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entitled 'Financial Market Regulation: Agencies Engaged in Consolidated 
Supervision Can Strengthen Performance Measurement and Collaboration' 
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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

March 2007: 

Financial Market Regulation: 

Agencies Engaged in Consolidated Supervision Can Strengthen Performance 
Measurement and Collaboration: 

GAO-07-154: 

GAO Highlights: 

Highlights of GAO-07-154, a report to congressional committees 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

What GAO Recommends: 

GAO recommends that the heads of the three agencies direct their staffs 
to develop a set of clear and consistent objectives and related 
performance measures specific to consolidated supervision and 
collaborate more systematically with each other and with other 
supervisors. The agencies generally agreed with these recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-154]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Richard J. Hillman at 
(202) 512-8678 or hillmanr@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Agencies Employ Differing Policies and Approaches to Provide 
Consolidated Supervision: 

Improved Program Objectives and Performance Measures Could Enhance 
Agencies' Consolidated Supervision Programs: 

Systematic Collaboration Could Enhance Consolidated Supervision 
Programs: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Criteria for Consolidated Supervision Included in Basel 
Committee on Banking Supervision's Core Principles: 

Appendix III: Comments from the Chairman of the Board of Governors of 
the Federal Reserve System: 

Appendix IV: Comments from the Director of the Office of Thrift 
Supervision: 

Appendix V: Comments from the Chairman of the Securities and Exchange 
Commission: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: U.S. Primary Bank, Broker-Dealer, and Insurance Supervisors, 
2005: 

Table 2: Number and Type of Institutions That Consolidated Supervisors 
Oversee, 2005: 

Table 3: Federal Reserve's Supervisory Cycle for LCBOs: 

Table 4: OTS's Standard Core Framework: 

Table 5: Thrift Holding Company Enterprises by Category, Complexity, 
Size, and Primary Business, as of December 31, 2006: 

Table 6: Key Elements of Collaboration: 

Figure: 

Figure 1: Supervisors for a Hypothetical Financial Holding Company: 

Abbreviations: 

BaFin: German Federal Financial Supervisory Authority (Die 
Bundesanstalt für Finanzdienstleistungsaufsicht): 
BCBS: Basel Committee on Banking Supervision: 
Board: Federal Reserve Board of Governors: 
CAMELS: capital adequacy, asset quality, management ability, earnings, 
liquidity, and sensitivity to market risk: 
CIO: Complex and International Organizations: 
CORE: capital, organization structure, relationship, and earnings: 
COSO: Committee of Sponsoring Organizations of the Treadway Commission: 
CSE: consolidated supervised entity: 
District Bank: Federal Reserve Bank in each of the 12 Federal Reserve 
Districts: 
EU: European Union: 
FCD: Financial Conglomerates Directive: 
FDIC: Federal Deposit Insurance Corporation: 
Federal Reserve: Federal Reserve System: 
FSA: Financials Services Authority of the United Kingdom: 
GLBA: Gramm-Leach-Bliley Act: 
ILC: industrial loan companies: 
LCBO: large complex banking organization: 
LTCM: Long-Term Capital Management: 
MOU: memorandum of understanding: 
NAIC: National Association of Insurance Commissioners: 
NERO: Northeast Regional Office: 
OCC: Office of the Comptroller of the Currency: 
OCIE: Office of Compliance Inspections and Examinations: 
OTS: Office of Thrift Supervision: 
SEC: Securities and Exchange Commission: 
SIBHC: supervised investment bank holding company: 
SRO: self- regulatory organization: 

[End of section] 

March 15, 2007: 

Congressional Committees: 

Increasingly, financial institutions headquartered in the United 
States, and their competitors, operate on a global basis, engage in a 
variety of businesses, and manage themselves from a consolidated 
perspective. Partly in response to these changes, entities with an 
interest in financial institutions have increasingly cited the need for 
supervisors to oversee the safety and soundness of these firms on a 
consolidated basis, mirroring the risk management practices of the 
firms. This increased focus is reflected in U.S. laws that provide 
holding company supervisors with authority to examine the financial and 
operating risks faced by holding companies and the controls for these 
risks on a consolidated basis. Similarly, the European Union's (EU) 
Financial Conglomerates Directive, implemented in 2005, requires 
conglomerates to have a consolidated supervisor--either an EU 
supervisor or a home supervisor that has demonstrated it provides 
equivalent consolidated supervision--and focuses on the risks, 
controls, and capital levels of holding companies. 

In the United States, consolidated supervision generally is equated 
with holding company supervision at the top tier or ultimate holding 
company in a financial enterprise. Three federal agencies--the Federal 
Reserve System (Federal Reserve), the Office of Thrift Supervision 
(OTS), and the Securities and Exchange Commission (SEC)--engage in 
oversight of financial services holding companies on a consolidated 
basis:[Footnote 1] the Federal Reserve oversees bank holding companies 
(including financial holding companies, which are bank holding 
companies qualified to engage in many nonbanking financial services), 
OTS oversees thrift holding companies, and SEC oversees consolidated 
supervised entities (CSE). Each of these agencies oversees large, 
complex financial institutions. 

In addition, the Federal Reserve and OTS provide consolidated 
supervision for the vast majority of U.S. financial institutions 
organized as holding companies that have remained relatively small, and 
are not complex. Under U.S. law, consolidated supervisors are to rely 
on primary bank and functional supervisors with respect to the 
supervision of regulated financial subsidiaries such as banks, broker- 
dealers, and insurers.[Footnote 2] The Federal Deposit Insurance 
Corporation (FDIC) and the Office of the Comptroller of the Currency 
(OCC), for instance, are the primary federal supervisors for state- 
chartered banks that are not members of the Federal Reserve System and 
for national banks, respectively. SEC is the primary regulator of 
broker-dealers and state insurance supervisors of insurers. 

As is generally the case for supervisors dealing with the financial 
viability of the entities they oversee, holding company supervisors 
face the challenge of striking the appropriate balance between 
adequately assessing the risks and controls of financial services firms 
and placing undue regulatory burdens on those enterprises. At the 
consolidated level the effects of not having the right balance could be 
unacceptable losses to the depository insurance fund, systemic failures 
that could threaten financial stability, competitive disadvantages for 
U.S. firms as a whole or for a firm or group of firms relative to their 
U.S. competitors, or higher costs or lower returns for consumers of 
financial services products or the owners of those firms. =

In previous reports,[Footnote 3] we have noted the challenges 
confronting the U.S. regulatory system: 

The present federal financial regulatory structure evolved largely as a 
result of periodic ad hoc responses to crises such as financial panics. 
In the last few decades, however, the financial services industry, 
especially as represented by the largest firms, has evolved, becoming 
more global, more concentrated, complex, and consolidated across 
sectors, and increasingly converging in terms of product offerings. 
Multiple specialized regulators bring critical skills to bear in their 
areas of expertise but have difficulty seeing the total risk exposure 
at large conglomerate firms or identifying and preemptively responding 
to risks that cross industry lines.[Footnote 4] 

In particular, we previously concluded that while the strength and 
vitality of the U.S. financial services industry demonstrates that the 
regulatory structure has not failed, there are questions whether that 
structure is appropriate in today's environment, particularly with 
respect to large, complex firms managing their risks on a consolidated 
basis. We suggested that Congress consider several alternative 
structures, including consolidating some or all of the current 
regulatory agencies or having a single regulator oversee complex, 
internationally active firms. However, this report evaluates 
consolidated supervision under the existing regulatory structure and 
does not address proposals to consolidate federal financial regulation. 

