The Extent of Insider Lending at Failed and and losses calls into question our conclusion in chapter 2 that insider problems are a significant contributing factor to bank failures. As discussed in this chapter, we do not believe it is necessary to demonstrate exact dollar losses to conclude that insider problems were a significant factor; according to FDIC investigators, 26 percent of the banks we reviewed failed because insider fraud, insider abuse, or loan losses to insiders was a major factor contributing to the failures. Chapter 5 Examiners Often Did Not Identify Insider Examiners Are Less Problems In our review of the examination reports of 175 failed banks from 1990 and 1991, we found that when the banks were open examiners were less likely to identify insider problems than were investigators after the banks failed. There are a number of reasons for this. Overall, examiners face many more obstacles than investigators in identifying insider fraud, insider abuse, or loan losses to insiders. Nonetheless, we believe there are some tools examiners could consider using to improve their abilities to detect these insider problems. We reviewed the examination reports of the 175 failed banks for the 3 years before they failed. On the basis of our review, we believe examiners may often fail to identify insider fraud, insider abuse, and loan losses to insiders. In many cases, both the FDIC investigator and the examiner identified insider problems in the bank. (See fig. 5.1.) However, in general, investigators were better able to identify these activities after the banks failed than the examiners were when the banks were open. Examiners were less likely to identify instances of insider problems in banks than were investigators. Investigators were substantially more likely to identify instances of insider fraud and abuse than were examiners. However, examiners were closer to investigators in identifying instances of loan losses to insiders. This makes sense in that one of the primary focuses of the safety and soundness examinations is the loan portfolio. Examiners concentrate much of their resources on the loan portfolio review. Because the loan portfolio typically represents the majority of a Examiners Often Did Not Identify Insider bank's assets and the greatest potential risk to its health, such scrutiny is necessary. Differing Two factors appear to largely account for the varying rates with which investigators and examiners identify various problems. These factors are (1) the different circumstances under which investigators and examiners conduct their reviews and (2) the disparate focus of examiners and investigators. Concerning the first factor, several investigators told us that after a bank has failed, interviews with bank personnel often aided their investigation of insider problems. Investigators also told us that bank employees are generally more willing to discuss a bank's problems after it has failed. Bank employees are more willing to do so because they are no longer restrained by concern over their positions at the bank and are, therefore, more willing to speak freely about the bank's management and board. Unfortunately, examiners find that bank employees, who rely on the bank for their livelihood, are less likely to discuss the bank's management and board. Investigators also have greater access to bank documents than do examiners. Although examiners may request all documents necessary to conduct their examinations, they are unlikely to receive documents from bank officials involved in abusive or fraudulent acts in which the officials are self-incriminated. After a bank fails, however, investigators have full access to all records (both manual and automated) on the bank's premises. To ensure that all pertinent documents are obtained, investigators will use desk audits, in which they examine the contents of desks and files belonging to key bank personnel. Through this effort, investigators may produce documents that were unavailable to examiners. However, this approach is of little use to examiners, as such an intrusion would probably be viewed as inappropriate without due cause. Examiners are primarily concerned with the safety and soundness of an institution, while investigators are primarily concerned with determining the culpability of those associated with the bank. Because examiners and investigators have different concerns, the way they perform their duties and the outcome of their efforts differ. Although examiners strive to maintain or improve the condition of open banks and investigators to identify potential recoveries from failed banks, it is important to note that both examiners and investigators ultimately serve a similar purpose-to Examiners Often Did Not Identify Insider minimize losses to the BIF. Given the high incidence of management and insider problems at failed banks we discussed in chapters 2 and 3, we believe examiners may prove better able to minimize such losses by increasing their scrutiny of insider activities. Deficiencies Can Some deficiencies-insider problems and violations-may be difficult for By itself, the omission of an insider's related interests may have little effect on the bank's overall condition. However, it also may mask other potentially abusive problems, such as the failure of a director to abstain from voting on loans to his or her interests or approving loans that exceed the bank's aggregate insider lending limit. Regardless of whether such management deficiencies have a direct detrimental effect or demonstrable financial impact on the bank, they may indicate broader internal control weaknesses in need of corrective action. Regulators Could We believe our data show that the relationship between insider problems |