cleclinc
from a peak of 385 in November 1376.
INTERPRETING THE PRORLEM BANK LIST
___.--..-Although
the
condition
of the
doing so requires
For example,
the
reflects
economic
due to examination
ings of the list
the
condition
of
problem bank list
is used to indicate
the
FDIC acknowledges
that
banking
industry,
considerable
interpretation
of the list.
increase
or decrease
of problem
bank numbers
declines
or upturns
only after
a timelag,
scheduling
and processing.
Other shortcomalso limit
its effectiveness
in portraying
the banking
industry.
The problem
bank list
identifies
and classifies
the risk
of FDIC financial
involvement
with a floundering
bank that
could fail.
While meaningful
to FDIC the list
implies
but
does not measure potential
loss to the insurance
fund or to
the depositors
of problem banks.
It emphasizes
a negative
--potential
bank failure--when
aspect of bank supervision
through
FDIC efforts
such failures
historically
do not result
in loss to the insurance
fund or bank depositors.
insurance
fund
As of December 31, 1977, the deposit
amounted to about $8 billion
with actual
and expected
losses
from liquidating
acquired
assets
shown as $308.4 million.
for 541 bank failures
from January
FDIC also reported
that,
of the depositors
1, 1934, to the end of 1977, 99.8 percent
had received
or were assured
of payments of their
deposits
in full.
The problem bank list
also does not reflect
all
the
financial
risk
to the deposit
insurance
fund.
It only indicates problem conditions
known to exist
in specific
insured
FDIC knows that banks can fail
for
banks at a given point.
Examples
reasons undetected
during
or between examinations.
include
defalcations,
embezzlement,
manipulations,
or rapid
four more
asset deterioration.
During
1977, six banks closed;
Data on these banks is
closed
in the first
6 months of 1978.
presented
on the next page.
20
Bank Closings
Bank and location
Date
closed
Estimated
insured
deposits
(000
Estimated
loss to FDIC
(note a)
omitted)
1977 closings:
First
State Bank,
Foss, Oklahoma
3/10/77
The Monroe Bank &
Trust Company,
Monroe, Connecticut
3/28/77
2,624
First
Auqusta
Bank
& Trust
Company,
Augusta,
Georgia
5/20/77
19,718
Republic
National
Bank,
New Orleans,
Louisiana
7/29/77
4,686
525
Donahue Savings
Bank,
Donahue,
Iowa
8/26/77
4,579
0
Banco Economias,
San German,
Puerto Rico
g/02/77
141,110
14,000
l/19/78
$144,447
$ 7,612
$
1,789
425
$
0
2,300
1978 closings:
Drovers
National
Bank
of Chicago,
Chicago,
Illinois
.
First
Bank of Macon
County,
Notasulga,
Alabama
l/26/78
Wilcox
County Bank,
Camden, Alabama
3/01/78
10,300
Banco Credit0
Y Ahorro
Ponceno,
Ponce,
Puerto Rico
3/31/78
534,532
3,718
a/Estimated
loss is actual
FDIC provision
for loss for
1977 closings
as of 12/31/77
and estimated
by Division
Liquidation
for 1978 closings.
21
of
Of the six banks that failed
during
1977, three were
undetected
until
the eleventh
hour.
One failed
due to an
illegal
bad check writing
scheme and was added to the problem
bank list
only days before
its closing.
Another
suffered
severe loan portfolio
deterioration
between examinations
and
was added to the problem
list
approximately
1 month before
failure.
Embezzlement
caused the third
of these banks to fail,
and
it
was not listed
on the problem
list
at all before
it
closed.
The remaining
three banks were on the problem
list
for approximately
14 months or more before
failure.
Of the
the I)roblern
they failed.
four banks that failed
in 1978, two were added to
list
based on examinations
about 12 months before
The remaining
two were on the list
over 2 years.
FDIC's Division
of Liquidation
compiles
statistics
on
the reasons
for bank failures.
These statistics
indicate
that 25 percent
of the bank failures
from 1960 through
1977
resulted
from defalcations,
embezzlement,
or manipulations
by bank officials
or employees.
This means approximately
25
percent
of the bank failures
could go undetected
and unreported
bank statistics.
in problem
CONCLUSIONS
The problem
bank list
internally
communicates
to E'DIC's
Board of Directors
those banks with known problems
which in
the Division's
opinion
might financially
affect
the deposit
insurance
fund.
However,
we believe
the list
can be
misinterpreted
and that it incompletely
conveys
information
on the condition
of the banking
industry
to the Congress,
the general
public,
and the banking
industry
itself.
The newly adopted
interagency
rating
syster! will
rate all
insured
banks in one of five overall
rating
groups according
to
the banks'
conditions.
We believe
showing all banks in the
overall
rating
groups is a more appropriate
means of conveying
the condition
of the banking
i.ndustry
than financial
risk
to
FDIC's insurance
fund alone.
RECOMMENDATIONS
We recommend
--Phase
out
indicator
that
the
Chairman,
FDIC:
the use of problem
bank data as an
of the condition
of the banking
industry.
22
--Release
data classifying
all insured
banks under
the newly adopted
uniform
interagency
ratinq
system.
This should show the total
number of banks in each
of the five overall b rating
groups.
it
AGENCY COMMENTS
FDIC aqreed to consider
phasinq
out the release
of problem
bank data,
and, instead,
to release
data classifyinq
all the Nation's
insured
banks under the uniform
interaqency ratinq
system.
However,
in respondinq
officials
commented that
--supervisory
releases
problem
of problem
to our
recommendations
banks are discussed
bank data;
and
FDIC
in the
--banks
not on the problem
bank list,
and which fail
due to unforeseen
or unpredictable
reasons,
would
also not be identified
as supervisory
problem
banks
for these reasons.
We agree with these comments;
however,
FDIC problem
bank data releases
only mention
that reqional
offices
maintain
unofficial
watch lists
of banks posing
supervisory
concern.
The data releases
do not indicate
how many supervisory
problem
banks are involved.
We believe
that without
data on both types
of problem
banks,
supervisory
and financial,
this
data does
not provide
a perspective
of FDIC supervisory
concern
fbr the
Releasing
data classifying
all
insured
Nation's
insured
banks.
banks under the uniform
interagency
rating
system should provide this
perspective.
3.3
APPENDIX II
APPENDIX II
Uniform
Interagency
Bank Rating
System
Ovrrvlew
The rating system 1s based upon an evaluation
of five crltlcal dlmenrlons
of a bank’s operations
that reflect In a compre
henrlve
farhlon
an Instltutlon’s
financial
condition.
compliance
with banklng regulations
and statutes and overall oper
atlng sourrdnc~
The cpeclflc dlmenrlons
that are to be evaluated are the following’
Capltdl
ddscluacv
Asset quahtv
Management,‘Admlnlrtratlon
Earnlnyr
Llquldlty
Each of these dlmenslons
1s to be rated on a scale of one through
five In descending
order
1 represents
the highest and 5 the lowest (and most crltlcally
defIcientI
level of operating
of performance
performance.
quality.
Thus,
Each bank II accorded
a sum~nary or composite
ratmg that is predicated
upon the evaluations
of the specific performance dlmenslonr.
The composite
rating 1s also based upon a scale of one through
five in ascending order of supervisory
concern
In arrlvlng at a composite
rating, each financial
dimension
must be weighed and due consideration
given to the
Interrelatlonrhlps
among the various aspects of a bank’s operations.
The delineation
of specific performance
dlmenslons
does not f)reclude conslderatlon
of other factors that, m the judgment
of the examiner
or revfewer, are deemed relevant
to accuratrly
reflect the overall condition
and soundness
of a particular
bank. However,
the assessment of the rpeclflr
performance
dlmenstons
represents the essential foundation
upon which the composite
rating is based.
Composite
Rating
The five composite
ratings
are defined
and dIstInguIshed
as follows,
Composite
1
Banks In this group are sound finstltutlons
fin almost every respect; any critlcal
flndmgs
are basIcally of a mmor
nature and can be handled
In a routme
manner. Such banks are reslstant to external
economic
and flnanclal
dir
turbances
and capable of wlthstandmg
the vagaries of business condltlons
more ably than banks with lower corn
posite tatmgs.
Comporitr
2
Banks In thts group are also fundementally
sound Instltutlons
but
the normal
course of busmess. Such banks are stable and also able
however,
areas of weakness could develop Into condltlons
of greater
merits are handled
In the normal course of business, the supervisory
may reflect modest weaknesses correctable
in
to wlthstand
business fluctuations
quite well,
concern.
To the extent that the minor adjust
response IS llmtted
Composite
3
Banks In this group exhlblt
a combmatlon
of weaknesses ranging from moderately
severe to unsatisfactory.