In recognition of the increasing importance of consolidated supervision 
for the federal financial regulatory system raised in these earlier 
reports, we undertook a review of consolidated supervision in the 
United States under the Comptroller General's Authority to initiate 
reviews. This report: 

* describes the policies and approaches U.S. consolidated supervisors 
use to oversee large and small holding companies in the financial 
services industry; 

* reviews the supervisory agencies' management of their consolidated 
supervision programs, including program objectives and performance 
measures; and: 

* evaluates how well consolidated supervisors are collaborating with 
other supervisors and each other in their activities. 

To meet our objectives, we reviewed the structure, policies, and 
activities of the Federal Reserve, OTS, and SEC as they relate to these 
agencies' consolidated supervision programs. We reviewed laws and 
regulations pertinent to each agency's consolidated supervision, as 
well as agency planning and performance documents, and regulatory 
planning and examination reports and letters for a group of 14 large, 
complex firms selected because they had at least one of these 
characteristics: (1) major international operations, so that they were 
subject to the EU Financial Conglomerates Directive; (2) operations in 
several business lines; or (3) oversight by one or more consolidated 
supervisors. We also interviewed agency officials and examiners and 
officials from some of the selected group of firms to determine their 
view of the regulatory process. In addition, for the Federal Reserve 
and OTS, we reviewed examination materials related to the supervision 
of smaller, less complex institutions. To determine the adequacy of 
management practices at the agencies, we analyzed the goals for holding 
company supervision, the strategies agencies employ to achieve their 
goals, including collaboration, and how agencies monitor their 
performance. We also reviewed officials' and examiners' statements and 
other examination materials to determine the degree to which 
consolidated supervision programs have effective internal control, key 
management practices that provide agencies with reasonable assurance 
that the programs are operating efficiently and effectively. This 
included an evaluation of how agencies coordinate their activities 
relative to the practices for effective collaboration that we have 
identified.[Footnote 5] We conducted our work between November 2005 and 
February 2007 in accordance with generally accepted government auditing 
standards in Washington, D.C; Boston; and locations where financial 
institutions we visited are headquartered. See appendix I for 
additional details on the objectives, scope, and methodology used in 
this report. 

Results in Brief: 

In recent years, financial services firms have grown dramatically and 
become more complex in terms of the products and services they offer; 
they increasingly operate on a global basis and often manage risks 
across the enterprise. The Federal Reserve, OTS, and SEC have all 
responded to the dramatic changes in the financial services industry, 
and now, for many of the largest, most complex financial services firms 
in the United States, these agencies examine risks, controls, and 
capital levels on a consolidated basis. Given the differences in the 
institutions that the agencies supervise and other factors, their 
specific policies and procedures differ. The agencies divide 
responsibilities for developing and implementing policies across a 
number of agency components. The Federal Reserve and OTS generally set 
policy centrally and implement it through District Banks or regional 
offices, respectively. At SEC, the Division of Market Regulation 
(Market Regulation) has primary responsibility for policy and for 
overseeing how firms manage risks, while SEC's examination offices 
scrutinize more control-oriented activities. Almost all firms overseen 
by the Federal Reserve are engaged primarily in the business of banking 
and those overseen by SEC are engaged primarily in the securities 
business. In contrast, a substantial minority of the firms OTS 
oversees--especially the large, complex ones--have primary businesses 
other than those traditionally engaged in by thrifts, such as 
insurance, securities, or commercial activities. In addition, large 
firms tend to be overseen by multiple supervisors and in the case of 
firms overseen by the Federal Reserve, on a consolidated basis, OCC or 
FDIC is often the primary federal regulator of the lead insured 
depository subsidiary. Finally, for their smaller, less complex firms, 
the Federal Reserve and OTS use abbreviated examination programs. 

Consolidated supervision becomes more important in the face of changes 
in the 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 a financial services firm on the same level that 
the firm manages its risks. Each of the agencies has broad goals for 
its consolidated supervision programs. However, each could better 
ensure accountability, efficiency, and consistency by more clearly 
articulating the objectives of its consolidated supervision program, 
distinguishing these objectives from those for primary supervision, 
linking its activities to these objectives, and measuring the extent to 
which the activities achieve the objectives by developing and using 
performance measures that are specific to the program. In addition, 
agencies could achieve greater consistency by improving examiner 
guidance. We found that the Federal Reserve, OTS, and SEC were 
generally meeting criteria for comprehensive, consolidated supervision. 
However, particularly in rapidly changing environments such as the 
financial services industry, clearer objectives and performance 
measures are essential. The Federal Reserve and OTS identify an 
objective of consolidated supervision as protecting the safety and 
soundness of depository institutions, but the agencies could take steps 
to better measure how consolidated supervision contributes to this 
objective in ways that are different from primary bank supervision. 
Similarly, SEC identifies protection of regulated subsidiaries as an 
objective but does not distinguish the contribution that consolidated 
supervision makes in addition to SEC's oversight of regulated broker-
dealers. SEC staff recently developed a draft document that is intended 
to provide objectives specific to its consolidated supervision program. 
Without such specific objectives and related performance measures, the 
agencies are less able to ensure that their supervisory activities 
avoid duplication and treat holding companies in a consistent manner. 

We have noted in the past that U.S. financial regulatory agencies 
cooperate through a myriad of devices such as the President's Working 
Group, the Federal Financial Institutions Examination Council, and 
Financial and Banking Information Infrastructure Committee often at the 
direction of the President or Congress. In addition, to varying 
degrees, examiners and officials at the supervisory agencies share 
information on supervisory procedures and examination findings over the 
course of exams. However, the U.S. regulatory system could benefit from 
more systematic collaboration, both between consolidated and primary 
bank and functional supervisors in the oversight of the largest, most 
complex firms and among the consolidated supervisors themselves. For 
many of the largest, most complex financial institutions, the 
consolidated supervisor is not the primary supervisor of holding 
company subsidiaries; other supervisors, such as bank supervisors, have 
this responsibility. The supervisory agencies, especially those 
involved in commercial bank supervision, do take steps to avoid 
duplication by sharing some information and examination activities. 
However, we found some evidence of duplication and lack of 
accountability when different agencies are responsible for consolidated 
and primary supervision, suggesting that opportunities remain for 
enhancing collaboration. For example, while the Federal Reserve and OCC 
have and generally follow procedures to resolve differences, one firm 
we visited had initially received conflicting information from the 
Federal Reserve, its consolidated supervisor, and OCC, its primary bank 
supervisor, regarding the firm's business continuity plans. Also, SEC 
and OTS both have consolidated supervisory authority for some of the 
same firms, but with no effective mechanism to collaborate in order to 
prevent duplication, assign accountability, or resolve potential 
conflicts in the feedback given to firms. Moreover, while these 
agencies all supervise large, complex, internationally active firms, 
they could better ensure consistency with more systematic collaboration 
to determine common goals, compatible strategies, and accountability. 

In this report, we make seven recommendations primarily related to 
improving certain management practices within and across the agencies 
engaged in consolidated supervision. We recommend that each agency 
better define objectives that are specific to its consolidated 
supervision program and develop performance measures that will help it 
measure the extent to which it is achieving these objectives. As noted 
above, SEC staff have developed draft objectives and performance 
measures for SEC's consolidated supervision program. With regard to the 
oversight of complex institutions where primary bank and functional 
supervisors oversee certain holding company subsidiaries, we recommend 
that those agencies engaged in consolidated supervision of the holding 
companies develop mechanisms for more systematic collaboration with the 
primary and functional supervisors responsible for the supervision of 
the subsidiaries. In a similar vein, we recommend that the three 
agencies engaged in consolidated supervision adopt mechanisms for more 
systematic collaboration among themselves, particularly when they share 
responsibility for the same firms. In both cases, more systematic 
collaboration would help to limit duplication, ensure that all 
regulatory areas are effectively covered, and ensure that resources are 
focused most effectively on the greatest risks across the regulatory 
system. In addition, we also make specific recommendations to each 
consolidated supervisor to help ensure that firms are treated 
consistently. The Chairman of the Board of Governors of the Federal 
Reserve System and the Director of the Office of Thrift Supervision 
provided written comments on a draft of this report; their comments are 
included in appendixes III and IV, respectively. The Chairman of the 
Securities and Exchange Commission provided written comments on a draft 
of this report and subsequently provided additional information 
detailing some of the actions he was taking in response to the report; 
these comments are included in appendix V. Officials from the three 
agencies generally agreed with the recommendations in this report and 
offered clarifying remarks. 

