The Federal Deposit Insurance Corp. overstated its expected losses last year, leading the agency to add more to its reserves than was necessary, according to a report issued Tuesday.
Releasing its annual audit of the bank and thrift deposit insurance funds, the General Accounting Office said the FDIC's forecasts are off because the agency underestimated the value of assets seized from failed banks and thrifts.
How well the FDIC forecasts future losses affects the overall size of the Bank and Savings Association insurance funds. Any reserves set aside to cover expected costs must be subtracted from a fund's assets.
Right now, with both funds at historic highs, the FDIC's accuracy is not that important. But the agency's system for projecting losses has played a key role in the past.
In 1991, GAO required FDIC to bulk up reserves for future bank failures, plunging the Bank Insurance Fund into insolvency. The expected volume of failures did not occur, reserves were pared back, and the fund was back in the black within 18 months.
"The FDIC did not have effective procedures in place to ensure that data used in the calculation of the yearend allowance for losses was adequately reviewed for accuracy," the GAO's 1996 audit concluded.
The GAO also faulted the FDIC's oversight of outside contractors hired to manage and sell assets inherited from failed institutions.
"We found that FDIC had limited assurance that contracted asset services properly safeguarded failed institution assets and accurately reported financial information to the FDIC," GAO said.
Last year, outside firms collected 63% of the $5.9 billion the FDIC recovered on failed institution assets. At yearend, the FDIC's inventory stood at $8.7 billion of assets with third parties managing about 55% of the total, GAO said.
Responding to the congressional watchdog agency, FDIC officials agreed to improve review and documentation of loss reserves and to beef up contractor oversight.
GAO approved of the financial statements filed by both the bank and thrift insurance funds. The tab for the thrift industry cleanup on Dec. 31 was $128.9 billion, according to the GAO.