Wall St. and Business Wednesdays: Government Accountability Office Study Suggests U.S. Regulators Should Reassess Their Support Efforts For Small Minority Banks by John Poirier

Oct 4 (Reuters) - U.S. regulators should reassess their support efforts for small minority banks, including African-American banks, which were less profitable than their peers last year, a congressional study suggested on Wednesday.

The Government Accountability Office said bank regulators have differing approaches to supporting minority banks, but no federal agency has regularly and comprehensively assessed the effectiveness of its efforts.

The Federal Deposit Insurance Corp. supervises more than half of all minority banks and has the most comprehensive support efforts for them among all the bank regulators, the congressional auditors said.

"Banks regulated by FDIC were more positive about their agency's efforts than banks regulated by other agencies," the report said.

The GAO said the FDIC has recently sought to assess the effectiveness of its support efforts through various methods.

But none of the regulators -- including the Federal Reserve, Office of the Comptroller of the Currency and Office of Thrift Supervision -- comprehensively surveys minority banks to seek their views, the GAO said. These regulatory agencies also have not developed outcome-oriented performance measures, according to the GAO.

Minority banks are mainly located in urban areas and account for about 2 percent of all financial institutions and total industry assets.

"Despite their small numbers, minority banks can play an important role in serving the financial needs of historically underserved communities," the GAO said.

Profitability of most large minority banks, with assets of more than $100 million, was nearly equal to their peers, according to the report.

Overall small minority banks had an average of return on assets of 0.4 percent, compared with 1 percent at their peer institutions.

Maintaining higher reserves for potential loan losses and high operating expenses, such as administrative expenses and salaries, as well as competition from larger banks are the likely reasons causing lower profits, the GAO found.

The GAO said it identified 195 minority banks in 2005, with Asian-American and Hispanic-American banks sprouting up in communities throughout the United States.

Among them, 73 banks served Asian-American communities, 46 banks served African-Americans, 38 banks for Hispanic-Americans, 20 banks served the Native American community and 13 were women-owned.

More than 40 percent of minority banks had assets of less than $100 million, 32 percent had assets between $100 million and $300 million, and 26 percent had assets of more than $300 million.

© Reuters 2006. All Rights Reserved. This article was published by Reuters

*Editor's Note: The 74 Page report is available on the website at: http://www.gao.gov/new.items/d076.pdf

John Poirier

Wednesday, November 1, 2006