Background: 

Modern financial services firms use a variety of holding company 
structures to manage risk inherent in their businesses. The United 
States regulatory system that consists of primary bank supervisors, 
functional supervisors, and consolidated supervisors oversees these 
firms in part to ensure that they do not take on excessive risk that 
could undermine the safety and soundness of the financial system. 
Primary bank supervisors oversee banks according to their charters, and 
functional supervisors--primarily, SEC, self-regulatory organizations 
(SRO), and state insurance regulators--oversee entities engaged in the 
securities and insurance industries as appropriate. Consolidated 
supervisors oversee holding companies that contain subsidiaries that 
have primary bank or functional supervisors. They are chartered, 
registered, or licensed as banks, securities firms, commodity trading 
firms, and insurers. International bodies have provided some guidance 
for consolidated supervision. 

Modern Financial Services Firms Use Holding Company Structures to 
Manage Risk: 

Many modern financial firms are organized as holding companies that may 
have a variety of subsidiaries. In recent years, the financial services 
industry has become more global, consolidated within traditional 
sectors, formed conglomerates across sectors, and converged in terms of 
institutional roles and products. The holding company structure, which 
allows firms to expand geographically, move into other permissible 
product markets, and obtain greater financial flexibility and tax 
benefits, has facilitated these changes. Financial services holding 
companies now range in size and complexity from small enterprises that 
own only a single bank and are being used for financial flexibility and 
tax purposes to large diversified businesses with hundreds of 
subsidiaries--including banks, broker-dealers, insurers, and commercial 
entities--that have centralized business functions that may be housed 
in the holding company. In addition, modern financial corporate 
structures often consist of several tiers of holding companies. 

To varying degrees, all financial institutions are exposed to a variety 
of risks that create the potential for financial loss associated with: 

² failure of a borrower or counterparty to perform on an obligation-- 
credit risk; 

² broad movements in financial prices--interest rates or stock prices-
-market risk; 

² failure to meet obligations because of inability to liquidate assets 
or obtain funding--liquidity risk; 

² inadequate information systems, operational problems, and breaches in 
internal controls--operational risk; 

² negative publicity regarding an institution's business practices and 
subsequent decline in customers, costly litigation, or revenue 
reductions--reputation risk; 

² breaches of law or regulation that may result in heavy penalties or 
other costs--legal risk; 

² risks that an insurance underwriter takes in exchange for premiums-- 
insurance risk; and: 

² events not covered above, such as credit rating downgrades or factors 
beyond the control of the firm, such as major shocks in the firm's 
markets--business/event risk. 

In addition, the industry as a whole is exposed to systemic risk, the 
risk that a disruption could cause widespread difficulties in the 
financial system as a whole. 

As firms have diversified, some holding companies have adopted 
enterprisewide risk management practices where they manage and control 
risks across the entire holding company rather than within 
subsidiaries. These firms have global risk managers who manage credit, 
market, liquidity, and other risks across the enterprise rather than 
within individual subsidiaries, such as securities, banking, or 
insurance businesses or subsidiaries in foreign countries. In addition, 
these firms generally provide services such as information technology 
on a firmwide basis and have firmwide compliance and internal audit 
functions. 

The U.S. Regulatory System Includes Many Agencies: 

We have previously reported that most financial services firms are 
subject to federal oversight designed to limit the risks these firms 
take on because (1) consumers/investors do not have adequate 
information to impose market discipline on the institutions and (2) 
systemic linkages may make the financial system as a whole prone to 
instability.[Footnote 6] In the United States, this oversight is 
provided by primary bank and functional supervisors as well as by 
consolidated supervisors. 

Primary Bank and Functional Supervisors Oversee Holding Company 
Subsidiaries: 

As table 1 illustrates, in the United States a variety of federal bank 
supervisors oversee banks that are subsidiaries of holding 
companies.[Footnote 7] State bank supervisors also participate in the 
oversight of banks with state charters. Similarly, securities 
supervisors that include SEC and SROs, such as the New York Stock 
Exchange and NASD, oversee broker-dealer subsidiaries and state 
insurance supervisors oversee insurance companies and products. While 
each of the agencies has multiple goals, all are involved in assessing 
the financial solvency of the institutions they regulate. 

Table 1: U.S. Primary Bank, Broker-Dealer, and Insurance Supervisors, 
2005: 

Federal primary bank supervisors[A]. 

Regulatory body: Federal Deposit Insurance Corporation; 
Number of entities overseen: 5,245[B]; [Empty]; 
Functions: Provides oversight of state-chartered banks that are not 
members of the Federal Reserve, state savings banks, and industrial 
loan corporations with federally insured deposits. Also serves as the 
secondary regulator for all banks with federally insured deposits. 

Regulatory body: Federal Reserve; 
Number of entities overseen: 907[C]; 
Functions: Oversees state-chartered banks that are members of the 
Federal Reserve. 

Regulatory body: Office of the Comptroller of the Currency; 
Number of entities overseen: 1,933[D]; 
Functions: Charters and supervises banks with national charters. 

Regulatory body: Office of Thrift Supervision; 
Number of entities overseen: 866[E]; 
Functions: Supervises state-chartered savings associations that are 
federally insured and federally chartered thrifts. 

Broker-dealer supervisors. 

Regulatory body: Securities and Exchange Commission and self-regulatory 
organizations; 
Number of entities overseen: 6,300[F]; 
Functions: Oversee compliance of securities brokers and dealers with 
federal securities laws. Self-regulatory organizations play a major 
role in enforcing conduct of business and capital requirements. The 
Securities and Exchange Commission validates self-regulatory 
organizations' rules and inspects and oversees their regulatory 
programs. 

Insurance supervisors. 

Regulatory body: State insurance supervisors; 
Number of entities overseen: 8,794[G]; 
Functions: Insurance firms are regulated primarily at the state level. 
The National Association of Insurance Commissioners aims to achieve 
some common minimum standards by encouraging consistency and 
cooperation among the various states as they individually regulate the 
insurance industry.[H]. 

Source: GAO analysis of agency data. 

[A] Because credit unions are not subsidiaries of holding companies, 
they are not included here. 

[B] Federal Deposit Insurance Corporation statistics, December 2005. 

[C] Federal Reserve, Annual Report 2005. 

[D] Office of the Comptroller of the Currency, Annual Report Fiscal 
Year 2005. This number does not include the 51 federal branches of 
foreign banks in the United States that are also overseen by OCC. 

[E] Office of Thrift Supervision, Budget/Performance Plan Fiscal Year 
2006. 

[F] Securities and Exchange Commission. 

[G] National Association of Insurance Commissioners, 2005 Insurance 
Department Resources Report. 

[H] SEC regulates sales of discrete products, such as certain types of 
annuities considered to be securities. Also, banks engage in certain 
types of insurance activities, such as underwriting credit insurance 
and, under certain circumstances, acting as an insurance agent either 
directly or through a subsidiary. Although these activities are subject 
to OCC regulation, national banks can be subject to nondiscriminatory 
state laws applicable to certain insurance related activities. 