Such
banks are only nominally
resistant to the onset of adverse business conditions
and could easily deteriorate
11 con
certed actIon IS not effecrlve
in correcting
the areas of weakness. Consequently,
such banks are vulnerable
and
requtire more than normal
sur)ervislon
Overall strength
and financial
capacity.
however, are still such as to make
falltrrca only a remote posslblllty.
Composite
4
Banks 111 this groul, have an Immoderate
volume of asset weaknesses, or a combination
of other condltlons
that
are less than satisfactory.
Unless prompt
actlon is taken to correct
these conditions,
they could reasonably
develop, Into asituat~on
that could lmpafr future viability.
A potential
for failure is present but is not pronounced.
Banks In this category
require close supervisory
attention
and financial
surveillance
Composlta
5
Thts category
IS reserved for banks whose conditions
are worse than defined
under Np. 4 above. The volume and
character
of weaknesses
are such as to require
urgent
aid from the shareholders
or other sources. Such banks
require
Immediate
corrective
actlon
and constant
supervisory
attention.
The probability
of failure
is high for
these banks.
Pdormrnw
Evaluation
As already
noted, the five key performance
earnings,
and liquidity
- are to be evaluated
utlllled
III assignlng performance
ratings,
Rotiqg No. 1
It IS the highest
dimensions
- capital adequacy,
asset quality,
management/administration,
on a scale of one to five. Following
is a description
of the gradations
mdlcates strong performance.
rating and is Indicative
of performance
Rating No. 2
reflects satisfactory
performance.
It reflects performance
that IS average or above;
sound operation
of the bank
Rating
factorv
3 -- represents performance
nor marglnal
but is characterlred
NO.
that is significantly
it includes
performance
higher
that
than
average,
adequately
that is flawed to some degree; as such, is considered
by performance
of below average quality.
provides
fair.
for the safe and
It is neither
Rating
No. 4
represents
marglnal
performance
which
IS significantly
below average; if left unchecked,
pc?rfnrmanct? might evolvt’ unto weaknesses or condltlons
that could threaten
the viability
of the institution.
25
to be
satIs-
such
APPENDIX
APPENDIX
II
( ,)(I~~,,I 11. I,,I~VI (1 thrrlllr$r
51 rr\ reldtrorr
to ta) the volume
of rrsk assets; (h) the volume
of marginal
and lnferror
II~I.~III~ ,v,w~~, 1~ I I!,lrrk rlrrlwth
t~x~~r~ence, plans. and prospects; and (d) the strength of management
rn relatron to (a).
II,/ ,IU~I (I ) III I~t~~~~~~ot~,c,orl~;,rir~r,ttrorl may be grven to a bank’s capital ratios relative to its peer group, Its earnings re
rr~r~r~r,rr ,111rl IIS, ,I, (VW -o r.,~f~rt~~l rnarketc or other approprrate
sources of fmancral assistance.
K,llk’,
I,IIOI~ 1 OI / drr’ c:or~~~ctc!rt~cl to have adequate
caprtal. although
the former’s
capital ratios will generally
exceed
IIIOV~ r,t rtlt, l,rrrr~r A 3 r,rtrnq rbould be ascrrhed to a bank’s caprtal posrtron when the relationship
of the capital strut.
(\I~v 10 (KJOII~\ ((II, It)). or ((:I 15 ddvrrsr! even glvrng weight to management
as a mitlgatlng
factor. In most instances such
I,,III~ o WIIIJI<I IINI~ c.,roltCtl r.~tr~, btblow peer group averages. Banks rated 4 and 5 are clearly Inadequately
capitalized,
the
I rtrrar ~V~JIVWII~III~ J srtuatlorr
of such gravrty as to threaten
vrahrlrty
and solvency.
A 5 ratrng also denotes a bank that
r~~r~~~rrr’~ II~I~VIII .~\~,r\tarrr.e Iron1 rh,+reholders
or other external
sources of financial
support.
Asset Qualrty
A\WI IIII~III~ 15 r,~rc*cl (1 through
51 rrr relation
to (al the level, drstrrbutron
and severity of classified assets; (bl the level
,IIII~ < orr~oo~~f~r,r~ of no!ldrcrtlal
and rc~iuced rate assets, (cl the adequacy
of valuatron
reserves; and (d) demonstrated
,II~IIII~
IO drln~rr~~~r~r ,rrrrl collect f~roblom credits. Obvrously.
adequate valuatron
reserves and a proven capacity
to polrce
.IIMI ~.oll1~1.t
(Irotrlr’rn
r:rr:rlrt, mrtrgate to some degree the weaknesses Inherent
rn a given level of classrfred assets. In evaI.
II~~I~IN] ~\WI cf~r,~l~ty corrslderat1on
should also be qlven to any undue degree of concentration
of credits or Investments,
rt\tz II~IIIIV drlrl vnlumc: of ~~~oc~al mentron
classlfrcatrons,
IendIng pollcres, and the adequacy
of credit admrnrstratlon
,,rc,c r~llurt’s
A\WI q~ral~ry r,rtjr)gr of 1 dnrl 2 represent
srtuatrons
mvolving
a minrmal
level of concern.
Both ratings represent sound
~K,I tfolloc
,rlt~lo~rrfh tht- ICWI and Ieverlty
of classlficatrons
of the latter generally
exceed those of the former. A 3 asset
r.tr~r~l ~rrrlrr ,rtra: <r \rl~r.rlror~ rnvolvrog
an aoorecrable
degree of concern,
especially
to the extent that current
adverse
~II,II~IS ~,~~yf~\t 1111tr~nt1dl fururcb proMems
Hatlngs 4 and 5 represent
Increasingly
more severe asset problems;
ratmg 5. I”
(r,rr ,I( (II~I, rry~~cc:r~~~ drl ~rnrn~nen~ threat to hank vrabrltty
through
the corrosive
effect of asset problems
on the level of
I ,,(,11‘11
‘,,I[),101
I
ManagementlAdministratron
M,rri,c~p,rrr~,r~r’,, (wrforrr~,rr~cr~
rnrrrl trf: evaluated
dyarnst vrrtually
all factors consrdered
necessary to operate
the bank
WII~IIII ,~:~.r~()r~rl Il,rnklnq
practIr:es and rn a safe and sound manner.
Thus, management
IS rated (1 through
51 with
rr*\(~r r 1r1 (dl rc~r:hrilcdl Wm(Jf!tt’nCf!,
leatlershlp
and admrnrstratcve
ability.
(b) complrance
with banking
regulatrons
and
~,I,I~LIIW.. (r ) .Illrlrfy
tr) plarl dntf rc!spond to changing
crrcumstances,
(d) adequacy
of and compliance
wrth Internal
IIO(II IVS. (VI rlr*l)t11 arrtf ~r:cess~r~n
(fl terrdencres toward self-dealrng;
and (gl demonstrated
willmgness
to serve the legit
IIII,~~V Il,crlklrlcf IWITIS of thrn cornrrron~ty
A 1 I,I?I~K~ 10 IINIII ‘rbvr’ 01 rnar~ag~nent
that IS fully effective with respect to almost all factors and exhlblts a responsive
IIV\~~ (III(I crlllllly
IO copr! ~ccc~ssfully
with extstlng and foreseeable
problems
that may arise In the conduct
of the bank’s
‘ilf,III~, A 2 I,IIIIK~ rr~fler 15 ~rnr: defrclencres
I)ut generally
indrcates a satisfactory
record of performance
II, light of the
l~.,t,k ‘(1 I)~~IICIJ~~I
r Ircum\ldnCes
A rating of 3 reflects performance
that IS lacking
rn some measure of competence
rlr~\rr,j~~lrl to rnrarst rr,sl,ortrrl,rlrtrr!~
of the srtuatron
m whrch management
is found.
Esther rt is characterized
by modest
t<rlr~r( whr!rl JIIOW overage nt)rlrrrer are called for, or it is distrnctly
below average for the type and sire of bank rn whrch
II OIWI~II~~~, I trrr\. II\ rr’\ponsrvr’ness
or abrlrty to correct less than satisfactory
conditions
may be lacking. The 4 rating is
~rrrlir:dtrvr! of ,I rrlanayemer~t
that 16 generally
Inferior
in ability compared
to the responsibilities
with which tt is charged.
A r,rtrrlq r)f 5 IS df)plrc&lr:
to those Instances where incompetence
has been demonstrated.
In these cases, problems
re~r~lrrrry frrjrrr rrl,rrragr~mc~rrt weakrless are of such severrty
that management
must he strengthened
or replaced
before
VJII~IO r.r~~rl~t~r~r~~ car, IlrB I)rouqht about
Earnmgs
I ,~rrrrryr wrll 01~ rated (1 through
51 wrth respect to (a) the ability
to cover losses and provrde
for adequate
caprtaf;
([)I r:Sirr~~r~q‘B 111~11rls. (r:) peer qroup oomparrsons,
and (d) quality
and composition
of net income.
