Summary
As financial institutions increasingly operate globally and diversify their businesses, entities with an interest in financial stability cite the need for supervisors to oversee the safety and soundness of these institutions on a consolidated basis. Under the Comptroller General's Authority, GAO reviewed the consolidated supervision programs at the Federal Reserve System (Federal Reserve), Office of Thrift Supervision (OTS), and Securities and Exchange Commission (SEC) to (1) describe policies and approaches that U.S. consolidated supervisors use to oversee large and small holding companies; (2) review the management of the consolidated supervision programs, including use of program objectives and performance measures; and (3) evaluate how well consolidated supervisors are collaborating with other supervisors and each other in their activities. In conducting this study, GAO reviewed agency policy documents and supervisory reports and interviewed agency and financial institution officials.
The Federal Reserve, OTS, and SEC have responded to the dramatic changes in the financial services industry and for many of the largest financial services firms the agencies focus on the firms' consolidated risks, controls, and capital. Reflecting in part differences in structure, traditional roles and responsibilities, and the length of time they have had to develop and refine their programs, the agencies employ somewhat differing policies and approaches for their consolidated supervision programs. Consolidated supervision becomes more important in the face of changes in the financial services industry, particularly with respect to the increased importance of enterprise risk management by large, complex financial services firms. Consolidated supervision provides a basis for the supervisors to oversee the risks of financial services firms on the same level that the firms manage those risks. GAO found that while all of these agencies were meeting international standards for effective oversight of large, internationally active conglomerates and have broad goals for supervision, they could more clearly articulate the specific objectives and performance measures for their evolving consolidated supervision programs. Both Federal Reserve and OTS, for example, focus on the safety and soundness of the depository institution but could take steps to better measure how consolidated supervision contributes to this in ways that differ from primary supervision of the depository institution. Such objectives and measures would help the agencies ensure consistent treatment of the firms that are subject to consolidated supervision. More effective collaboration can occur if agencies take a more systematic approach to agreeing on roles and responsibilities and establishing compatible goals, policies, and procedures on how to use available resources as efficiently as possible. While the three agencies coordinate and exchange information, they could take a more systematic approach to collaboration with respect to their consolidated supervision programs. For instance, SEC and OTS have authority for some of the same firms with no effective mechanism to prevent duplication, assign accountability, or resolve potential conflicts. Similarly, while the Federal Reserve and other federal bank supervisory agencies have taken steps to share information and examination activities when the Federal Reserve is not the primary supervisor of the lead bank in a bank holding company, some duplication and lack of accountability remain. As a result, consolidated supervision of U.S. financial institutions is not as efficient and effective as it could be if agencies collaborated more systematically. GAO has noted in the past that it is difficult to collaborate within the fragmented U.S. regulatory system and has recommended that Congress modernize or consolidate the regulatory system. However, if the current system is maintained, it is increasingly important for agencies to collaborate to ensure effective and efficient consolidated supervision, consistent treatment of financial services firms, and clear accountability of the agencies for their supervisory activities.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
Richard J. Hillman
Government Accountability Office: Financial Markets and Community Investment
(202) 512-8678
Recommendations for Executive Action
Recommendation: To better assess their agencies' achievements as consolidated supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should direct their staffs to develop program objectives and performance measures that are specific to their consolidated supervision programs.
Agency Affected: Department of the Treasury: Office of Thrift Supervision
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Federal Reserve System
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include ensuring common understanding of how the respective roles and responsibilities of primary bank and functional supervisors and of consolidated supervisors are being applied and defined in decisions regarding the examination and supervision of institutions.
Agency Affected: Department of the Treasury: Office of Thrift Supervision
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Federal Reserve System
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include developing appropriate mechanisms to monitor, evaluate, and report jointly on results.
Agency Affected: Department of the Treasury: Office of Thrift Supervision
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Federal Reserve System
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To take advantage of the opportunities to promote better accountability and limit the potential for duplication and regulatory gaps, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should foster more systematic collaboration among their agencies to promote supervisory consistency, particularly for firms that provide similar services. In particular, the Chairman of the Securities and Exchange Commission and the Director of the Office of Thrift Supervision should jointly clarify accountability for the supervision of the consolidated supervised entities that are also thrift holding companies and work to reduce the potential for duplication.
Agency Affected: Department of the Treasury: Office of Thrift Supervision
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Federal Reserve System
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Chairman of the Securities and Exchange Commission should direct SEC staff to develop and publicly release explicit written guidance for supervision of Consolidated Supervised Entities. This guidance should clarify the responsibilities and activities of the Office of Compliance Inspections and Examinations and the Division of Market Regulation's responsibilities for administering the Consolidated Supervised Entity program.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Director of the Office of Thrift Supervision should direct OTS staff to revise the capital, organization structure, relationship, and earnings, supervisory framework to focus more explicitly and transparently on risk management and controls so that it more effectively captures evolving standards for consolidated supervision and is more consistent with activities of other supervisory agencies and facilitates consistent treatment of OTS's diverse population of holding companies.
Agency Affected: Department of the Treasury: Office of Thrift Supervision
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Chairman of the Federal Reserve should direct Federal Reserve Board and District Bank staff to look for ways to further reduce operational differences in bank supervision among the District Banks, such as developing additional guidance related to developing and communicating examination findings.
Agency Affected: Federal Reserve System
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