[End of table] 

All of the primary bank supervisors use the same framework to examine 
banks for safety and soundness and compliance with applicable laws and 
regulations. Among other things, they examine whether: 

² the bank has adequate capital on the basis of its size, composition 
of its assets and liabilities, and its credit and market risk profile; 

² the bank has an appropriate asset quality based on the credit risk of 
loans in its portfolio; 

² the bank's earnings trend measures up to that of its peers; 

² the competence and integrity of the bank's management and board of 
directors to manage the risks of the bank's activities and their record 
of complying with banking regulations and other laws; 

² the bank has adequate liquidity based on its deposit volatility, 
credit conditions, loan commitments and other contingent claims on the 
bank's assets and its perceived ability to raise funds on short notice 
at acceptable market rates; and: 

² the bank adequately identifies and manages its exposures to changes 
in interest rates and, as applicable, foreign exchange rates, commodity 
and equity prices. 

Primary bank examiners rate banks in each of the areas; these ratings 
are usually referred to as CAMELS ratings (capital adequacy, asset 
quality, management ability, earnings, liquidity, and, where 
appropriate, sensitivity to market risk). 

SROs oversee certain aspects of broker-dealer activity. SEC 
concurrently oversees these SROs and independently examines broker- 
dealers. SEC considers its enforcement authority crucial for its 
protection of investors. Under this authority, it brings actions 
against broker-dealers and other securities firms and professionals for 
infractions such as insider trading and providing false or misleading 
information about securities or the companies that issue them. However, 
to protect investors, SEC also requires broker-dealers to maintain a 
level of capital that should allow the broker-dealer to satisfy the 
claims of its customers, other broker-dealers, and creditors in the 
event of potential losses from proprietary trading or operational 
events. SEC and the SROs examine broker-dealers to determine if they 
are maintaining required capital and evaluate broker-dealers' internal 
controls. 

The central purpose of insurance regulation is to protect consumers by 
monitoring the solvency of insurers and their business practices. 
Insurance companies are supervised on a state-by-state basis, although 
states often follow general standards promulgated by the National 
Association of Insurance Commissioners (NAIC), a private voluntary 
association for insurance regulators. For example, insurance 
supervisors generally require insurance firms to prepare their 
quarterly and annual financial statements in a format unique to 
insurance known as statutory accounting principles that are maintained 
by NAIC. Insurance supervisors impose capital requirements on insurance 
companies to try to limit insurance company failures and ensure their 
long-run viability. In addition, all state insurance supervisors 
monitor insurers' business practices and terms of insurance contracts 
in their states. 

Consolidated Supervisors Oversee Holding Companies: 

In the United States, three agencies provide consolidated supervision-
-the Federal Reserve oversees bank holding companies, OTS oversees 
thrift holding companies, and SEC oversees certain CSEs on a 
consolidated basis. As table 2 shows, the number and type of 
institutions these agencies oversee varies. 

Table 2: Number and Type of Institutions That Consolidated Supervisors 
Oversee, 2005: 

Consolidated supervisor: Federal Reserve; 
Number of entities overseen: 5,154; 
Type of entity overseen: Bank holding companies, including small shell, 
medium-sized, and large complex firms--the majority of which have 
banking as their primary business but many, especially larger firms, 
have securities or other nonbank subsidiaries. 

Consolidated supervisor: OTS; 
Number of entities overseen: 476; 
Type of entity overseen: Savings and loan holding companies, including 
small, medium-sized, and large firms that may include substantial 
nonbanking subsidiaries focused on commercial activities, securities, 
or insurance. 

Consolidated supervisor: SEC; 
Number of entities overseen: 5; 
Type of entity overseen: Large complex firms that focus primarily on 
securities and have chosen to be participants in the CSE program. 

Source: GAO analysis of agency data. 

[End of table] 

As the table shows, SEC, under its CSE program, oversees only large 
complex firms. These include Bear Stearns & Co., Goldman Sachs & Co., 
Lehman Brothers Inc., Merrill Lynch & Co. Inc., and Morgan Stanley & 
Co., while the Federal Reserve and OTS oversee firms that vary 
significantly in size and complexity. Among larger firms, the Federal 
Reserve oversees Bank of America Corporation, Citigroup, and JPMorgan 
Chase, and OTS oversees American International Group Inc., General 
Electric Company, General Motors Corporation, Merrill Lynch & Co. Inc., 
and Washington Mutual Inc. Most of the large bank holding companies 
that the Federal Reserve oversees are primarily in the business of 
banking but to a lesser extent engage in securities or other nonbank 
activities as well. Many of the large firms OTS oversees are engaged in 
commercial businesses, as well as securities and insurance. The Federal 
Reserve and OTS also oversee the vast majority of U.S. financial 
institutions that have remained relatively small and are not complex. 

The Federal Reserve and OTS base their consolidated supervision 
programs on their long-standing authority to supervise holding 
companies, while SEC has only recently become a consolidated 
supervisor. The Federal Reserve's authority is set forth primarily in 
the Bank Holding Company Act of 1956, which contains the supervisory 
framework for holding companies that control commercial banks.[Footnote 
8] OTS's consolidated supervisory authority is set forth in the Home 
Owners Loan Act of 1933, as amended, which provides for the supervision 
of holding companies that control institutions with thrift charters 
(other than bank holding companies).[Footnote 9] SEC bases its 
authority on section 15(c)(3) of the Securities Exchange Act of 
1934.[Footnote 10] Specifically, in 2004, SEC adopted the Alternative 
Net Capital Rule for CSEs based on its authority under that provision, 
which authorizes SEC to adopt rules and regulations regarding the 
financial responsibilities of broker-dealers that it finds necessary or 
appropriate in the public interest or for the protection of 
investors.[Footnote 11] Under the CSE rules, qualified broker-dealers 
can elect to be supervised by SEC on a consolidated basis. If the 
holding company of the broker-dealer also is a bank holding company, 
SEC defers to the Federal Reserve's supervision of the holding company. 
At the same time that it issued the CSE rules, SEC promulgated final 
rules for the consolidated supervision of supervised investment bank 
holding companies (SIBHC) pursuant to a provision in the Gramm-Leach- 
Bliley Act (GLBA).[Footnote 12] The GLBA provision established a 
supervisory framework for SIBHCs--qualified investment bank holding 
companies that do not control an insured depository institution-- 
similar to the approach prescribed in the act for the supervision of 
bank and thrift holding companies.[Footnote 13] As of this date, no 
firm has elected to be regulated under the SIBHC scheme. 

The Federal Reserve, SEC, and OTS vary in their missions in that the 
Federal Reserve and SEC have responsibilities outside of the 
supervision and regulation of financial institutions. The Federal 
Reserve is the central bank of the United States, established by 
Congress in 1913 to provide the nation with a safer, more flexible, and 
more stable monetary and financial system. It is responsible for 
conducting the nation's monetary policy; protecting the credit rights 
of consumers; playing a major role in operating the nation's payment 
system; and providing certain financial services to the U.S. 
government, the public, financial institutions, and foreign official 
institutions. The Federal Reserve consists of the Board of Governors 
(Board) and 12 Districts, each with a Federal Reserve Bank (District 
Bank). SEC is responsible for, among other things, overseeing the 
disclosure activities of publicly traded companies and the activities 
of stock markets. 

The three agencies engaged in consolidated supervision are financed 
differently. The Federal Reserve primarily is funded by income earned 
from U.S. government securities that it has acquired through open 
market operations; OTS primarily by assessments on the firms it 
supervises; and SEC by congressional appropriations. SEC collects fees 
on registrations, certain securities transactions, and other filings 
and reports. However, unlike the banking regulators, SEC deposits its 
collections in an SEC-designated account at the U.S. Treasury that is 
used by SEC's congressional appropriators for, among other things, 
providing appropriations to SEC. 

