GAO releases report on causes for recent bank failure

foil.seal.gaoA new report released by the Government Accountability Office revealed the failure of many smaller financial institutions between 2008 and 2011 was primarily caused by credit losses on commercial real estate loans.

The GAO study was conducted to uncover why 85 percent of bank failures during the three-year time period were small institutions with less than $1 billion in assets.

The failures raised questions about the accounting and regulatory requirements needed to maintain reserves large enough to absorb expected loan losses. Commercial real estate loans with small banks experienced particularly high credit losses with finance land development and construction.

The report also found many of the failed banks had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited poor underwriting and credit administration practices. 

Financial experts, including the Department of the Treasury, said earlier recognition of credit losses could have potentially protected the banks from the impact of the crisis. The Financial Accounting Standards Board issued a proposal in December 2012 for public comment for a loan loss provision model that is more progressive and would incorporate a broader range of credit information.

The GAO said the proposal would help address the cycle of losses and failures that resulted from the financial crisis.

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