Arthur Andersen Is Putting Final Touches on FDIC Audit

WASHINGTON - Arthur Andersen & Co. will weigh in Wednesday on a long-running debate between the Federal Deposit Insurance Corp. and the General Accounting Office: Is the Bank Insurance Fund adequately reserved against future losses from expected bank failures?

The FDIC hired the accounting firm in June - for a fee of $50,000 - to look into the dispute. The GAO says the bank fund is underestimating liabilities by $2 billion to $5 billion.

How the issue is settled could affect the size of bank insurance premiums and the timing of the fund's recapitalization.

Estimates Vary by Billions

L. William Seidman, FDIC chairman, says the fund ended 1990 with $8.4 billion, including reserves for future losses. But Charles A. Bowsher, U.S. comptroller general, contends that Mr. Seidman's figure is at least $2 billion too high. An auditor with the General Accounting Office told the American Banker recently that the FDIC's calculations could be off by as much as $5 billion.

The dispute erupted in May when Mr. Bowsher told Congress that the FDIC has not adequately reserved against losses expected from 40 banks that are insolvent and 31 that are close to insolvent. The 71 institutions hold $69 billion in assets.

The FDIC is hoping Arthur Andersen, which examined the books of these 71 banks, will find its reserves sufficient. But that may not sway the GAO, which is completing its review without the accounting firm's input.

"We're finishing our audit," said a GAO auditor. "We are the auditors of record for the FDIC, not Arthur Andersen." The GAO expects to make its audit public in September, he said.

A senior FDIC official said Arthur Andersen is briefing the agency on its findings this week and is expected to issue a final 1990 financial statement by the end of August.

Borrowing Authority

Reserve size is important because it affects the FDIC's borrowing power. The FDIC is allowed to borrow up to nine times its equity, which will shrink if more cash is set aside for losses. If the fund has $8.4 billion, as Mr. Seidman claims, it can borrow up to $75.6 billion. If the fund estimate is off by $5 billion, borrowing could be capped at $30.6 billion.

The FDIC just started using its borrowing power this year and has $5.5 billion in loans.

Still, the amount the FDIC can borrow is likely to become moot when Congress enacts legislation to recapitalize the fund.

New Reserve Criteria Proposed

In congressional testimony, Mr. Bowsher said he wants two changes in how future losses are estimated.

Reserves are now set aside only for "probable" losses. The GAO wants the FDIC to make reserves for what are judged to be "more likely than not" losses.

Second, Mr. Bowsher has endorsed changing the presumptions underlying the "definition and determination of fair market value." Now, it is presumed that an owner will not be compelled to sell an asset and may hold a property until the market improves.

Mr. Bowsher wants to set asset values based on existing market conditions "unless there is clear evidence to support projections of improved financial and economic conditions."

The FDIC does not accept the recommendations, according to the senior agency official.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.