Summary: GAO discussed the financial condition of the banking industry and the savings and loan (S&L) industry, and recommendations for solving the S&L crisis. GAO found that: (1) despite the adverse events of the last decade, the banking industry and its insurer, the Federal Deposit Insurance Corporation (FDIC), remain fairly healthy; (2) U.S. banks in general have curtailed or eliminated new loans to less-developed countries and increased their capital and loan loss allowances; and (3) as of September 30, 1988, less than 2 percent of all FDIC-insured banks, with about 1 percent of industry assets, were insolvent. However, GAO also found that: (1) the S&L industry and its insurer, the Federal Savings and Loan Insurance Corporation (FSLIC), were adversely affected by their expanded lending and investment powers as they diversified their portfolios away from traditional residential mortgage loans into more profitable but riskier activities, such as acquisition, development, and construction; and (2) the FSLIC deficit has at least quadrupled from its 1987 deficit of $14 billion. GAO believes that: (1) future industry earnings should first be used to capitalize the new insurance fund; (2) supervisors and examiners should be placed under the control of the insurer; (3) an on-budget approach should be used to raise a portion of the funds needed to resolve the crisis; and (4) non-governmental sources can be expected to provide funds to defease principal on bonds and pay interest costs.
