Summary

GAO discussed its review of a major bank's failure, focusing on the: (1) causes of the failure; (2) Office of the Comptroller of the Currency (OCC) efforts to adequately assess safety and soundness deficiencies at the bank; and (3) extent to which insider activity may have contributed to the failure. GAO noted 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) due to a rapidly declining real estate market and inadequate reserves, the bank was unable to absorb loan losses through earnings or capital; (3) 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; (4) as of May 1991, bank records showed an aggregate amount of outstanding loans to insiders of about $300 million; (5) as a result of the 1989 OCC examination, OCC required an increase in the bank's FY 1989 provision for loan losses from $200 million to $1.6 billion for the full year, reducing the bank's equity capital to less than 3 percent of the assets; (6) the banks payments to its holding companies also increased dramatically during the FY 1987 and FY 1989 expansion; (7) the bank's loans to insiders were substantial, but did not cause the bank's failure; and (8) the supervisory process lacks standard measures for safe and unsound practices or conditions and bank regulators have wide discretion in deciding both the timing and forcefulness of enforcement actions.