Comments From the Federal Reserve demonstrates that insider problems pose a major safety and soundness issue for the banking industry. 5. We believe it is very important to maintain Regulation O rules on insider lending limits. Violation of individual lending limits was the single most common Regulation O violation in our review of failed banks. The argument that small banks have difficulty attracting directors because of insider lending limits does not appear to be consistent with our information. As we point out on page 19, only 54 banks had notified the Federal Reserve that they were taking advantage of the small bank exception to the aggregate lending limits. This exception is available to the 8,484 banks with deposits of $100 million or less (as of September 30, 1993). In addition, directors of small banks (those with assets of $100 million or less) we talked to generally did not believe that access to credit at their banks was a primary reason for becoming a director. In fact, many suggested they would be less likely to seek a loan from their banks than from a bank on whose board they did not serve. As we have discussed with Federal Reserve officials, we are more concerned about changes to Regulation O that may relax a bank's recordkeeping requirements related to identifying extensions of credit to insiders, including related interests. A sound system of records is critical for accurate quarterly reporting of insider activity and for examiners to be able to assess the bank's internal controls over those activities. For these reasons, we believe examiners need to be diligent in ensuring that banks' related recordkeeping produces complete and accurate information. 6. In general, we agree that the Federal Reserve's full-scope examinations include a review of insider activities. However, we noted instances in which a separate review of insider transactions was not part of the scope of an examination. In some of these cases, selected insider loans were only reviewed as part of the overall review of the loan portfolio. In addition, we noted instances in which information on insiders and their transactions was accepted by the examiner with minimal or no attempt at verification. We agree that Federal Reserve examination policies call for a thorough review of insider activities. The purpose of our recommendation is to highlight the need for the scrutiny of insider transactions in practice consistent with the examination policy. 7. The focus group participants and bank boards in our open bank sample included individuals from banks supervised by all three federal bank regulators. In general, as we discuss in chapter 6, bank boards and focus Comments From the Federal Reserve group participants felt frustrated in their interactions with examiners and regulators. As we acknowledge, bank directors have a responsibility to ensure that bank management makes changes to correct identified deficiencies. However, we believe federal bank regulators could take additional steps to communicate the need for corrective actions and provide more assistance to bank directors and management in accomplishing the corrections. The Federal Reserve's written examination summary, which is provided to each director, is a good step in this direction. However, we believe the steps we outline in chapter 6 would provide additional assurances that identified deficiencies are understood and corrected before they negatively affect a bank's financial health. |