International Bodies Provide Some Guidance for Consolidated 
Supervision: 

International bodies in which U.S. supervisors participate have 
developed guidance for consolidated supervision of large, complex, 
internationally active financial firms or conglomerates.[Footnote 14] 
The Basel Committee on Banking Supervision (BCBS) does not have formal 
supervisory authority; rather, it provides an international forum for 
regular cooperation on banking supervisory matters, including the 
formulation of broad supervisory standards and guidelines. BCBS has 
recently revised its "Core Principles for Effective Banking 
Supervision," which include countries' requiring that banking groups be 
subject to consolidated supervision, although the definition of a 
banking group does not always include a top-tier holding 
company.[Footnote 15] These principles include a number of specific 
criteria that are presented in appendix II of this report. BCBS also 
has developed the Basel Capital Standards, which have been adopted in 
various forms by specific countries; a revised set of standards, Basel 
II, is currently under consideration for adoption in the United 
States.[Footnote 16] These standards require that holding companies 
engaged in banking meet specific risk-based capital requirements. 

In addition, the Joint Forum, an international group of supervisors 
established in 1996 under the aegis of BCBS and equivalent bodies for 
securities and insurance regulators[Footnote 17] to consider issues 
related to the supervision of financial conglomerates, has issued 
supervisory guidance. The guidance focuses on risks and controls and 
specifically directs examiners to review the organizational structure, 
capital level, risk management, and control environment of 
conglomerates. 

The EU promulgated rules for consolidated supervision of certain firms 
operating in Europe that took effect in 2005. U.S.-headquartered firms 
with operations in EU countries are among those affected by these 
rules, which, therefore, has had implications for consolidated 
supervision in the United States. The Financial Conglomerates Directive 
(FCD) requires that all financial conglomerates operating in EU 
countries have a consolidated supervisor. Conglomerates not 
headquartered in the EU must have an equivalent consolidated supervisor 
in their home country that has been approved by a designated supervisor 
from an EU member state in which the company operates. That supervision 
focuses on capital adequacy, intragroup transactions, risk management, 
and internal controls. 

Agencies Employ Differing Policies and Approaches to Provide 
Consolidated Supervision: 

The Federal Reserve, OTS, and SEC have all responded to the dramatic 
changes in the financial services industry, and now, for many of the 
largest, most complex financial services firms in the United States, 
these agencies examine risks, controls, and capital levels on a 
consolidated basis. Given the differences in their authorities and in 
the institutions that they supervise, as well as other factors, the 
agencies' specific policies and procedures differ. Also, the agencies 
divide responsibilities for developing and implementing policies across 
a number of agency components. The Federal Reserve and OTS generally 
set policy centrally and implement it through District Banks or 
regional offices, respectively. At SEC, Market Regulation has primary 
responsibility for policy and for overseeing how CSEs manage risks, 
while SEC's examination offices scrutinize more control-oriented 
activities. The oversight of complex firms involves multiple 
regulators. Finally, for their smaller or less complex firms, the 
Federal Reserve and OTS use abbreviated examination programs. 

All Agencies Examine Consolidated Risks, Controls, and Capital Levels 
of Their Largest, Most Complex Firms, but Specific Policies and 
Approaches Differ: 

All of the agencies have responded to the dramatic changes in the 
financial services industry, including dramatic growth, increased 
complexity in terms of the products and services firms offer, more 
global operations, and greater use of enterprisewide risk management. 
Now, for many of the largest, most complex financial services firms in 
the United States, the agencies focus on the firms' risks, controls, 
and capital levels on a consolidated basis. However, the agencies have 
developed and revised their programs over different time frames and 
used different frameworks. The Federal Reserve, beginning in the mid- 
1990s, has developed a systematic risk-focused approach for large, 
complex banking organizations (LCBO); OTS began to move toward a more 
consistent, risk-focused approach for some large, complex firms in 
2003; and SEC's CSE program, implemented in 2004, is new and evolving. 
Both the Federal Reserve and OTS have approaches to supervision of 
smaller, less complex holding companies that reflect the risks of these 
institutions. 

The Federal Reserve Has a Systematic Risk-Focused Approach for Large, 
Complex Banking Organizations: 

In the mid-1990s, the Federal Reserve began to develop a systematic 
risk-focused approach for the supervision of LCBOs. The program focuses 
on those business activities posing the greatest risk to holding 
companies and managements' processes for identifying, measuring, 
monitoring, and controlling those risks. According to the Federal 
Reserve, LCBOs have significant on-and off-balance sheet risk 
exposures, offer a broad range of products and services at the domestic 
and international levels, are overseen by multiple supervisors in the 
United States and abroad, and participate extensively in large-value 
payment and settlement systems.[Footnote 18] As of December 31, 2005, 
there were 21 LCBOs that together controlled 62 percent of all banking 
assets in the United States. 

In issuing a revised rating system in 2004, the Federal Reserve 
acknowledged that the firms it oversees had become even more 
concentrated and complex. In addition, it noted that the growing depth 
and sophistication of financial markets in the United States and around 
the world have led to a wider range of activities being undertaken by 
banking institutions.[Footnote 19] This new rating system has 
components for the bank holding company's risk management, financial 
condition, and potential impact of the parent (and its nondepository 
subsidiaries) on the insured depository institution, as well as a 
composite rating of the holding company's managerial and financial 
condition and potential risk to its depositories; the system also 
includes the supervisory ratings for the subsidiary depository 
institution. 

Generally policy changes for the consolidated supervision program are 
made by the Board and implemented by the 12 District Banks which are 
responsible for day-to-day examination activities of banks and bank 
holding companies. However, the distinction between policy setting and 
implementation blurs at the edges. Board staff may participate in exams 
and District Bank officials serve on committees that provide input for 
policy development and ensure that supervision is provided at some 
level of consistency across District Banks. 

The Federal Reserve requires that all bank holding companies with 
consolidated assets of $500 million or more meet risk-based capital 
requirements developed in accordance with the Basel Accord and has 
proposed, with the other bank supervisors, revised capital adequacy 
rules to implement Basel II for the largest bank holding 
companies.[Footnote 20] In addition, the Federal Reserve requires that 
all bank holding companies serve as a source of financial and 
managerial strength to their subsidiary banks.[Footnote 21] 

The Federal Reserve's supervisory cycle for LCBOs generally begins with 
the development of a systematic risk-focused supervisory plan, follows 
with the implementation of that plan, and ends with a rating of the 
firm. The rating includes an assessment of holding companies' risk 
management and controls; financial condition, including capital 
adequacy; and impact on insured depositories. The Federal Reserve noted 
that in addition to its other activities, it obtains financial 
information from LCBOs in a uniform format through a variety of 
periodic regulatory reports that other holding companies also provide. 
Table 3 provides detailed descriptions for each of the steps. 

Table 3: Federal Reserve's Supervisory Cycle for LCBOs: 

Supervisory plan; 
The planning process begins with an overview of the consolidated 
holding company that may include its business strategy, organizational 
structure, and a summary of supervisory activity performed since the 
last review; proceeds through developing a critical risk assessment; 
and ends with a supervisory plan that determines the ongoing and 
targeted supervisory activities for the year. The risk assessment 
captures a preliminary analysis of firms' consolidated risks, including 
credit, market, liquidity, operational, legal, and reputational risks 
that are inherent in firms' activities and the controls firms use to 
manage those risks. Board staff will review key elements of the 
supervisory process. 

