Summary: Several congressional committees requested the evaluation of the effectiveness of the supervisory efforts of three federal agencies involved in monitoring banking operations, because of the increasing instability of banks. The study objectives were to evaluate the agencies' efforts to identify unsound conditions and violations of laws in banks, and cause bank management to take corrective actions.
Adverse economic conditions contributed to some bank failures, but generally embezzlement and poor management of loans were the causes. Problems were not corrected because: (1) the regulatory agencies were reluctant to use their legal authority to force the banks to change, (2) the agencies did not consult with bank boards, (3) examinations were set up on a time basis rather than a problem solving basis, and (4) recommendations were not generally made as to how to solve problems. Examiners have enforcement tools they may use, both informal and formal. These include: (1) an informal request that banks make the changes, (2) formal written agreements to confirm correction plans, (3) cease and desist orders, (4) removal of management, (5) financial assistance, (6) cancellation of deposit insurance, (7) cancellation of Federal Reserve membership, and (8) revocation of a charter. Federal Reserve Board surveillance of bank holding companies is not adequate nor is the training of examiners. Major improvements of bank supervision include organizational changes, closer bank surveillance, self-dealing and insider transaction monitoring, consumer protection law enforcement, new examination procedures, closer contact with bank boards, problem solving monitoring, more use of formal powers, experiments on relying on state examinations, and better training of examiners. The agencies involved are not working as closely as they should.
