FDIC Improvement Act Of 1991 Mandates Major Change

ANNUAL EXAMINATION TO BE ROUTINE FOR ALL INSTITUTIONS
President Bush signed into law the Federal Deposit Insurance Corporation Improvement Act of 1991 (Act) after it was passed by both the U.S. Senate and the House of Representatives on November 27, 1991.

Although the Act does not do all bankers hoped it would, it contains many parts that will make necessary some significant changes to many financial institutions.

One of the more important requirements is that effective within one year each depository institution of over $100 million must receive an annual, "full-scope, on-site examination."

The exceptions are those institutions:
under $100 million that are "well capitalized?significantly in excess of regulatory minimums" that had a "well managed" and "outstanding" rating in the last examination, and that have had no change of control since its last examination. They can go as long as 18 months before being examined again, according to one provision of the Act.

This annual examination is a major change for many institutions-some have gone as long as five years between examinations. "Bankwatchers" feel this provision was brought on, in part, by the savings and loan problem, and by the increasing number of fines imposed on institutions exhibiting non-compliance with the Bank Secrecy Act. Congress my have perceived that having a management, compliance, or regulatory problem go on undiscovered for a long period of time created a major threat to the institution's profitability and in some cases, its very existence.

The method of regulatory compliance examinations has undergone a subtle change over the last five years. More examiners are being instructed to go directly to the front line and ask questions in order to determine compliance. Training of front line employees in compliance issues has become of major importance.

ANNUAL AUDITS
The Act also mandates that after December 31, 1992 depository institutions will institute annual internal and external audits. The internal audit is going to create some major headaches. The Act requires that the internal audit must include a report on the institution's financial condition and management, be signed by the chief executive officer and either the chief financial or accounting officer, and be attested to by the institution's independent accountants.

Other provisions of what the audit must include are very specifically set out in the Act. The headache will develop not from the fact that this audit report must be given to the regulators, but because it must also be publicly available.

Although financial institutions with assets of less than $150 million are exempt from these audits, there are other sections that do apply.

OTHER REQUIREMENTS
There are sections in the Act that cover such areas as real estate lending, restrictions of state-chartered bank powers, mergers and acquisitions, deposit insurance changes, accounting standards and consumer provisions, among others. We will be addressing some of these in future issues of BANKERS' HOTLINE, keeping you as up-to-date as possible.

Copyright © 1992 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 2, No. 12, 3/92