Summary

Pursuant to a congressional request, GAO reviewed a major bank's failure, focusing on the: (1) causes of the failure; (2) extent to which insider activity may have contributed to the failures; and (3) Office of the Comptroller of the Currency (OCC) efforts to adequately assess safety and soundness deficiencies at the banks.

GAO found that: (1) the bank grew rapidly from fiscal year (FY) 1985 to FY 1988, mainly through acquisitions and mergers and by aggressively expanding its commercial real estate lending; (2) in FY 1988, as the New England real estate market began to soften, the bank held nearly 28 percent of total loans in commercial real estate and strikingly inadequate loan loss reserves; (3) due to a rapidly declining real estate market and inadequate reserves, the bank was unable to absorb loan losses through earnings or capital; (4) OCC took no enforcement action to compel corrective measures until FY 1989, despite the bank's failure to correct problems identified by OCC and the increased risk of management's aggressive growth strategy; (5) as of May 1991, bank records showed an aggregate amount of outstanding loans to the bank's directors and officers of about $300 million representing about 1.5 percent of assets at the time of the bank's failure; (6) in FY 1989, the OCC review of nonperforming assets found four insider loans that had been made with terms more favorable than those of loans made to noninsiders or that had been made at more than the normal risk of repayment; (7) as a result of the 1989 OCC examination, OCC required an increase in the bank's FY 1989 provision for loan losses from the $200 million recorded in the first 9 months to $1.6 billion for the full year, reducing its equity capital to less than 2 percent of assets; (8) the bank's payments to its holding company also increased dramatically during the FY 1987 to FY 1989 expansion; and (9) the bank's loans to insiders were substantial, but did not cause the bank's failure.