Supervisory activities; 
For LCBOs, a lead examiner called a central point of contact and 
dedicated team members assigned as coordinators for specific risk 
categories provide continuous supervision, which consists of regular 
ongoing contact with the relevant firm managers. These teams, which 
include from 3 to 11 members, also review internal management reports. 
For limited scope examinations and targeted reviews, a core team risk 
coordinator leads a team that includes specialists from the District 
Bank, and may have appropriate assistance from other District Banks or 
the Board. Targeted reviews can focus on particular nonbank 
subsidiaries of the holding company, such as consumer lending 
affiliates; one or more specific activities or business lines of the 
consolidated organizations and the risk management framework used by 
the holding company to manage those risks on a consolidated basis, such 
as market risk management for structured products; or compliance with 
holding company policies and procedures, and with applicable statutes 
and regulations. 

Rating; 
Once a year, examiners rate firms on their risk management and 
controls, financial condition, the impact of the holding company and 
nondepository subsidiaries on insured depositories, and on a composite 
basis. The financial condition component rating includes an assessment 
of the quality of the holding company's consolidated capital, asset 
quality, earnings, and liquidity. In evaluating capital adequacy, 
examiners are required to consider the risk inherent in an 
organization's activities and the ability of capital to absorb 
unanticipated losses. In addition, capital is expected to provide a 
basis for growth and support the level and composition of the parent 
company and subsidiaries' debt. 

Source: GAO. 

[End of table] 

For LCBOs, a management group, which consists of District Bank and 
Board officials, provides additional review of supervisory plans and 
examination findings. Annually, the management group chooses three or 
four topics for horizontal exams--coordinated supervisory reviews of a 
specific activity, business line, or risk management practice conducted 
across a group of peer institutions. Horizontal reviews are designed to 
(1) identify the range of practices in use in the industry, (2) 
evaluate the safety and soundness of specific activities across 
business lines or across systemically important institutions, (3) 
provide better insight into the Federal Reserve's understanding of how 
a firm's operations compare with a range of industry practices, and (4) 
consider revisions to the formulation of supervisory policy. Horizontal 
examination topics have included stress-testing practices at the 
holding company level and the banks compliance with the privacy 
provision in GLBA.[Footnote 22] Staff from more than one District Bank 
likely participate in the review. In addition, because many of the 
large bank holding companies have national banks, nonmember banks, or 
nonbank operations overseen by another governmental agency, Federal 
Reserve guidance instructs staff, consistent with the requirements of 
GLBA, to leverage information and resources from OCC, FDIC, SEC, and 
other agencies, as applicable.[Footnote 23] After the examinations are 
completed, the Federal Reserve informs firms generally on how they 
compare with their peers and may provide information on good practices 
as well. 

The Federal Reserve has a range of formal and informal actions it can 
take to enforce its regulations for holding companies. The agency's 
formal enforcement powers are explicitly set forth in federal 
law.[Footnote 24] Federal Reserve officials noted that the law provides 
explicit authority for any formal actions that may be warranted and 
incentives for firms to address concerns promptly or through less 
formal enforcement actions, such as corrective action resolutions 
adopted by the firm's board of directors or memorandums of 
understanding (MOU) entered into with the relevant District Bank. 
According to Federal Reserve officials, in 2006 the Federal Reserve 
took six formal enforcement actions against holding companies. 

OTS Is Moving to a Broader, More Systematic Approach to Consolidated 
Risks for Some of Its Largest, Most Complex Firms: 

In 2003, OTS revised its handbook for holding company supervision to 
reflect new guidance for its large, complex firms or conglomerates that 
it says relies on the international consensus (as evident in Joint 
Forum publications) of what constitutes appropriate consolidated 
oversight of conglomerates and also responds to the EU's FCD.[Footnote 
25] While the guidance is presented in OTS's standard CORE--capital, 
organization, relationship, and earnings--format, it differs from OTS's 
standard guidance in that it focuses on consolidated risks, internal 
controls, and capital adequacy rather than on a more narrow view of the 
holding company's impact on subsidiary thrifts. As with the Federal 
Reserve, OTS headquarters officials generally set nationwide policies 
and programs and regional office staff conduct examinations. However, 
the Complex and International Organizations group (CIO), which was 
established in 2004 in OTS headquarters, both sets policy for holding 
company supervision of conglomerates and oversees examiners for three 
firms that must meet the FCD. CIO is developing a process that is 
similar in some respects to the Federal Reserve's. First, on-site 
examination teams consisting of lead examiners and others who focus on 
specific risk areas provide continuous supervision. Second, while 
examiners for firms in the CIO group we spoke with had not had a formal 
supervisory plan in past years, these examiners are now preparing plans 
that focus on the coming year and, unlike the Federal Reserve, take a 
longer 3-year prospective as well. A CIO official said that this 
planning framework allows them to examine high-risk areas on an annual 
basis while ensuring that lower risk areas are covered at least every 3 
years. The plans we reviewed were less detailed than those of the 
Federal Reserve; however, the official in charge of this program said 
that the group is looking to develop more systematic risk analyses and 
has reviewed those being used by the Federal Reserve and their 
counterparts in Europe. 

Although OTS's guidance for its large, complex firms provides explicit 
directions on determining capital adequacy, OTS does not have specific 
capital requirements for holding companies. Generally, OTS requires 
that firms hold a "prudential" level of capital on a consolidated basis 
to support the risk profile of the holding company. For its most 
complex firms, OTS requires a detailed capital calculation that 
includes an assessment of capital adequacy on a groupwide basis and 
identification of capital that might not be available to the holding 
company or its other subsidiaries because it is required to be held by 
a specific entity for regulatory purposes. The EU's European Financial 
Conglomerates Committee's guidance to EU country supervisors on the 
U.S. regulatory system noted OTS's lack of capital standards;[Footnote 
26] however, the United Kingdom's Financial Services Authority (FSA) 
has designated OTS as an equivalent supervisor for the two firms it has 
reviewed, and in February 2007, the French supervisory body, Commission 
Bancaire, approved OTS as an equivalent supervisor for another complex 
conglomerate.[Footnote 27] 

As noted, only three firms currently are subject to the increasingly 
systematic, detailed analysis of risks being implemented through the 
CIO program. Regional staff oversee other large, complex conglomerate 
thrift holding companies and use OTS's standard CORE framework, which 
focuses more directly on the risks to the thrift posed by its inclusion 
in the holding company structure rather than an assessment of the risk 
management strategy of the holding company (see table 4). We also found 
that OTS regional examination staff were expanding their risk analyses 
of some large, complex holding companies, but they had not adopted the 
CIO program. 

Table 4: OTS's Standard Core Framework: 

Capital: Examiners focus on the extent to which the holding company 
depends on subsidiary thrifts to meet debt commitments and other 
expenses. The handbook for holding company supervision defines the 
risks holding companies may face but does not provide specifics for 
analyzing those risks. 

Organizational structure: Examiners review the structure of the thrift 
holding company, the ownership/control of the holding company, and its 
potential effect on the thrift. They also review the activities of the 
holding company and other affiliates to determine whether the company 
is doing anything illegal. 

Relationship: To determine if the thrift has the ability to "stand 
alone" in the event of the parent company's financial collapse, 
examiners assess the degree of influence the holding company has over 
the thrift, whether the board of directors provides adequate oversight 
of the thrift, and the degree of managerial interdependence between the 
thrift and the holding company. 

Earnings: To determine the potential for the holding company to draw 
money or collateral from the thrift, examiners assess the current and 
prospective financial condition and the earnings and liquidity of the 
holding company. Examiners are also to assess whether the thrift would 
suffer operational or reputation risk if the holding company were to 
fail due to poor financial condition. 

Source: GAO. 