Consideration
must
.I(W fw qrvr’r~ to thr, ~~~~rrrrelat~or~s~~rf~s that exrst between the drvidend
payout ratio, the rate of growth
of retalned
earn
III+
drlrl Ihv drl~~c~uat‘y 01 Odnk cdl)rtal A d~vrdenti payout rate that IS sufficiently
high as to cause an adverse relationship
10 c’xl\t ~r~r]gt~~~r c.onrlrtronc
warranting
a lower rating despite a level of earnings
that might otherwise
warrant
a more
(Irvr~rlrl)lr’ .r~)l)r,ri~l
Ourll~ty
15 also an Important
factor rn evaluatrng
thus dimension
of a bank’s performance.
Considerl~~~or) stlo~~l~l 1~ I)IYHII IO the! arlr~~r~acy of transfers to the valuatron
reserve and the extent to which extraordinary
items,
‘,w III III+“, II ,BIW,.HIloll’,, ‘~r~rl ldx r.ftects contrrbute
to net Income. Earnrngs
rated 1 are sufficient
to make full provrsion
1111 ltrr# ctil~‘,orllllorl
01 IOSW\ dr~rl thr: accreflorl
of capital
when due consrderatron
IS given to asset qualrty
and bank
rIt’jwtt\
(;I’III’I,IIIv, tl,rrlkq, 50 rdrrad wrll have earnrngs well above peer group averages. A bank whose earnmgs are relatrvzly
,.1,111r or I’VI’II I~~OVIIMI rlr~r~w~rrrl
rndy recerve a 2 ratrng provrded
Its level of earmngs is adequate
II, view of the consid
( ,,1111~1,‘,(IIV 115’d’il dOOVl’ Norrr~lly,
t)dnks so rated wrll have earnrngs that are in lrne wrth or slightly above peer group
26
II
APPENDIX II
APPENDIX II
norm6. A 3 6hould th’ accorded
earning1 that are not sufflClent
co make full provirlon
for the ObsOrptlOn of lo6686 and
the accretron
of capnal
in relation
to bank growth.
The earnings pictures of 6uch banks may be further
clouded
by
6tatic or rncon6lstent
rarnmgs
trends. chronicellv
insufficient
earning6, a high dividend
payout rate or lo)6 than ratrrfac,
tory a6601 qUalrtv
Earnlngs
of such bunk8 are ganerallv
below peer group averager. Earning6 rated 4, while generally
pO6ItlV0, may be characterrzed
bv erratic fluctuations
In net income, the development
of a downward
trend, Intermittent
los6e6 or a 6Ub6tantial
drop from the previous year. Earnings Of ruch banks ara ordmarily
sUb6tantiabv
below peer group
everager.
Bank6 wrth earnings
accorded
a 5 rating rhould
be expsrrsncing
IO##BI or reflectmg
a level of earmngr
that 16
wor6e than dsfmad
m No. 4 above, Such IOIMI may represent
a distinct
threat to the bank’6 solvency through
the
erouon
of csprtal.
Liquldlty
Lrqurdrtv
16 rated 11 through
6) with respect to (a) the volatility
of deposits;
tb) reliance on interest,tensitive
fund6 and
frequency
and level of bOrrOWinp6.
(cl technical
competence
relative to structure
of liabilrtier,
Id) avarIability
of a6setr
readrlv convertible
into ca6h; and (0) access to money market6 or other ready 6ource6 of ca6h. Ultimatelv,
the bank’s
liqurdrty
mU6t be evaluated
on the brris of it6 capacity
to promptly
meet the demand
for payment
of its obligations
and to rsadrlv
1111the reasonable
credit need6 emanating
from the communities
which it 6erve6. In appratring
liquidtty,
attentron
6hould be directed
to the bank’6 average liquidity
over a specific time period as well as its liquidity
position
on any partrcular
date. Contideration
should be given, where approprrate,
to the overall effectivenerr
of arset.tiablllty
management
stratapie
and compliance
with and adequacy
of establi6hed
liqurdity
policier.
The nature, volume and
antrcrpated
u6age of a bank’6 credit commitmenta
are also factors to be weighed
in arriving
at an overall rating for
Imurdrtv.
A lrqurdity
rating of 1 mdicater
a more than sufficient
volume of liquid a66et6 and/or ready and easy acce6s on favorable
terms to external
sources of liquidity
within
the context
of the bank’s overall arret.liability
management
6trategy.
A
bank developmg
a trend toward decreasing
liquidity
and increa6ing
relrance on borrowed
funds. vet still within accept.
able proportions,
may be accorded a 2 rating
A 3 liquidity
rating reflects an Insufficient
volume of liquid asset6 and/or
a relrance
on intere6taensitive
funds that is approaching
or exceed6 reasonable
proportions
for a grven bank. Ratings of
4 and 6 reprersnt
mcreasingly
seriour liquidity
position6
Bank6 with liquidity
porltions
so crltical as to constitute
an
Imminent
threst to continued
viability
rhould be accorded
a 5 rating, Such bank6 require immediate
remedial
action or
external
fmancial
arristrnce
to allow them to meet their maturing
obligations.
May
1978
27
APPENDIX III
I II
APPENDIX
FEDERAL DEPOSIT INSURANCE
August
Mr. Donald
Assistant
Pul Ien
Regional
Wnsl~ington
80’1
Regional
W.
Fnl In
Broach
11,
Washmgton.
DC
20429
1978
Manager
Office
Street
~hl~rcll,
Dtsar Mr.
CORPORATION,
Virginia
22146
Pullen:
1 appreciate
the opportunity
to review
the draft
TnsurnnrP
Corporation’s
examination
and supervisiofi
with
respect
to the draft
follow.
report
of
on the
insured
Federal
banks.
Deposit
Comments
In our response
to your
1977 audit
report
(FOD-77-8).
we expressed
concern
of placing
on the cover
page criticisms
nf FDIC
with
yollr
then new format
t og~* thr,r
wi th certain
recommendations.
We stated
that
such a format
could
“ccbrtninly
mislead
an llninformed
reader”
(FOD-77-8
- Appendix
III,
Page 49)
h~cnust*
your comments
stood
alone
without
any explanation
or rebuttal.
We
also
statcbd
on Page 50 of Appendix
III
of that
report
that
we were not
sure
there> was any need for recommendations
to appear
unilaterally
on the cover.
Wr rpiterntr
and repeat
all
of those
comments
with
respect
to the 1978 GAO
audit
report.
There
is a very
real
danger
that
the uninformed
and even the
informed
might
he misled
by the one-sided
sunnnary
of GAO findings
on the cover
the rebuttal
to and explanation
of those
statements
which
are not
P” Rf‘ since
rc~ft~renc~d
might
he overlooked.
We urge
again
that
the format
of summarizing
your criticisms
and reccmamendations
on the cover
page not be followed.
If it
is followed,
we urge
that
GAO, in the interest
of fairness,
at least
reference
the fact
that
F’DIC has commented
on the GAO criticisms
and
on t-he covrar page
recommendat
ions
in the appendix
of the report.
In the second
sentence
of the first
paragraph
of the cover
page the statement
is madcb that
“restricts
itself
by emphasizirig
financial
risk
the Corporation
to thra insllrance
fund
as the only
concern
of top management.”
The corollary
implicit
in this
assertion
is that
top management
of the Corporation
ignores
supervisory
prohlems.
Simply
stated,
the assertion
is inaccurate.
From ralendar
year
1976 to date
the Corporation
has issued
15 emergency
cease
and desist
orders
under
Secti.on
8(c)
and 83 cease and desist
orders
under
SrAct ion 8(h)
of the Federal
Deposit
Insurance
Act.
Three,
or 20%, of the
or more than
14X, of the regular
cease
and desist
emfbrgency
orders
and twelve,
ordrrri
were
issued
against
banks not
formally
designated
problem
banks.
In
every
instance,
cease
and desist
orders
of any type
are not only
reviewed
and
28
APPENDIX III
APPENDIX III
anolysed
by top Warhington
staff
perronnel
but also are reviewed,
analysed
and
issued
by the Corporation’s
Board of Directors.
These data belie
the asaertion
that
top management
of the Corporation,
either
in the Regional
Offices
or
in the Waahington
Office,
ara on1
concerned
with
banks posing
serious
financial
problems
and are complete 9 y unconcerned
with
those posing
supervisory
concerns.
indicated
in our comments
to the 1976 and 1977 GAO audit
reports,
the
Corporation’s
Regional
Directors
mnintain
unofficial
lists
of supervisory
problems.
