The Prompt Regulatory Action provisions required federal regulators to institute a two-part system of regulatory actions that would be triggered when an institution fails to meet minimum capital levels or safety-and-soundness standards. Specifically, FDICIA requires a number of corporate governance and accounting reforms to (1) strengthen the corporate governance of depository institutions, (2) improve the financial reporting of depository institutions, and (3) help in the early identification of emerging safety-and-soundness problems in depository institutions. Other specific actions available to the regulators include imposing more stringent asset growth limitations than required for undercapitalized institutions or requiring the institution to reduce its total assets; requiring the institution, or its subsidiaries, to alter, reduce, or terminate an activity that the regulator determines poses excessive risk to the institution; improving management by (1) ordering a new election for the institution’s board of directors, (2) dismissing directors or senior executive officers, and/or (3) requiring an institution to employ qualified senior executive officers; prohibiting the acceptance, including renewal and rollover, of deposits requiring prior approval for capital distributions from holding companies having control of the institution; and requiring divestiture by (1) the institution of any subsidiary that the regulator determines poses a significant risk to the institution, (2) the parent company of any nondepository affiliate that regulators determine poses a significant risk to the institution, and/or (3) any controlling company of the institution if the regulator determines that divestiture would improve the institution’s financial condition and future prospects. To assess the impact of sections 38 and 39 on the regulatory oversight of banks and thrifts, we used the 61 banks that we determined were undercapitalized for section 38 purposes to evaluate OCC’s and FRS’ use of their section 38 authority (reclassification and directives) versus the use of traditional enforcement tools. We provided a draft of this report to the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision for their review and comment. Few Institutions Have Been Subject to Enforcement Actions Under Sections 38 and 39

Regulators have taken steps to implement FDICIA’s Prompt Regulatory Action provisions. The remaining two standards—asset quality and earnings—became effective on October 1, 1996, allowing for the full implementation of section 39. OCC used directives against a relatively small number of the banks in our sample. Regulators Had Not Used Their Section 39 Enforcement Authority

As of September 1996, regulators had not used their section 39 enforcement authority against an institution. Moreover, regulators have wide discretion governing the application of section 39 because the guidelines and regulations implementing section 39, as amended, do not (1) establish clear and specific definitions of unsound conditions and practices or (2) link such conditions or practices to specific mandatory regulatory actions. The success of these initiatives, coupled with the regulators’ willingness to use their various enforcement authorities, including sections 38 and 39, will be instrumental in determining whether losses to the insurance funds are prevented or minimized in the future.
Why GAO Did This Study

GAO reviewed the Federal Reserve System's (FRS) and the Office of the Comptroller of the Currency's (OCC) efforts to implement the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) prompt regulatory action provisions and the impact of those provisions on federal oversight of depository institutions.

What GAO Found

GAO found that: (1) regulators have taken the required steps to implement FDICIA prompt regulatory action provisions, but have had to use the additional enforcement powers granted by the provisions against a relatively small number of depository institutions; (2) the improved financial condition of banks and thrifts has allowed them to build their capital levels to the point where only a few institutions were considered undercapitalized according to section 38 standards; (3) OCC and FRS generally took prescribed regulatory actions against the 61 undercapitalized banks reviewed; (4) as of September 1996, regulators had not used their section 39 authority; (5) the final two safety and soundness standards, asset quality and earnings, required to fully implement section 39 became effective on October 1, 1996; (6) the guidelines and regulations issued to date by regulators to implement section 39 do not establish clear, objective criteria for what would be considered unsafe and unsound practices or conditions or link the identification of such conditions to specific mandatory enforcement actions; (7) other FDICIA provisions and initiatives recently announced by regulators should help in the early identification of depository institutions with safety and soundness problems; and (8) the success of these provisions and initiatives will be determined by the regulators' willingness to use their enforcement powers early enough to prevent or minimize losses to the deposit insurance funds.