[End of table] 

Similar to the Federal Reserve, OTS has explicit authority to take 
enforcement actions against thrift holding companies that are in 
violation of laws and regulations.[Footnote 28] According to OTS 
officials, in 2005 OTS took three formal enforcement actions against 
holding companies.[Footnote 29] 

SEC's CSE Program Is New and Evolving: 

In 2004, SEC adopted its CSE program partly in response to 
international developments, including the need for some large U.S. 
securities firms to meet the FCD. However, SEC says that the program is 
a natural extension of activities that began as early as 1990 when, 
under the Market Reform Act, SEC was given supervisory responsibilities 
aimed at assessing the safety and soundness of securities activities at 
a consolidated or holding company level.[Footnote 30] Formally, SEC 
supervision under the CSE program consists of four components: a review 
of firms' applications to be admitted to the program; a review of 
monthly, quarterly, and annual filings; monthly meetings with senior 
management at the holding company; and an examination of books and 
records of the holding company, the broker-dealer, and material 
affiliates that are not subject to supervision by a principal 
regulator.[Footnote 31] 

Under the net capital rule establishing the CSE program, the Division 
of Market Regulation has responsibility for administering the 
program.[Footnote 32] Market Regulation recommends policy changes to 
SEC Commissioners and, through its Office of Prudential Supervision, 
performs continuous supervision of the five firms that have been 
designated as CSEs. Each firm is overseen by three analysts, and each 
of these analysts oversees at least two firms. This office includes a 
few additional specialists as well. Although the rule did not specify a 
role for the Office of Compliance Inspections and Examinations (OCIE), 
this office, with the assistance of the Northeast Regional Office 
(NERO), examines firms' controls and capital calculations.[Footnote 33] 
Each of these offices has designated staff positions for the CSE 
program but also uses staff from SEC's broker-dealer examination 
program. 

Market Regulation generally is responsible for overseeing the financial 
and operational condition of CSEs, including how they manage their 
risks, but does not provide written detailed guidance for examiners. 
During the reviews of the firms' applications for admittance to the CSE 
program, staff reviewed market, credit, liquidity, operational, and 
legal and compliance risk management, as well as the internal audit 
function, and continue to do so on an ongoing basis. The firms are to 
provide SEC with monthly, quarterly, and annual filings, such as 
consolidated financial statements and risk reports, substantially 
similar to those provided to the firm's senior managers. Unlike the 
Federal Reserve and OTS that have their examiners continuously on site 
at some of their larger more complex firms, Market Regulation staff are 
not on site at the companies. However, Market Regulation staff meet at 
least monthly with senior risk managers and financial controllers at 
the holding company level to review this material and share the written 
results of these meetings among themselves and with the SEC 
Commissioners. These reports show that meetings with the firms cover a 
variety of subjects, such as fluctuations in firmwide and asset- 
specific value-at-risk, changes to risk models, and the impact of 
recent trends and events such as Hurricane Katrina. Market Regulation 
staff also review activities across firms to ensure that firms are all 
held to comparable standards and that staff understand industry trends. 
Market Regulation staff has conducted some horizontal reviews of 
activities such as hedge fund derivative products and event-driven 
lending that are similar in some ways to the Federal Reserve's 
horizontal examinations. In addition, one staff member attends all 
monthly meetings that Market Regulation staff hold with the firms in a 
given month. That staff member identifies common themes and includes 
these in the monthly reports. 

OCIE generally is responsible for testing the control environments of 
the CSEs, focusing on compliance issues. OCIE and NERO staff followed 
detailed examination guidance when reviewing CSE applications but, 
unlike the Federal Reserve and OTS, this guidance is not publicly 
available. They reviewed firms' compliance with the CSE rule, including 
whether unregulated material affiliates were in compliance with certain 
rules that had previously applied only to registered broker-dealers. 
OCIE and NERO staff continue to conduct exams of the holding companies, 
the registered broker-dealers, and unregulated material affiliates. 
During our review of the program, NERO completed the first examination 
of one of the CSEs, which included a review of the capital computations 
for the holding company and broker-dealer, the firm's internal controls 
around managing certain risks, and internal audit. 

As a condition of CSE status, CSEs agree to compute a capital adequacy 
measure at the holding company in accordance with the new Basel II 
standards, and OCIE and NERO validated the firms' calculations as part 
of their reviews of firms' CSE applications. The U.S. bank supervisory 
agencies have proposed rules to implement Basel II standards for the 
largest, most complex banking organizations, and SEC officials said 
they will continue to monitor these developments and will adopt rules 
that are largely consistent with the banking agencies' final rules 
implementing the Basel II standards.[Footnote 34] According to Market 
Regulation staff, CSEs' use of the Basel II capital standards should 
allow for greater comparability between CSEs' financial position and 
that of other securities firms and banking institutions. As part of 
their supervisory activities, Market Regulation staff review the models 
or other methodologies firms used to calculate capital allowances for 
certain types of risks. While the CSEs' broker-dealers are also 
required to compute capital according to Basel standards, these broker- 
dealers are required to maintain certain capital measures above minimum 
levels.[Footnote 35] SEC staff also noted that CSEs are required to 
have sufficient liquidity so that capital would be available to any 
entity within the holding company if it were needed. 

Unlike the bank regulatory agencies, SEC does not have a range of 
enforcement actions that it can take for violations of the CSE 
regulations because participation in the CSE program is voluntary. That 
is, a violation of the CSE regulations can disqualify a broker-dealer 
from the benefits of CSE status without resulting in a violation of SEC 
regulations or laws that could lead to an enforcement action. SEC staff 
noted, however, that the prospect of not being qualified to operate as 
a CSE served as an effective incentive for complying with CSE 
requirements. 

Supervision of Complex Firms Involves Multiple Regulators: 

Large firms generally contain a number of subsidiaries that are 
overseen by primary bank and functional supervisors in the United 
States as well as by supervisors in other countries; however, in some 
cases, the holding company's supervisor may also be the primary bank or 
functional supervisor for subsidiaries in these holding companies. 
Figure 1 illustrates this regulatory complexity for a hypothetical 
financial holding company. A hypothetical thrift holding company and 
CSE would differ in that it would not have national or state member 
bank subsidiaries and potentially could have commercial subsidiaries. 
GLBA instructed the Federal Reserve, SEC, and OTS, in their roles as 
consolidated supervisors, to generally rely on primary bank and 
functional supervisors for information about regulated subsidiaries of 
the holding company.[Footnote 36] 

Figure 1: Supervisors for a Hypothetical Financial Holding Company: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

While the Federal Reserve is the primary federal bank supervisor for 
the lead bank in some bank holding companies, OCC and FDIC are more 
often the primary bank supervisor for the lead banks in these holding 
companies. OCC, because of the growth in the national banking system 
over the past 10 years, is now most likely to be the supervisor of the 
lead banks that are owned by bank holding companies in the Federal 
Reserves' LCBO program. In examining these banks, OCC uses a 
systematic, risk-focused process similar to that of the Federal 
Reserve. Specifically, OCC's process begins with a risk analysis that 
drives the examination process over the course of the examination 
cycle. According to OCC's handbook, in assessing the bank's condition 
examiners must consider not only risks in the bank's own activities but 
also risks of activities engaged in by nonbanking subsidiaries and 
affiliates in the same holding company.[Footnote 37] FDIC is the 
primary federal supervisor of the lead bank in some larger bank holding 
companies and of most of the banks in smaller holding 
companies.[Footnote 38] In addition, as part of its deposit insurance 
role, FDIC officials told us that they have a continuous on-site 
presence at six of the largest LCBOs where OCC is the primary bank 
supervisor of the lead bank and the Federal Reserve is the consolidated 
supervisor. Larger bank holding companies also include a number of 
other regulated subsidiaries, including broker-dealers and thrifts. 

