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Vol. 75, No. 1
Posted 1993-01-01

Implications of Annual Examinations for the Bank Insurance Fund

The Federal Deposit Insurance Corporation Improvement Act of 1991 requires federal supervisors to examine insured depository institutions annually. This article investigates whether mandatory annual examinations will make supervisors more effective in limiting losses to the Bank Insurance Fund (BIF) that result from bank failure. Gilbert’s findings, based on data for more than 800 banks that failed between 1985 and 1990, support the view that annual examinations are important for effective supervision of banks. First, more than 90 percent of failed banks were classified as problem banks in examinations before their failure. Thus examiners can distinguish between sound and troubled banks when they examine them. Second, changes in balance sheets around the time of examinations indicate that examiners discovered bank problems that were not revealed in prior Call Reports. Annual examinations are important if supervisors use the information in the examination reports to constrain problem bank behavior that would tend to increase exposure of BIF to losses. Gilbert reports sharp declines in dividends and in the growth rates of assets after banks were examined and downgraded to problem status. Finally Gilbert finds that losses to BIF were smaller in those bank failure cases in which banks were examined in their last 12 months of operation. The information derived from examination reports appears to be important to the efforts of supervisors to limit exposure of BIF to losses when banks get into serious trouble.

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