Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: THURSDAY, March 14, 1991                   TAG: 9103140137
SECTION: BUSINESS                    PAGE: B-5   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium

BANK REGULATORS CITED ON LENIENCY/ GAO: CRACKDOWN BEATS COOPERATION BANKS

The three federal agencies overseeing the nation's 12,000 banks "share a common philosophy to try to work informally with banks in an effort to promote cooperation with the banks having difficulties," the General Accounting Office said in a report prepared for Rep. Frank Annunzio, D-Ill.

"Regulators have wide discretion in choosing among enforcement actions of varying severity," the agency said. "The combination of wide discretion and cooperative philosophy often did not resolve the problems regulators had identified."

A draft of the study was obtained by The Associated Press. It will be discussed by GAO Comptroller General Charles A. Bowsher when he testifies today before Annunzio's House Banking subcommittee on financial institutions.

The GAO, Congress' auditing and investigative agency, analyzed the regulation of 72 banks listed as weak as of Jan. 1, 1988.

"In 37 of the cases GAO sampled, the regulators should have been more aggressive in using stronger regulatory measures than they did," the report said.

The GAO looked at the performance of the Office of the Comptroller of the Currency, an arm of the Treasury Department; the Federal Deposit Insurance Corp., and the Federal Reserve Board.

It said regulators generally were more successful in arresting a bank's decline when they used legal orders and other formal means rather than simply working with the bank's management.

Twenty-two of the banks showed clear improvement, and in 15 of those regulators had taken the strongest actions available. However, among 20 institutions whose decline continued, only six were subjected to examiners' toughest measures.

"GAO does not object to regulators working cooperatively with bankers," the report said. "However, GAO is concerned that if the cooperative approach is carried too far . . . it can prove damaging over the longer term because underlying problems can become intractable."

The agency said regulators too often did not take strong action until a bank's capital, which represents the investment of its owners, had declined.

Capital is crucial because it acts as a buffer, protecting the government insurance fund from losses. However, the GAO said examiners usually know a bank is in trouble long before its capital deteriorates.

"For example, management weaknesses resulted in poor lending policies," the report said. "The poor lending policies eventually resulted in a high level of bad loans. As these bad loans defaulted, the bank's earnings suffered. After a period of poor earnings, bank capital was depleted."

The GAO is recommending what it calls a "trip wire" regulatory approach. As a bank declines, regulators would use a series of increasingly more forceful actions, prescribed in advance.