This report responds to your separate requests that we review the role of insider activities in, and their effects on the health of, financial institutions. The report discusses the nature of insider problems, such as insider fraud, insider abuse, and loan losses to insiders at failed banks, and violations of insider laws and regulations at both failed and open banks. It also discusses the underlying causes of these problems and ways in which federal bank regulators could improve their oversight of these problems. We are sending copies of this report to the Chairman of the Board of Governors of the Federal This report was prepared under the direction of Mark J. Gillen, Assistant Director. Other major Purpose Background Officers and directors of a bank have fiduciary responsibilities to the bank, its customers, and its shareholders to ensure the safe and sound management of bank operations. They are also responsible for putting the bank's interests before their own in business dealings affecting the bank. Congress has long recognized in legislation that because of these responsibilities bank insiders, such as officers and directors, who obtain loans from their banks must be treated the same as anyone from the general public obtaining loans. When insider lending violates these laws, the bank may suffer financially. Even without major financial effects, such violations may indicate serious problems with the management and board oversight of bank operations. This report responds to separate requests from the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs and the Chairman of the House Committee on Banking, Finance and Urban Affairs. Both Chairmen asked that GAO review insider activities at failed and open banks; the underlying reasons for insider problems, such as insider fraud, insider abuse, and loan losses to insiders; and the way federal bank regulators supervise such activities. The Chairman of the House Banking Committee also asked GAO to determine the overall amount of insider lending in the United States banking industry. Federal Reserve Regulation O generally provides that bank loans to insiders officers, directors, and principal shareholders-must be made on the same terms that are available to other bank customers. Such loans also must not be any riskier than loans to other bank customers. Regulation O also provides for both individual lending limits for any one insider and aggregate lending limits for all insiders, and it requires prior board approval for loans to insiders. Sections 23A and 23B of the Federal Reserve Act provide rules for transactions between banks and their affiliates. For the purposes of this report, an insider violation is defined as a violation of either Regulation O or sections 23A or 23B of the Federal Reserve Act. Insider problems, such as loan losses to insiders, may occur with or |