Bank and Thrift Regulation: Improvements Needed in Examination Quality and Regulatory Structure

GAO reviewed bank and thrift examinations and bank holding company inspections performed by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). GAO noted that: (1) 94 percent of the bank and thrift examinations performed did not include an adequate assessment of internal controls; (2) the determination of examination procedures to evaluate internal controls was left to the discretion of the examiners in the field; (3) 70 percent of the examinations did not review loan quality and loss reserves; (4) there were no regulatory guidance or specific procedures to quantify the potential loss that examiners should consider in evaluating reserve adequacy; (5) FDIC and FRB sometimes relied on state examinations, but have not developed a formal program to review the quality of state examinations; (6) there were quality control deficiencies in almost all FDIC and several OTS examinations, including inadequate evidence of work performed and lack of documented supervisory review; and (7) there were inconsistencies among the regulators in their examination policies and practices including differences in examination scope, frequency, documentation, and assessment of critical areas.