The Regional
Directors
are considered
part
of the top management
of
upon whom we rely
with
confidence
to be fully
cognizant
of
the Corporation,
and to take or recommend
necessary
measures
to correct
any supervisory
Nevertheless,
Washington
Office
staff
perform
an
concerns
in their
Regions.
oversight
function
of the activities
of the Regional
Offices
by reviewing
and
analysing
examination
reporta
of State
nonmember
insured
commercial
banks
which
are earmarked
by the weekly
computer-generated
examination
analysis
of
“the
edit
check
list”)
and the documentation
(hereafter
14 weighted
variables
of the Regions
generated
by the computerized
Integrated
Monitoring
System
( “TMS” ) * For every
action
report
generated
by the IMS and every
bank
examination
report
earmarked
by the edit
check
list
for review
and analysis
in
the Washington
Office
a permanent
record
is made on the Summary Analysis
of
Examination
Report
(Form 6620/22,
formerly
form 96; hereafter
“Suxsnary
it is impossible
for senior
Analysis”).
From a practical
standpoint,
Washington
staff
to have detailed
knowledge
of each State
nowember
insured
aa distinguished
from a financial,
problem.
bank presenting
a supervisory,
However , the number of banks that
present
supervisory
problems
are reported
to
senior
Washington
staff
on a quarterly
hasis
and details
on these
bank.8 are
available
on request.
As
We suggest,
therefore,
that
the GAO delete
that
portion
of the second
sentence
of the first
paragraph
on the cover
of the draft
report
which
reads
“but
restricta
itself
by emphasizing”
and the word “only,”
and substitute
therefor
language
eimilar
to the following:
“and emphasizes
financial
risk
to the
insurance
fund as one of the primary
concerns
of top management.”
The necond
paragraph
on the cover
on the draft
report
contains
a recommendation
that
the “Corporation
release
data on the conditions
of all
the
Nat ion’ s federally
insured
banks , and not just
problem
banks posing
financial
ri sk. ” We would
be less
than candid
if we did not indicate
that
we simply
do
The Corporation
releases
a wide variety
not understand
this
recommendation.
of the Nation’s
federally
insured
banks including,
of data
on the condition
The Annual
Report
of the Corporation
but not limited
to, problem
bank data.
contains,
among other
things,
data on the supervisory
activity
of the
Corporation,
on the formal
enforcement
actions
taken
by the Corporation
in the
course
of the calendar
year,
and pages upon pages of tables
of statistical
data on federally
insured
banks setting
forth
such information
as capital,
of which
directly
relate
to
total
assets,
earnings
performance
and so on, all
the condition
of federally
insured
banks.
The Corporation
also publishes
or
makes available
to the public
many other
publications
containing
financial
data
on the banking
system.
For example,
a publication
entitled
“Bank
Operating
Statistics”
enables
the reader
to compare
bank operations
in each
A list
of the
state
and in some instances
within
more immediate
areas.
29
nPl’r:;NDIX
APPENDIX III
I I I
vnriolls
FDIC publications
with a brief
description
of each is included
as
The GAO may wish to rethink
the recommendation
stated
on the
At t ;~chmc~nt I.
~‘over page and either
delete
it or qualify
it in some way that
does not create
the impression
that
the only data released
by the Corporation
is that
related
lo formnllv
designated
problem
banks.
Our remaining
comments
gcnrr:Il
ly follow
its
are
directed
at
numbering
scheme:
the
body
of
your
draft
report
and
on the third
line
fras
the top of this
page,
Digest,
psge ii - Beginning
vou indicate
that
only
financial
problems
are identified
to the Division
of Bank Supervision’s
Washington
Office.
You also
indicate
that
the
Regional
Offices
use their
own criteria
for identifying
supervisory
problem
banks and that
this
results
in differences
between
Regions.
You
then cone ludt=
that,
without
knowledge
of the supervisory
problem
banks,
senior
Corporation
managers
cannot
be certain
that
supervison
is proper
and tlni form throughout
the Regions.
As indicated
in our opening
comments,
the number
of supervisory
problem
banks are identified
to
senior
Washington
staff
on a quarterly
basis
and detailed
data on those
banks
are available
upon request.
The Corporation
has made a conscious
decision
to allow
the Regions
to exercise
the flexibility
to identify
hanks of special
supervisory
concern
in each Region
and to tailor
the
characteristics
of such
banks to the geographic
region
in which
the bank
is
located.
We concluded
that
such banks could
be better
handled
if
Corporation
personnel
closer
to the situation
were allowed
a broader
range of options
to deal with
those
banks.
Woweve r , the Regions
are not
given
unbridled
rein
in handling
banks with
special
supervisory
concerns.
Oversight
of the handli.ng
of those banks
in each Region
is
performed
in the Washington
Office,
as we have stated,
through,
among
other
things,
the edit
check
list
and the IMS.
On the other
hand,
the
after
much thought
and experience
in dealing
with
Corporation
has,
failed
and failing
banks,
determined
that
banks posing
financial
problems
require
greater
concern
by Washington
Office
senior
staff,
because
they are inherently
the most likely
to fail
and a greater
risk
to the insurance
fund.
Al though
we are confident
that
our present
system
of identifying
financial
problem
banks,
as well
as those
exhibiting supervisory
concern,
has worked
well,
we are,
nevertheless,
hopeful
that
the recently
inaugurated
Uniform
Interagency
Bank Rating
System
(“Bank
Rating
Svstem”)
will
enable
the Corporation
to establish
more
llniform
interand intra-agency
criteria
for supervisory
aa well
as
financial
problems
without
seriously
inhibiting
the desirable
flexibility
in the present
system.
More detailed
discussion
of the range
of
possible
uses of the Bank Rating
System
is presented
in our comments
on
Chapters
3 and 4 of the draft
report.
2’
The first
full
paragraph
on this
page grates
that
the
s&%%%s;
can be misleading.
A similar
comment
is made on pages
32 and 34 of your
draft
report.
Although
we will
have more to say about
the
characterization
“misleading”
in our commentary
on Chapter
4 of your
draft
report,
suffice
it to say that we disagree
with
your suggestion
that
problem
bank data released
by the Corporation
is or can be misleading.
We agree,
however,
that,
like
most things,
the identification
30
APPENDIX III
APPENDIX III
and clarrification
of problem
bank6 can be improved.
Further,
the
present
ryrtao
may not be the bert
way of interpreting
the condition
of
the bankin
indu6try.
We are,
therefore,
continuing
our effort6
to
refine
our critarir
and heighten
ohjactivity
in derignating
problem
bankr
and in l rruring
that
renior
management
ir provided
with
the
necerrary
amount
of uraful
and employable
information
for
the propsr
We are hopeful
that,
when greater
performanca
of their
duticr.
cxperiencs
i6 pained
in the ume of the Bank Rating Syrtan,
it will
prwide
a better
mearure
of the condition
of the banking
indurtry.
For
on thir
rubject
refer
to our commentary
on Chapters
additional
commentr
3 and 4 of the draft
report.
3.
Digert,
on the
Chaptera
4.
Chapter
1, page.
1 - On the third
line
from
the bottom
of the page you
direct
supervisory
refer
to the twalve
federal
Rerervc
bank@ as having
tesponribility
of State
member banks.
We ruggert
that
reference
might
more properly
be to the 0oard of Governor6
of the Federal
Reserve
Syrtan
rupervirory
authority
over
otate
member banks.
48 PO6 6ei)l inp
5.
Chapter
2, page.
4 - (a)
In the first
sentence
of the first
paragraph
of thir
paue,
the Divirion
of Bank Supervision
is characterized
as the
“Corporati&ir
principal
lupervi#or.“The Corporation
itself
is the
principal
ruperviror
of State
nonmember
insured
banks.
We, therefore,
rugpert
that
the firrt
rantence
of the firrt
paragraph
be amended
to
of Bank Supervision
is the Corporntion’s
indicate
that
the Divirion
principal
office
for
carrying
out the supervisory
responsibility
of the
Corporation.
paper
ii and iii
- With
respect
to the
bottom
of paper ci and iii,
plealre
refer
3 and 4 of the draft
report.
rccamnendationr
to our commentr
appearing
on
(b)
The first
rentcnce
of the recond
paragraph
attempts
to describe
the
To the extent
that
the firot
overall
objective
of bank examination.
rentence
limit8
the overall
objective
to safety
and eoundneee
it is
An equally
important
objective
of bank examination
ir to
incomplete.
determine
compliance
with
laws and regulations.
Accordingly,
the
sentence
should
be amended
to delete
the period
efter
the word
” roundner
6” and add the following:
“and
compliance
with
laws and
regulationa
.”
the reference
to compliance
with
laws and
If you agree,
regulations
on the third
line
of the recond paragraph
may be deleted.
(cl
The Second
sentence
of the second paragraph
attempt6
to set forth
the
The u6e
manner
in which
bank examination
Seek6 to obtain
its
objective.
of the word “determinine”
is romewhat
misplaced
and should
be replaced
by the word
“evaluating,”
Furthermore,
es we read
“(1)“.
of the second
Analysis
and evaluation
of the liquidity
sentence,
it seems incanplete.
posture
and earnings
performance
of a bank under
examination
are an
integral
part
of the bank examination
process
and should
be included
in
‘I( 1) .”
