The General Accounting Office has concluded that sections 23a and 23b of the Federal Reserve Act cannot prevent banks from providing improper financial assistance to their subsidiaries.
In a June 10 letter to Rep. Richard H. Baker, which was released publicly Thursday, GAO Chief Economist James L. Bothwell said the two provisions are nearly impossible to enforce.
"Without examining loan files in great detail, it may not be possible to determine whether the interest rate or repayment terms properly reflect the degree of risk involved in the extension of credit," he said.
The GAO letter is a follow up to a March 17 report that said allowing banks and commercial firms to merge would increase the risk of systemic failures. Rep. Baker asked the GAO if it had considered the impact of sections 23a and 23b.
Section 23a limits to 20% the amount of capital banks can invest in subsidiaries while 23b prevents banks from offering discounted loans and other perks to subsidiaries.