Summary: GAO discussed: (1) issues associated with reforming the federal deposit insurance system, focusing on whether such reforms will result in a more safe, sound, and stable banking industry; and (2) the comparison between its reform approach with that of the Department of the Treasury. GAO noted that its three-part reform program could change bank regulation and supervision and deposit insurance system functions by: (1) strengthening supervision, bank internal controls, and financial reporting requirements so that regulators can more effectively protect the Bank Insurance Fund from losses; (2) changing economic incentives through strengthened capital requirements, risk-based premiums, and other means to ensure that owners, managers, and creditors bear most of the bank failure costs; and (3) updating the bank holding company structure and regulation to reduce risks to the banking system and to modernize the financial system if Congress expands banks' and other financial institutions' powers. GAO also noted that: (1) Treasury's reform approach fundamentally differed in its respective strategies for dealing with the magnitude of failing or failed banks; (2) it agreed with Treasury that deposit insurance reform must bolster the safety and soundness of the U.S. banking system and enhance the competitiveness of the industry to minimize taxpayer exposure to loss; and (3) it believes that Treasury underestimated the need for improving bank supervision and regulation.