In addition,
the word
“policies”
should
be added
on the fourth
line
of the second
paragraph
after
the word “controls.”
The lest
sentence
of this
paragraph
deCm6 to indicate
that
securities
are
examined
only
to determine
their
credit
eoundneee.
Securities
are ala0
31
:
APPENDIX III
APPENDIX III
taxamined
to ascertain
their
marketahility
and liquidity.
that
the phrase
“, among other
things,
” be inserted
” i nc 1 udes”
and “a” on line
6 of paragraph
2.
6.
(h)
We suggest
between
the word
Chapter
2, page 5 - (a) The first
sentence
of the first
full
paragraph
on this
psge states
that
the Division
conducts
separate
examinations
to
drtprmine
whether
banks are operating
according
to laws and regulations.
The separate
examinations
conducted
by the Division
of Bank Supervision
are primari
Iy designed
to ascertain
compliance
with
consumer-oriented
laws and regulations.
Other
laws such ss the Bank Secrecy
Act and the
Bank Protection
Act are also
included
in the separate
compliance
examinations.
However,
as we have stated,
the determination
of compliance
with
banking
laws and regulations
is an integral
part
of the regular
The referenced
sentence
should
be
safety
and soundness
examination.
amended
tn read similar
to the following:
“The Division
also conducts
srparate
examinations
primarily
to determine
whether
banks operate
in
accordence
with
consumer-oriented
laws and regulations
.‘I
full
paragraph
you state
that
the Regional
Offices
schedule
In the third
bank examinations.
In several
of our Regions
bank examinations
are
The firat
scheduled
by Field
Offices
and not by the Regional
Office.
1 ine of the third
full
paragraph
on the page should
be amended
to read
“Bank examinations
are scheduled
giving
consideration
to....”
In the
fourth
full
paragraph
of this
page you set forth
what bank examiners
review
in determining
the scope of a given
examination.
An important
aspect
of determining
the scope of any safety
and soundness
examination
involves
a review
of the correspondence
file
of the bank about
to be
review
of the correspondence
file
by the examiner
examined.
Hence,
should
he added to the first
sentence
of the fourth
paragraph
on this
wzp
7.
Chapter
2, page 6 - On the second
line
from the top of the page,
YOU
Indicate
that
the examiner
is required
to meet with
“top
officials”
of
the bank after
each full-scope
examination.
Division
policy
requires
that
the examiner
meet with
the board
of directors
of the bank or a
committee
sane of whose members must be members
of the bank’s
board
of
directors.
The sentence
should
be amended
to reflect
that
requirement.
The third
line
from the top of the page indicates
that
bank “managers’
commitments
and/or
reactions
are included
in the examination
report.”
The word “managers”
is not appropriate
and should
be replaced
by the
word “managements’
.”
8.
Chapter 2, page 7 - (a) On the first
line
of this
page you refer
to the
“characteris
tics
of problem
or
74 Items
of the edit
check
list
as:
potential
problem
banks.”
The 14 items
of the edit
check
list
are not
intended
to be, nor are they in fact,
characteristics
of problem
or
They are 14 potentially
unfavorable
characterpotential
problem
banks.
istics
which must be looked
at and analysed
individually
before
any
meaningful
conclusions
can be drawn regarding
the earmarked
bank (see
our discussion
at p. 54, Appendix
III,
FOD 77-8).
The portion
quoted
above should
be deleted
and the phrase
“potentially
unfavorable
characteristics”
substituted
in its
place.
32
APPENDIX III
APPENDIX III
(h)
On tha fifth
line
from thr top of the pa80 you rtate that the bank@
aannrrked
by the edit check limt arc) reviewed
“to formally identify
problam bankr .” Actually
the purpose
of the review
in to determine
the
potentially
unfavorable
charactrrmaeon@ why the bank ia exhibiting
irtio,
Accordingly,
thr fifth
line from the top of the page rhould be
amended by deleting
the phrarr
“to formally
identify
problem
bank@” and
“To
rubrtituting
in ita plrcr
language rimilar
to the following:
datermina the nrturr
rnd cause of the potentially
unfavorable
charrcterirtice.
If tha review ertablirher
the need, the bank will be derignated
a problem.”
(cl
9.
(b)
Cc)
The lart manlance on thir page eeem~ to imply that the examiner arrignr
for hank@ under the newly adopted Bank Rating Syrtem.
In
the rating
rctuelity
the examiner l rrigna
the initial
individual
and comporitc
retinp
for the bank and if the Regional Office doer not rgrac with the
the Regional Office
arrignr
it@ own rating on the
examinor’r
rating,
ramr page end the Regionel
Office rating constitute@
the official
rating.
In ehort,
the examiner recommend6 and the Regional Office
the final
rating.
The lart rentcnce on the page rhould be
arrignr
amended to reflect
that policy.
0 - (a) Line 3 of the
page atetee
that the
#pacific
guideliner
in rating
bank@.
thir time developing any more rpecific
third sentence
of the firrt
agencies are developing more
In fact the agencieo are not at
guideline8
than are contained in
the Bank Rating Byatem. The agencier are gaining experience with the
Bank Rating
Syatm
and after
more experience
has been achieved may then
conrider developing new or additional
guidelines.
Chapter
paregraph
pege
on thia
The recond rentence of the recond paragraph atates,
in part, that the
“of a problem before it becomes
idea of the Xl48 ir to alert
the Divirion
reriour
.I’
The ure of the word “problem” in thir context could create
the imprerrion
that the IMS ir intended to identify
“problem banko.”
As
you know, the IMS waa never designed to identify
problem banks.
The
second
rentence of the recond full paragraph should be emended, in part,
“The idea is to alert the Division
to
to read rimilar
to the following:
the prerence of a deteriorating
rituation
before it becomes serious,
so
it can be quickly
corrected.”
The third
rentence of the third paragraph says that banks submit their
condition
and income on a quarterly
basis.
Only those banks
of $300 million
or more are required to submit income reports on a
quarterly
basis.
Reports of condition,
of course, are submitted by all
banks on a quarterly
basis.
The third sentence should be amended to
reflect
the fact that banks under $300 million
do not s’ubmit reports of
income on a quarterly
basis.
report8
(d)
2,
of
We question the relevance of the last paragraph.
Our reading of the
paragraph suggests an attempt to canpare the IMS with the edit check
list.
The two cannot
be compared because they are completely
separate
systems and are dependent for their data from two separate and distinct
sources--the
IMS measures condition
and income data submitted by the
33
APPENDIX
APPENDIX
I11
hanks whereas
is notraworthy
comprrtrrized
10.
data.
in the
It
2,
page 9 - (a) As we read
the first
sentence
at the top of the
lmpllcitly
conveys
the impression
that
the Regions
only
receive
;tlwrtrrly
riports
;n connection
wiih
the JAWS tests
under
the I&.
In
fact,
path
Region
ia equipped
with
a computer
terminal
which
not only
provides
JAW’s test
data
but also
condition
and income
report
data
on
cbarh State
nomnember
insured
bank for
the last
three
years
as well
as
SNIP rxamination
data
for analvsis
purposes.
The analyst
can,
as soon
as the condition
and income
report
data
are placed
in the computer,
hcgin
the financial
analysis
in his or her Region
without
awaiting
rtiaceipt
of the quarterly
reports.
The third
sentence
of the same
paragraph
statrs,
in part,
that
the Action
Report
outlines
a bank’s
problems
or adverse
trends.
It would
be more accurate,
in our judgment,
TV, say that
the report
outlines
the nature
of the test
failure,
why it
occur red,
and any corrective
measures
needed.
Hence,
the third
sentence
of the paragraph
should
be amended
to read
similar
to the following:
“This
report
outlines
the nature
of the test
failure,
why the failure
occllrred
and any corrective
measures
which
may be needed.”
The last
s(*ntpnco
of the paragraph
seems to imply
that
follow-up
on Action
The Regional
Offices
are
Rcparta
is conducted
in the Washington
Office.
responsible
for
follow-up
i.f any is needed.
The Washi.ngton
Office
performs
an oversight
fllnction
to ascertain
that
the analysis
and review
conducted
by the Region
are accurate
and that
appropriate
corrective
mf,asurPs
are taken
where
necessary.
Chapter
WRP,
(h)
the edit
check
lists
measures
examination
report
some examination
data
that
the TMS does include
analysis
information
provided
to the analyst.
111
It
page
discusses,
to some extent,
the Annual
Tlr~ sc=cond paragraph
of this
Rrbv i~w Report
and the Annual
Review
Memorandum.
However,
there
is no
mention
of the review
of the Annual
Review
Memorandum
in the Washington
Office.
We believe
that
an important
oversight
review
is performed
by
the Washington
Office
which
should
be included
in your
discussion
of the
Annual
Review
Report
and Annual
Review
Memorandum.
Il.
