Summary: Regulatory and legislative changes, along with market forces, have expanded the range of activities undertaken by insured banking institutions, particularly the largest ones, and the risks that they assume. These institutions, which now deal in a host of nontraditional bank products, such as mutual funds, securities, derivatives, and other off-balance sheet products, pose major supervisory and regulatory challenges. Federal bank and thrift regulators recently announced that bank examinations will assess how effectively banks manage risk and will rate their sensitivity to risks posed by various market factors. Although GAO has not fully evaluated the implementation of the recent changes to supervisory and examination policy, these changes appear to address some of GAO's concerns about examinations in the aftermath of bank failures in the 1980s and early 1990s. Perhaps the most important--yet unanswered--question is to what extent improvements in the detection of problems can help ensure that regulators take timely and forceful corrective measures to prevent or minimize losses to the deposit insurance funds. This testimony (1) describes the history of the bank and thrift crises of the late 1980s and early 1990s and the legislative response to them, (2) highlights supervisory and regulatory weaknesses that GAO has noted in the past and improvements that have been made or are under way, and (3) identifies continuing issues.
