Financial Markets and Institutions:

Information on Selected Issues Concerning Banking Activities

GAO-07-593R: Published: Apr 30, 2007. Publicly Released: May 30, 2007.

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This letter responds to Congress's request for information on (1) selected federal expenditures, policies, and programs that affect the U.S. banking industry and (2) certain banking industry trends. These include the savings and loan industry crisis, trade finance, tax policies, and profits and executive compensation. Congress's letter also asked us for information on bank fees; as agreed with Congressional staff, we will discuss this topic in a separate report. On December 11, 2006, we briefed Congressional staff on information gathered during our preliminary work. This letter summarizes and updates the information presented at the briefing.

Since 1996, when we reported that the total estimated cost of resolving the savings and loan industry crisis was $160.1 billion (equivalent to $198 billion in 2006 dollars), there have been limited additional costs associated with litigation expenses; however, our 1996 estimates of tax benefit costs and the interest expense on certain bonds issued to provide financing are consistent with recent Federal Deposit Insurance Corporation (FDIC) and Federal Housing Finance Board data. Litigation costs have arisen from cases against the government regarding both the use of accounting practices by institutions that acquired failing thrifts and the tax benefits associated with certain FSLIC-assisted acquisitions. FDIC data indicate that since 1996, these cases have resulted in judgments, settlements, and related litigation expenses that total $2 billion ($2.1 billion in 2006 dollars). We could not determine the precise extent to which U.S. banks use the Export-Import Bank of the United States (Ex-Im) products because Ex-Im records do not specifically distinguish between banks and nonbank lenders. However, relatively few U.S. commercial banks appear to use Ex-Im products or participate in trade finance. Ex-Im officials and industry participants noted that transactions involving Ex-Im products generally result in high internal administrative costs and low profit margins for banks. However, officials and participants also identified a number of factors that might prompt bank use of Ex-Im products, including risk mitigation through Ex-Im's loan guarantees and insurance and increased liquidity through the sale of certain Ex-Im products in the secondary market. Furthermore, Ex-Im officials and industry participants said that using Ex-Im products offers U.S. banks the opportunity to develop broader relationships with their customers and, in turn, offer them other services. According to IRS data and officials, banks and thrifts use tax deductions, credits, and other provisions that are generally available to all corporations. Treasury considers only one tax provision--the deduction of excess bad debt reserves--a tax expenditure available exclusively to banks and thrifts and estimates revenue losses for this tax expenditure at $10 million in 2007. The profits of U.S. depository institutions have grown over the last 15 years, accompanied by changes in sources of income. The industry's growth in profits has been accompanied by a gradual shift toward greater reliance on noninterest income--investments, fees, and service charges, among other things. Although publicly available information on executive compensation in the banking industry is limited, several studies that we reviewed identified an increase in bank executives' compensation over the past decade, and some generally attributed the increase to the elimination of interstate banking barriers and competitive pressures. The federal banking regulators routinely collect information about salaries and wages at depository institutions, but the information is not specific to the institution's executives.

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