Chapter
2, page
10 - (a) Line
four
of the second
sentence
of the first
1111 paragrnph
should
be amended
by deleting
“conducting”
and substi.tuting
in its
place
“engaging”
and by deleting
“business”
and substituting in its place
“practices.”
On 1 ine five
of the same paragraph,
we
suggest
that
the phrase
“entered
into
with
the Corporation”
be inserted
hetwecn
the words
“agreement”
and “and.”
Finally,
we suggest
that
the
last
line
of this
paragraph
be amended
by inserting
the phrase”,
among
other
things,”
between
the words
“if”
and “the,”
by inserting
“in
an”
betwe~~n “is”
and “unsafe,”
and
by ac’ding
the word “condition”
at the end
of the sentence.
This
last
suggestion
is made because
an unsafe
or
unsound
condition
is only
one of the statutory
reasons
for
terminating
a
bank’s
deposit
insurance.
(b)
TOP last
paragraph
of this
page contains
a discussi.on
of the
Corporation’s
authority
to remove
officers,
directors,
or other
persons
participating
in bank management.
The Corporation’s
power
to remove
these
persons
is contained
in Section
8(e)
of the Federal
Deposit
34
APPENDIX III
APPENDIX III
Section
8(e),
the Corporation
muat allege
and
Insurance
Act I Undrr
prove
in each removal
GAIL that the act complained
of involved
personal
dishonesty.
Tha burdan
is difficult
and,
as the legislative
hirtory
of
the statuta
maker clear,
is tantamount
to proving
a crime.
The
Corporation,
in conjunction
with
the other
two Federal bank regulatory
l mandmants
to Section
8(e)
to Congrerlr
which
agcnciw,
has proporad
would
substantially
lrrran
the burden
by, among other
thingr,
removing
the need to prove
personal
dishonesty.
12
13
of clarity,
you may wirh
to
Chapter
2, page 11 - In the interest
consider
amending
the last
sentence
on this
page to read along
the
following
linar:
“The Corporati.on
alro
issued
regulations
to cover
deficirncisr
in the statute
found
by the court.”
the
- The coumentr
here cwer
the general
themer
of the chapter;
%s+
t at there
is a need for more specific
guidelines
in classifying
banks l e financial
and ruperviaory
problems,
that
there
is at prenent
a# to which
are problem
or nonproblem
banks,
and that
senior
confusion
Addimanagerr
need to be more concerned
about
supervisory
problems.
tional
detaflsd
coanaentr
will
be made with
respect
to certain
specific
port ions of Chrpter
3.
Certainly
there
are and will
be a few borderline
or near problem
cases
an to
whether
a bank is a
where rearonabls
parsons
may disagree
rupervieory
concern
only
or also poses
such an exceptional
financial
It is
risk
to the Corporation
as to merit
formal
problem
bank status.
equally
certain
that
in most inrtances
the distinction
between
financial
Thus,
the problem
bank list
and supervisory
problem
banks ir clear
cut.
represents
overall
an accurate
appraisal
of those banks possessing
the
highest
potential
for failure
based upon the state
of the Division
of
Bank Suparvirion’r
knowledge
at that
time.
Even in the few borderline
to designate
or not to designate
a bank as a problem
CALICS, the decirion
ir not lightly
made.
On the contrary,
that
decision
represents
the
caaporite
judgmant
of individuals
skilled
and experienced
in the analysis
While
a few close
cases
are
and evaluation
of a bank’s
condition.
encountered,
no confusion
exists
within
the Corporation
in designating
or withholding
formal
problem
bank status.
In our coeunente
to previous
GAO studies,
we stressed
that
mechanical
formulae
can not be applied
universally
to determine
whether
or not an
operating
bank warrants
FDIC problem
status
and that
such status
should
be imposed
only on a case-by-case
basis
after
a comprehensive,
in-depth
analyaia
of the entire
hank.
We stressed
also
our firm
conviction
that
the decision
to designate
a bank formally
as a problem
is dependent
on
several
variables
and in the final
analvsis
involves
the judgment
of
experienced
professionals.
When a bank”6
condition
d’eteriorates
to the
point
where problem
bank status
is warranted,
a memorandum
providing
detailed
information
on the nature
of the problem
and the status
of the
bank is disseminated
to management
at the highest
levels
in the
Corporation.
Although
similar,
banks of
same essential
characteristics
special
supervisory
as financial
35
concern
do not have
problem
banks;
namely,
the
a high
-_
APPENDIX
III
APPENDIX
degree
of risk
to the insurance
fund and the greatest
likelihood
of
emphasis
in the supervision
of
fni lure.
Conceptual
ly, our primary
financial
problem
banks is rehabilitation--to
return
the bank to
nonproblem
status.
On the other
hand,
our primary
emphasis
with
banks
of special
supervisory
concern
is preventive--to
keep the bank from
deteriorating
to a level
necessitating
formal
problem
designation.
Thus,
It is a misconception
to suggest
that
both types
of banks exhibit
the “same”
deficiencies
and that
supervisory
concerns
generally
are
afforded
the same degree
of supervison
as financial
problem
banks.
In
the case of banks formally
designated
as problems,
the magnitude
or
degree
of supervision
is more intense
than the supervision
of banks of
aprcial
supervisory
concern
because
financial
problem
banks constitute
more imminent
threat
of failure.
III
a
As indicated
previously,
we are hopeful
that
the newly
adopted
Bank
Rating
Svstem will,
over time,
enhance
our capabilities
in formally
designating
problem
banks and in providing
even more meaningful
The definitions
of
information
to the Corporation’s
senior
management.
composite
groups
3, 4, and 5 are similar
to the kinds
of banks currently
found
in our supervisory
and/or
financial
problem
categories.
These new
ratings
are in the process
of being
phased-in
as each bank is examined
and it probably
will
take at least
18 months
before
each bank is rated.
it may well
be that
at the threshold
stage
inconsistencies
Fur thermore,
in assigning
ratings
under
the new svstem
between
examiners,
Regions,
and even regulatory
agencies
might
occur.
Until
we are assured
that
an
appropriate
level
of consistency
has been achieved,
utilization
of the
current
system
will
continue
in tandem with
the new rating
system
in
assigning
banks problem
and near problem
status.
Assuming
that
the
start-up
problems
associated
with
the Bank Rating
System
can be and are
solved,
the Corporation
will
certainly
consider
phasing
out the current
method
of designating
problem
banks and replacing
it with
the composite
If that
occurs,
we would
also
ratings
under
the Bank Rating
System.
consider
reporting
data on the entire
banking
industry
by aggregates
hased upon the new rating
system.
We note
in passing
that
Case Study A, appearing
on pages 16-18 of the draft
subjective
nature”
of
report
is labeled
as an illustration
of the “extremely
The report
states
further
that
identifying
problem
banks by the Corporation.
the decision
not to designate
the bank in question
as a problem
was nsubjective
because
it was based on an unproved
future
condition,”
i.e.
a capital
infusion.
Since
completing
the GAO draft
report,
the capital
infusion
in the bank has
been completed
and the latest
examination
report
shows that
the volume
of
adversely
classified
assets
has significantly
decreased.
Our latest
information
shows that
the adjusted
capital
of the bank has risen
to 8.9% and the net
capital
to 4.7%.
Net capital
is adjusted
capital
minus
the remaining
half
of
the assets
classified
“doubtful”
and all
the assets
classified
“substandard.”
14.
Chapter
3, page 12 word “emphasizes”
be
the first
paragraph,
supervisory
problems
Since
every
bank in
We suggest
that
on the first
line
of this
page the
changed
to “recognizes.”
In the last
sentence
of
you state
that
the Division
does not consider
that
pose a risk
to Corporation
financial
involvement.
operation
poses some degree
of risk
to the insurance
36
APPENDIX III
APPENDIX III
you may wirh to conaider
rephrnaing
that
sentence
by deleting
the
“a” in line
8 from the top of the page and inrcrting
in itr
place
the word8
“an undue.”
For purporao
of clarity,
you may alao wirh
to add
of “Serious
Problem--Potential
Payoff”
on the second
to the definition
line
from the bottom
of the page, the wordr
“or more” hctwccn
“percent”
&nd “chrnee.
”
fund,
word
15
aentcncc
of the third
full
paregraph
review
uncover8
a problem
bank not
rcccmmendrd
by the Region
“The Problem
Rank Section
preparer
the memorandum and notifiar
the RagCanal
Director
of thir
action.”
The procedure
ia that
the Problem
Bank Section
contacts
the Regional
Director
and,
if
agreement
ir mached,
the problem
bank memorandum
may be either
written
The last
sentence
of the
in the Region
or in the Werhington
Office.
third
full
paragraph
rhould
be amended to reflect
thio
procedure.
16
full
paragraph
the identification
of
3, page 16 -- In the recond
hanka by the FDIC ir described
aa “extremely
subjective.”
As we
have rtated
many timer,
the deaignation
of a problem
bank is the product
of rasiduoua
mrly#ir
and review by akilled
and experienced
personnel.
