WASHINGTON — Although the Federal Deposit Insurance Corp. is now better at estimating costs of loss-sharing deals, more can be done to improve bank-failure loss projections, a government watchdog said Friday.
As part of its regular audit of the Deposit Insurance Fund, the Government Accountability Office urged better documentation of how the FDIC predicts costs from covering losses suffered by failed-bank buyers. The GAO also said the FDIC should automate its calculation of certain loss reserves reported on the DIF's balance sheet and improve internal controls over the valuing of failed-bank assets, among other recommendations.
"We identified several internal control issues that, while not rising to the level of a significant deficiency or material weakness …, nonetheless warrant management's attention and action," the GAO report said.
The report, which focused on the FDIC's 2010 failure expenses, said the agency had mitigated the risk - identified in the 2009 audit - of misstating costs from the loss-sharing agreements. Still, the GAO said, the FDIC lacked a manual or other documentation to outline how it calculated those loss estimates.
"The lack of such documentation could impact FDIC's ability to ensure that the methodology for deriving one of the most significant estimates on DIF's financial statements is in conformity with management intent, results in a reasonable estimate of loss, and is consistently applied by staff in future periods," the report said.
Meanwhile, the audit said the agency was relying on an overly manual process for calculating loss reserves for receivables on the fund's balance sheet, leaving the FDIC open to errors.
"The complexity and manual nature … increases the risk that inaccurate or incomplete data could be used in the year-end calculations for the overall allowance for losses and not be detected and corrected," the report said.
The audit also recommended that the FDIC ensure officials comply with internal guidelines on reviewing valuations of failed-bank assets.
The current "review process required … to minimize errors going undetected and uncorrected was not fully effective," the GAO said.
In an Aug. 1 letter included with the report, Steven App, the FDIC's chief financial officer, concurred with the GAO's recommendations.
"We continue to be proactive in addressing issues that could adversely impact controls over financial reporting," App wrote.
