Summary

Pursuant to a congressional request, GAO reviewed the effectiveness of federal bank regulators' enforcement activities in ensuring that banks operated in a safe and sound manner to preserve the banking industry and the Bank Insurance Fund.

GAO found that: (1) in about half of the 72 cases it sampled of banks having difficulty in meeting minimum capital standards, the federal regulatory process did not result in improved bank capital levels or correction of the underlying causes of bank capital problems; (2) the three federal bank regulators had wide discretion in choosing among enforcement actions, but they shared a common philosophy of working informally with banks to promote cooperation with those having difficulties; (3) this combination of wide discretion and a cooperative philosophy often did not resolve the problems the regulators identified; (4) bank regulators inconsistently executed the most aggressive actions to correct unsafe and unsound banking practices, but such enforcement actions typically produced improved bank conditions; (5) in 37 of the 72 cases, the regulators should have used stronger regulatory measures than they did; (6) such cases involved instances where banks knew but did not correct the underlying causes of problems or banks had a history of noncompliance or repeated violations; (7) bank capital typically was a lagging, rather than a leading, indicator of problems, although regulatory enforcement actions tended to focus on capital inadequacy as the key indicator of unsafe and unsound practices; and (8) regulators could improve the regulatory process by establishing a system consisting of industry-wide measures of unsafe and unsound practice to complement the capital standards, and specific regulatory responses linked to violations of such measures.