The final
decirion
to place
a bank on a problem
bank list
or to withhold
ouch deaignution
ir made at the highert
levela
within
the Division
of
Bank Supervision.
Describing
the procear
an “extremely
subjective”
auggertr
that
the final
decision
in no more than a whim or caprice
and,
aa such,
ir inappropriate.
17.
Chapter 3, page 15 -- In the lrrt
you mtata that vhrn the headquartera
Chapter
problem
Chapter
3, p8ge 20 -- The draft
report
displaya
the banks designated
aa
problem
hanka by the Corporation,
aa well
as those
identified
by the
Officer
aa apeciel
supervisory
concerne,
according
to the
kegional
Corporation
policy
and
Regional
Office
in which
the bank is located.
practice
are not to relcaae
data or information
on prohlem
banks by
geographic
sections
of the country.
Our concern
ia that
by releeeing
data in the manner
followed
in the draft
report,
you may unwittingly
provide
the capability
of identifying
a Rpecific
problem
bank or cause a
lack of confidence
in the banking
system
in certain
areas
of the
with respect
to the banka
identified
as special
country.
Fur thermore,
eupervisory
problems,
we bel.ieve
that
data
should
not be released
at all
becauee
that
list
pertains
only
to State
nonmember
banks and not to
national
and State
member banks.
The release
of the data in the form
proposed
in the draft
may aleo be violative
of the Agreement
between
the
PDIC and the GAO to preserve
the confidentiality
of bank data,
Paragraph
II(6)
(b) (iii.),
which
states
that
the GAO will
not provide
detail
in
of any bank or bank customer.
its report
that
can lead to identification
18.
Chapter
the last
3, page 21 -- In
sentence
on this
the interest
page.
19.
Chapter
4, - Once again
the comments
that
follow
will
cover
the general
thrust
of the chapter;
namely,
that
the information
released
on problem
that
use of problem
bank data as
hanks by the Corporation
is misleading,
an indicator
of the condition
of the banking
industry
he phased
out,
and
37
of
clarity,
you may wish
to
recast
APPENDIX
APPENDIX III
I I I
that
r*>l(snse
!uIY~*(I on thp
of data
on the condition
newly
adopteE
bank rating
of all
system
the Nation’s
insured
be implemented.
banks
‘I?IP Cnrpora:inn
hPs confidence
in the accuracy
and reliability
of the
problem
bank data
released
to the public
as a creflible
measure
of those
hanks
which
pose the greatest
degree
of financial
risk
to the insurance
fund and possess
the
higtiest
likelihood
of failure.
Obviously
, the
designation
of a bank as a problem
bank and the release
of aggregate
data
on problem
banks
to the pllblic
can only
be based
on thope
problem
conditions
known to exist
by the Corporation
at that
given
point
in
time.
No doubt,
from time
to time
banks not
included
on the problem
hank list
will
fail
because
of unforeseen
or largely
unpredictable
Tf’B(i
OOR .
Sudden and large
asset
deterioration
between
examinations
or
thr. ctnmnission
of a criminal
act are the kinds
of eventualities
which
do
not lend themselves
to prediction
by financial
analysis
sod oversight
nor can they
normally
be’foreseen
in a particular
bank before
their
nc cur rt*nce . Those
types
of situations
would
not be helped
by maintaining
a formal
list
of supervisory
concerns
or near
problem
banks.
In making
public
information
on banks
formally
designated
as problems,
the Corporation
has never,
c.xpressly
or impliedlv,
suggested
that
the
problem
bank information
released
is the only
determinant
needed
to
nsscss
the condition
of the banking
industry.
Indeed,
the Corporation
carcbfully
informed
the pslblic
that
the problem
bank data
is only
part,
nlbrit
an important
part,
of the data
available
to better
understand
the
pbneral
condition
of the banking
industry.
In the news release
on
problem
hank data
(PR-65-77
(8-22-77))
the FDIC expressly
stated:
“The
FDIC list
includes
sane,
but not all,
of the banks
being
more closely
slrpervispd
hv the Comptroller
of the Currency
and the Federal
Reserve.
Their
watch
1 istn,
es well
as similar
lists
of banks maintained
bv F‘DIC
Rt.gionnl
Offices,
include
some
banks
with
super-risory
problems
that
nppcar
to pose little
risk
to the insurance
fund
and which
are not
likrly
tn involve
any financial
outlays
by the FDIC.”
A copy of the
news release
is included
as Attachment
2.
A similar
statement
appears
at page 10 of the FDIC’a
Annual
Report
for calendar
year
1976.
Clearlv,
delineating
the prohlem
hank information
released
to the public
as
Furthermore,
as
“misleading”
and incomplete
is lacking
in
merit.
indi cat Pd above,
the FDIC p*lblishes
and makes available
a plethora
of
information
and
statistical
data
on the condition
of the Nation’s
banking
system,
much of which
is used by banks
and professional
financial
advisers
in evaluating
the health
and earnings
performance
of
insured
banks.
If the number
of banks
formally
designated
as problems
b; the Corporation
is vicbwed
in light
of the number
of actual
failctres
over
the years,
there
stems
little
doubt
that
the Corporation’s
problem
bank
list
more
than meets
the test
of informing
the public
of those
banks
evincing
the
greatest
propensity
for closing,
based
upon review
and analysis
of
rr*lpvant
data.
If valid
criticism
were to be leveled
at the
Corporation’s
problem
bank list,
that
criticism
more properly
might
be
For example,
that
the list
covers
too many,
rather
than
too
few,
hanks.
thP number
of hanks
on the
problem
hank list
at year-enE
1975 was 319
38
APPENDIX III
APPENDIX III
Similarly
in
actually
closed
during
that
calendar
year.
of problem banka
listed
at year-end was 37” with 16
actual clorurea,
and at vear-end 1977 problem ban’fr numbered 368 with 6
actual cloaurcr . The percentage
of banke actually
cloning in relation
for the yeara 1975, 1976, and
to the number of banka on the problem list
1977 ia leas than 4%, lera than 5X, and lerr than 2X, renpectively.
Even CAO’r review of bank8 clored in 1977 and 1978 shows that 7 out of
the 10 bankr were on the problem list
for a year or more prior to their
closure.
Of the remaining three, two were closed
aa a result
of unforeBeen criminal
actr and one rerulted
frw a audden asset deterioration
In all likelihood,
becaure of the
which
occurred between examinations.
unforeseen and largely unpredictable
event cauring their failure,
none
of the three would have been detected or dcaignated aa apeciel superconcern6
or near problems other than, aa happened, when knowledge
visory
of the event WPI obtained by the Corporation.
while
1976
20.
13 benks
the
ChThptcr
number
4,
p;gt
-34 -
recompen atlana
reference.
Our opening comments on Chapter 3 are rerponsive
and those cOmmenta are incorporated
here by
These comments are somewhat lengthy
but are intended
to
be helpful.
Sincerelv.
Direct&
Attachmenta
tiA0
note:
Page references
in this
draft
report
and do not
the page nunbers
in the
appendix
refer
to
necessarily
agree
final
report.
39
the
witn
to
APPENDIX
III
APPENDIX
FEDERAL DEPOSIT INSURANCE
I-It
I I(:I
OF
March
INFORMATION
Slnqfr* copres of the following
publications
wtthout
charge, unless otherwise indicated.
ANNUAL
REPORT
CORPORATION,
OF THE FEDERAL
can be procured
DEPOSIT
from
INSURANCE
Warhmplon.
o c 20429
1978
the OFFICE
OF INFORMATION
CORPORATION
conformrty
with the provisions
of Section 17 of the FDI Act, as amended,
the Corporation
makes an annual report of its operations
to the Congress as soon as practicable
after the first of the
year An abbrevrated
Annual Report generally is published
in March. It is available in quantity
for
classroom use. The March Report is reprinted
later in the year together with bank merger decisions,
tables of commercral and mutual savings bank statistical data, etc. Single copies are available.
In
ASSETS
INCOME
81 LIABILITIES
- COMMERCIAL
& MUTUAL
SAVINGS
BANKS
and REPORT
OF
These reports are published semi-annually
as of June 30 and December 31. They are based on data
In Reports of Condition
and Reports of Income. This is a combined
effort of the Federal Deposit
Insurance Corporation,
the Board of Governors of the Federal Reserve System, and the Office of
the Comptroller
of the Currency.
BANK
OPERATING
STATISTICS
The Corporation
publishes annually
based on the Report of Condition
banks.
CHANGES
AMONG
OPERATING
a presentation
of year-end data, in a geographical
and Report of Income submitted
by all insured
BANKS
AND
ELECTRONIC
FUNDS
TRANSFER
DEPOSIT
INSURANCE
occurred
during
the
SERIES
EFTS Introduction
to Point of Sale Systems
EFTS introduction
to EFT Security
E FTS Introduction
to Automated
Tellers
EFTS Introduction
to the Automated
Clearing
A Guide to EDP and EFT Security
FEDERAL
ACTS
framework,
commercial
BRANCHES
This IS an annual publication
as of year-end which sets forth the changes which
year In number and classification
of operating
banks and branches.
