Banks need stronger ground rules for their accounting and auditing functions, according to Federal Deposit Insurance Corp. Chairman Don Powell.
Some changes took place as a result of the savings and loan and banking crisis of the late 1980s and early ’90s, when nearly 3,000 institutions failed at a cost to the industry and taxpayers of almost $200 billion.
Following that crisis, due in part to auditing problems, auditors at banks with assets over $500 million were required to have 1,000 hours of relevant audit experience, Powell told a group from the American Bankers Association this month.
But more changes are needed in light of recent corporate failures such as Enron and Global Crossing, he said.
Powell mentioned accounting problems that contributed to the failure last year of Oakbrook Terrace-based Superior Bank FSB, specifically the complexities of how banks account for securitizations, which are loans that are sold to investors.
In 1997, regulators adopted an accounting principle for securitizations that bases a bank’s gains on assumptions about future cash flows.
“When the assumptions are wrong–as often happens in a declining economy–these projected gains disappear, capital takes a hit and sometimes the institution is left fighting for its life. This was clearly the case with the Superior failure, and we have seen evidence of it elsewhere as well,” Powell said.
That issue has been partially resolved by a new rule adopted last year, he said, but regulators need to look again at other issues surrounding securitizations.
Bank regulators also should consider banning accounting firms from providing internal auditing and other consulting services to a financial institution that they are auditing externally, Powell said.
In addition, regulators should require auditing records and working papers to be kept for insured institutions, and regulators should have a wider range of sanctions to impose on auditors, he said.
“While we can bar auditors now for knowing or reckless misconduct, it is often more difficult to address situations involving less egregious misconduct,” Powell said. “Congress gave us authority 10 years ago to deal with this issue, but we haven’t written the regulations to implement the law.”
A new Discover: Discover Card wants to move out of your wallet and onto your key chain, where you might be more likely to use it.
To that end, Riverwoods, Ill.-based Discover has introduced a small version of its card.
“No longer will people have to take their wallets along in their gym bags, beach totes or briefcases,” reads a breathless release from the issuer.
Discover is the country’s fourth-largest card issuer, behind Visa, MasterCard and American Express.
Bank Notes: Firstar Bank signs will begin to disappear at 39 Chicago-area branches this week, to be replaced by U.S. Bank signs. Firstar acquired Minneapolis-based U.S. Bancorp in February 2001 but adopted the latter bank’s name and headquarters city.
Speaking of acquisitions, Chicago-based Bank One Corp. continues to integrate its deposit computer systems. Almost all of its customers can make deposits at branches in other states–all, that is, except customers with accounts based in Chicago and Michigan. Those will be the last areas converted, scheduled for later this year.
