Finally, OCC also believed that First City would not be able to raise sufficient capital through stock issuances. The Second Resolution: First City Banks Were “Bridged” in 1992 and Sold in 1993

After being advised of OCC’s examination findings, FDIC considered two basic alternatives to provide for the orderly resolution of the First City banks: (1) liquidate them immediately or (2) place them under FDIC control and operate them as bridge banks until a sale could be arranged. Under the other alternative, FDIC could have provided open bank assistance to willing acquirers of the First City banks—as long as the estimated cost of assistance was less than the estimated cost of liquidation to the insurance fund. FDIC staff estimated resolution costs to BIF ranging from a low of about $700 million (bridge bank with loss sharing) to a high of over $1 billion (FDIC liquidation). Lesson on Closure Determinations

OCC could have better documented the bases for its closure decision had its examination reports and workpapers been clear, complete, and self-explanatory. DOR officials could have used the OCC examiners’ assessment of asset quality as a means of verifying the asset valuations estimated through its own techniques. We will provide copies of this report to the Chairman, Federal Deposit Insurance Corporation; the Comptroller of the Currency; the Chairman of the Federal Reserve Board; and the Acting Director of the Office of Thrift Supervision. Our objectives were to review the events leading up to First City’s 1988 open bank assistance and its 1992 bank failures to determine why FDIC provided open bank assistance in 1988 rather than close the First why the 1992 resolution estimate differed so much from the estimate resulting from the 1993 sale of the banks; whether the First City banks’ failures in 1992 are expected to result in additional costs to BIF; and whether the First City experience provides lessons relevant to the assistance, closure, and/or resolution of failing banks. First City Bancorporation of Texas typified this structure. We found that First City suffered about $300 million in losses on such loans. GAO Comments

1. 3. 4. 5. Therefore, FDIC believed bridge banks would provide for the most orderly resolution, which FDIC also determined to be the least costly resolution alternative available at that time. 6. GAO Comments

1. 2.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Federal Deposit Insurance Corporation's (FDIC) resolution of the First City Bancorporation of Texas, focusing on: (1) why FDIC decided to resolve the corporation by providing financial assistance instead of using other available resolution alternatives; and (2) the additional cost to the Bank Insurance Fund (BIF) as a result of the resolution.

What GAO Found

GAO found that: (1) in 1988, FDIC provided $970 million in financial assistance to recapitalize and restructure the banking organization; (2) FDIC chose this method of resolution because it was less costly than liquidating the banks in the event of insolvency; (3) FDIC estimated BIF costs to liquidate the banks to be about $1.74 billion, as opposed to the $970 million estimated for open bank assistance; (4) FDIC did not opt to sell the banks because it did not believe that it would be able to find acceptable buyers with sufficient capital to restore the banks to long-term viability; (5) FDIC placed the banks under its control for about 3 months and operated them as bridge banks to facilitate the orderly resolution of the banks; (6) FDIC relied on its best business judgment in estimating BIF costs at the time of the banks' failures; (7) FDIC considered loss estimates that ranged from $300 million to over $1 billion in making its least-cost resolution determination; (8) the Office of the Comptroller of the Currency could have better supported its decision to close the largest bank by ensuring that its examination reports and underlying workpapers were clear, well documented, and self-explanatory; and (9) FDIC resolution officials could have used OCC examination findings as a means of verifying its valuation of the banks' assets.