CORPORATION
House
-
LAW,
REGULATIONS
AND
RELATED
.
Ttlrs Inforrnatron
is presented in loose-leaf format in two volumes and includes the FDI Act, Rules
and Regulatrons
Issued as prescribed
by the Corporation’s
Board of Directors, and certain other
statutes
and regulations
which affect the operations
of insured banks. The service includes also
Report Bulletins issued at two.month
intervals which reflect the text of any statutory
or regulatory
char,ges that may have occurred,
and summarizes
Congressional
and Federal agency actions
affectrng
insured banks. The charge for this information
is $50 for each service per calendar year.
Orders and checks (payable to FDIC) should be sent to the Office of Information
at the above
address.
NEWS RELEASES
News releases on actions of the FDIC which affect the status of commercial
and mutual savings
banks, amended
regulations
and policy statements,
addresses by FDIC officials,
payoffs to deposrtors 111Insured banks that have been closed, FDIC assistance to failing banks, personnel changes and
other matters considered of interest to the public.
40
III
APPENDIX III
APPENDIX III
OPERATING
BANKING
OFFICES
A list of opernting
banking offices is published annually as of Oecember 31, in limited quantity.
It
\ncludos the cities and states in which the offices are located - it does not include street addresses,
zip codas or namas of officers.
ROSTERS
FDIC Regional Directors
State Banking Authorities
SUMMARY
OF OEPOSITS
From 1964 through 1972, the aggregate results of a June 30 survey of deposits of commercial
end
mutual savings banks were published at two-year intervals in the even years. Since 1973, the data
have been published annually, with the format and general presentation
changing from year to year.
The data are grouped by state, county, SMSA and FDIC Region in the following types of accounts:
(1) Demand, IPC; (2) Savings, IPC; (3) Other time, IPC; (4) Public funds, demand; (5) Public funds,
time and savings; and (6) All other.
TRUST
ASSETS OF INSURED
COMMERCIAL
BANKS
An annual publication
of trust department
data collected from all insured commercial
banks and
presented by type of account, asset distribution,
and size of trust department.
This publication
lists
also trust assets by type of account (but not asset distribution)
for each of the 300 largest trust
departments
- ranked according to total trust assets.
YOUR
INSURED
DEPOSIT
A pamphlet which provides examples of insurance
types of accounts commonly
held by depositors
quantity
for classroom use.
The following
MANAGEMENT
DEPOSIT
data are available
SYSTEMS AND
coverage under the Corporation’s
rules on certain
in insured banks. This pamphlet
is available in
from the DATA REQUEST
FINANCIAL
STATISTICS.
SECTION
OF THE
DIVISION
OF
DATA
Deposit data can be generated for all banking offices of a specific bank on a computer printout;
all
banking offices within a given city, county, SMSA, or state on a computer printout;
and all banking
offices in the country on magnetic tape. Nominal fees are charged for these services.
A series of books of 1976 DEPOSIT DATA - one for each of the 14 FDIC Regions which groups
each banking office by FDIC Region, state, county and SMSA, with total deposits and the percent.
age thereof in each of the six categories of deposits. There is a $5.00 charge for each book in the
series.
REPORTS
OF CONDITION
and REPORTS
OF INCOME
(lO.year
Retension)
The captioned
Reports must be requested by name of bank - in writing - addrI?ssed to the Division
of Management
Systems and Financial Statistics, Reports of Condition
available on quarterly basis;
Reporrs o/ lrlcome avallable on annual basis through December 1976 and semiannual basis since
June 1977. There IS a charge of $1 for the first Report and $0.25 for each additional
Report.
pamphlets
are available
SERVICES BRANCH.
The followinq
GRAPHIC
CONSUMER
in quantity,
PAMPHLETS
Truth
in Lcndin<l
F;tlr Credit Billing
C(Jll!iLJlYwr
Information
Ery,jl Crerllt
E[~II,I~ Cretltt
Opportunity
Opportunity
and Age
and Women
41
without
charge, from
the PUBLICATIONS
AND
APPENDIX
For
Immediate
.._.. Release
_----_
PR-65-77
FDIC
RELEASES MIDYUR
III
(0-22-77)
PROBLEM BANK DATA
Chairman
George A. LeMaistre
of the Federal
Deposit
Insurance
Corporation
has
.June 30, 1977, problem
bank data.
The release
of this
information
c.cjntinura
the practice
the Corporation
has followed
in recent
years
to aid the
(:‘lnRreHH,
the general
public
and the banking
industry
to better
understand
the
~‘,cnrral
condition
of the nation’s
approximately
15,000
insured
commercial
and
mut IL11 savings
banks.
r-is1 ~afwd
Chairman
LeMaistre
reported
that
there
were 368 banks on the problem
of .Junr 30. 1977, one more than a year earlier
but significantly
less
peak of 385 reached
in November
1976 and the 379 ae of December
31,
!i il I d ) “We expect
some continued
moderate
decline
in the number over
months.”
He pointed
out that
there
have been only
four
insured
bank
* to date in 1977,
compared
with
ten as of this
date in 1976 and eight
The FDIC. through
problem
banks
into
its Division
of
three
categories:
Serious
ProblewPotential
situation
with
anestimated
ing financial
aesietance
Serious
involve
occur.
Problem:
the FDIC
Bank
Supervision,
presently
Payoff:
An advanced
50 percent
chance
from the FDIC in the
A eltuation
in a financial
that
threatens
outlay
unless
segregates
ultimately
drastic
to
changes
f t
rcgulnrly
list
re-
not limited
to the Stats-chartered
nonmember
It includes
also national
banks and State-chartered
b‘lnks
tti;it
arc members of the Federal
Reserve
System.
The Corporation
subjects
all
the banks to the same criteria
in making
its designations,
using
the most
rt’ccxnt
information
available
to it.
The FDIC list
includes
some, but not all,
of ttw banks being
more closely
supervised
by the Comptroller
of the Currency
;~nd t ht. Federal
Reserve.
Their
watch
lists,
as well
as similar
lists
of banks
m;lf nt<i f 11tbd by FDIC Regional
Offices,
include
some banks with
supervisory
problems
th<~t <appear to pose little
risk
to
the insurance
fund and which
are not likely
to
I nvo I V(’ {any f Inanciill
outlays
by the FDIC.
banks
bank
its
serious
problem
or more of requirnear future.
Other
Problem:
A eicuation
wherein
a bank contains
significant
weakness
but where
the FDIC is less vulnerable.
Such banks
quire
more than ordinary
concern
and agressive
supervision.
‘I’hc E’IJIC problem
list
as
than the
1976.
He
the coming
failures
in 1975.
is
examines.
91 banks were added to the list
I)urin):
the first
half
of 1977,
rt,mc)vtad (3 by actual
failure).
The net decrease
of 11 results
Problem-Potential
1 5 i II the “Other
Problem”
and 6 in the “Serious
g1lritA.s.
;ind’;ln
increase
of IO in the “Serious
Problem”
group.
- more
I
and 102 were
from decreases
of
Payoff”
CateFrom a deposit-
,“.,‘,I,,
42
‘,1,J.I
,
!
, ,.,I:
;‘:
*
,
”
APPENDIX III
APPENDIX III
size
standpoint,
$100 million,
and $1 billion,
292 had deposits
under
$50 million,
34 between
27 between
$100 and $500 million,
7 between
$500
and 8 with
$1 billion
or more.
$50 and
million
One hundred
nineteen
oi the listed
banks,
compared
with
115 at the beginning
However,
92 of these banks
of 1977,
were in the two more serious
categories.
had deposits
of less
than $50 million.
The remaining
27 banks in these
two
categories
included
10 banks having
deposits
between
$50 and $100 million,
13
between
$100 and $500 million,
3 between
$500 million
and $1 billion,
and one
with
deposits
of $1 billion
or more.
There were no banks with
deposits
of
over $350 million
considered
to be in the “Serious
Problem-Potential
Payoff”
category.
Twelve
banks in this
category
had deposits
of less than $25 million
and 3 had deposits
between
525 and $50 million.
The number of banks on the problem
list
represents
approximately
2.5 percent
of all
fnsured
banks.
Conversely,
it is to be remembered
that
97.5 percent
of
all
insured
banks are not on the FDIC problem
list;
also,
that
the overall
experience
in recent
years
has been that
about
75 percent
of the banks listed
on a given
date will
no longer
be considered
in problem
status
2 years
later
due to the progress
that
will
have been made in correcting
their
deficiencies.
Reference
meaning
of
is directed
to
the Corporation’s
the
1976 FDIC Annual
problem
bank list.
Report
for
more
background
.
(97617)
on the
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