	Scope and Methodology

To meet our first objective, we reviewed reports on two banks that failed during the second year of the MLR mandate and two banks that failed during the first year of the mandate but whose losses were not recognized until the second year. The staff engage in a range of activities, including criminal investigations, financial audits, and audits of the economy and efficiency of agency operations. In July 1995, we issued our first report on the MLR process, as required by section 38(k). In particular, the reports found that the banks, primarily during the 1980s, engaged in unsafe and unsound practices, such as rapid growth, significant concentrations in real estate loans, inadequate lending practices, and violations of laws and regulations. The reports also identified various shortcomings in bank regulatory practices; for example, the reports on MNB and The Bank of Hartford cited OCC and FDIC for not ensuring that the banks complied with existing enforcement actions, and the Pioneer Bank report cited the Federal Reserve for not taking more aggressive enforcement actions to correct identified deficiencies. Conclusions

The four MLR reports we reviewed found that the banks failed for similar reasons. Our review of the MNB report verified its major findings. As currently structured, there are reasons to question the cost-effectiveness of the MLR process, such as the limited basis it provides for making recommendations to improve bank supervision and the administrative burden and expenditures that the requirement places on the IG offices. We are sending copies of this report to the Inspectors General for the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Department of the Treasury, and other interested parties. GAO Comments

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Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the compliance of the Inspectors General (IG) offices of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury with section 38(k) of the Federal Deposit Insurance Act of 1991, focusing on: (1) the findings of the material loss review (MLR) reports initiated between July 1, 1994, and June 30, 1995; (2) recommendations to improve bank supervisory practices; and (3) the economy and efficiency of the MLR process.

What GAO Found

GAO found that: (1) the Federal Reserve, FDIC, and Treasury IG issued a total of four MLR reports on banks that failed or whose losses were recognized during the second year of the MLR mandate; (2) these reports noted that the four banks failed for similar reasons, including rapid growth, excessive loan concentrations in the commercial real estate industry, poor internal controls, and violations of laws and regulations; (3) in three of the four cases, bank regulators did not take aggressive enforcement actions to correct identified safety and soundness deficiencies or to ensure that troubled banks complied with existing enforcement actions; (4) the relatively small number of reports issued in the first 2 years of the mandate did not provide a sufficient basis to reach overall conclusions about the quality of bank supervisory practices; and (5) there are reasons to question the cost-effectiveness of the MLR process, including the fact that certain MLR requirements are relatively inflexible and divert IG staff and resources from broader reviews of the quality of bank supervision.