Except when a thrift is in a bank holding company, OTS serves as the 
supervisor for both the thrift and the thrift holding company.[Footnote 
39] While most of these firms are in the business of banking, as table 
5 shows, OTS also oversees a number of complex holding companies that 
are primarily in businesses other than banking, and some of these are 
in regulated industries, especially insurance. In addition, a number of 
thrift holding companies contain industrial loan companies (ILC), state-
chartered institutions overseen by FDIC, and some have broker- dealers 
as well.[Footnote 40] 

Table 5: Thrift Holding Company Enterprises by Category, Complexity, 
Size, and Primary Business, as of December 31, 2006: 

Category I-low risk/ noncomplex. 

Holding companies: category, complexity, and size: Assets less that 1 
billion; 
Primary business: Banking: 296; 
Primary business: Insurance: 6; 
Primary business: Securities: 2; 
Primary business: Other financial: 11; 
Primary business: Commercial: 4; 
Primary business: Total: 319. 

Holding companies: category, complexity, and size: Assets between 1 
billion and 5 billion; 
Primary business: Banking: 47; 
Primary business: Insurance: 5; 
Primary business: Securities: 2; 
Primary business: Other financial: 3; 
Primary business: Commercial: 1; 
Primary business: Total: 58. 

Holding companies: category, complexity, and size: Assets greater than 
5 billion; 
Primary business: Banking: 11; 
Primary business: Insurance: 9; 
Primary business: Securities: 0; 
Primary business: Other financial: 2; 
Primary business: Commercial: 1; 
Primary business: Total: 23. 

Category II-high risk/complex. 

Holding companies: category, complexity, and size: Assets less that 1 
billion; 
Primary business: Banking: 12; 
Primary business: Insurance: 1;
Primary business: Securities: 0; 
Primary business: Other financial: 5; 
Primary business: Commercial: 1; 
Primary business: Total: 19. 

Holding companies: category, complexity, and size: Assets between 1 
billion and 5 billion; 
Primary business: Banking: 9; 
Primary business: Insurance: 3; 
Primary business: Securities: 2; 
Primary business: Other financial: 5; 
Primary business: Commercial: 1; 
Primary business: Total: 20. 

Holding companies: category, complexity, and size: Assets greater than 
5 billion; 
Primary business: Banking: 7; 
Primary business: Insurance: 12; 
Primary business: Securities: 5; 
Primary business: Other financial: 5; 
Primary business: Commercial: 4; 
Primary business: Total: 33. 

Category III- conglomerate. 

Holding companies: category, complexity, and size: Assets less that 1 
billion; 
Primary business: Banking: 0; 
Primary business: Insurance: 0; 
Primary business: Securities: 0; 
Primary business: Other financial: 0; 
Primary business: Commercial: 0; 
Primary business: Total: 0. 

Holding companies: category, complexity, and size: Assets between 1 
billion and 5 billion; 
Primary business: Banking: 0; 
Primary business: Insurance: 0; 
Primary business: Securities: 0; 
Primary business: Other financial: 0; 
Primary business: Commercial: 0; 
Primary business: Total: 0. 

Holding companies: category, complexity, and size: Assets greater than 
5 billion; 
Primary business: Banking: 0; 
Primary business: Insurance: 1; 
Primary business: Securities: 2; 
Primary business: Other financial: 0; 
Primary business: Commercial: 1; 
Primary business: Total: 4. 

Total; 
Primary business: Banking: 382; 
Primary business: Insurance: 37; 
Primary business: Securities: 13; 
Primary business: Other financial: 31; 
Primary business: Commercial: 13; 
Primary business: Total: 476. 

Source: OTS. 

Note: These data include 34 holding companies that own state savings 
banks where FDIC is the primary federal bank supervisor. 

[End of table] 

OTS oversees a large number of firms where insurance is the primary 
business of the firm and thus shares some responsibilities with state 
insurance supervisors that have adopted their own holding company 
framework. In addition, OTS and FDIC share responsibilities when thrift 
holding companies include ILCs. Generally, OTS guidance refers to 
protecting thrifts in thrift holding companies rather than more broadly 
to the protection of insured depositories. However, thrifts and ILCs in 
the same thrift holding company may face similar threats to their 
safety and soundness. 

As the consolidated supervisor of CSEs, SEC oversees large, complex 
entities that include insured depositories that have FDIC or OTS as 
their primary federal supervisor. Those CSEs that have thrifts are also 
supervised at the consolidated level by OTS. SEC's consolidated 
supervisory activities focus on the financial and operational condition 
of the holding company and, in particular, activities conducted in 
unregulated material affiliates that may pose risks to the group. SEC 
staff noted that they generally rely on the primary bank supervisor 
with respect to examination of insured depositories.[Footnote 41] 

Federal Reserve and OTS Use Abbreviated Approach for Smaller or Less 
Complex Holding Companies: 

In recent years, the Federal Reserve has limited the resources it uses 
to oversee the 4,325 small shell bank holding companies (i.e., 
companies that are noncomplex with assets of less than $1 billion) 
because it perceives that those entities pose few risks to the insured 
depositories they own.[Footnote 42] The Board has adopted a special 
supervisory program for these companies that includes off-site 
monitoring and relies heavily on primary federal supervisors' bank 
examinations. For these companies, the Federal Reserve assigns only 
risk and composite ratings, which generally derive from primary bank 
supervisors' examinations. Also, in addition to the primary bank 
supervisors' examinations, Federal Reserve examiners review a set of 
computer surveillance screens that include the small shells' financial 
information and performance, primarily to determine if the firms need 
more in-depth reviews. 

Federal Reserve staff told us that they spend a limited amount of time 
on small shell holding company inspections. For example, a Board 
official said they spend on average about 2 to 2.5 hours annually on 
each small shell bank holding company. According to Federal Reserve 
guidance, the only documentation required for small shell ratings where 
no material outstanding company or consolidated issues are otherwise 
indicated are bank examination reports and a copy of the letter 
transmitting the ratings to the company. 

Similarly, OTS uses an abbreviated version of its CORE program for its 
low-risk and noncomplex or Category I firms, which make up 401 of the 
476 holding companies OTS oversees. Once examiners determine that the 
holding company is a shell, they are directed to the abbreviated 
program, which differs from the full CORE in that it requires less 
detailed information in each of the four CORE areas. For example, the 
abbreviated CORE does not require that examiners calculate leverage and 
debt-to-total-asset ratios in the capital component of the examination, 
while these are required in the full CORE program. However, the 
handbook advises examiners to refer to the full CORE program for more 
detailed steps whenever they feel it is warranted. In addition, the 
handbook advises examiners to consider the specific issues that relate 
to certain holding company populations, such as those containing 
insurance firms. At one regional office, managers told us that 
examinations of shell holding companies take 5 to 10 days; however, 
because the holding company examination is conducted concurrently with 
the thrift examination, OTS cannot determine the exact number of hours 
spent reviewing the holding company. An OTS official noted that for 
shell holding companies, the difference in examiners' activities 
between holding company and thrift examinations is largely a matter of 
perspective rather than a difference in what examiners review. 

Improved Program Objectives and Performance Measures Could Enhance 
Agencies' Consolidated Supervision Programs: 

In recent decades, the environment in which the financial services 
industry operates, and the industry itself, have undergone dramatic 
changes that include globalization, consolidation within traditional 
sectors, conglomeration across sectors, and convergence of 
institutional roles and products. The industry now is dominated by a 
relatively small number of large, complex, and diversified financial 
services firms, and these firms generally manage their risks on an 
enterprisewide or consolidated basis. Consolidated supervision provides 
the basis for supervisory oversight of this risk management, but 
managing consolidated supervision programs in an efficient and 
effective manner presents challenges to the supervisory agencies. We 
found that the Federal Reserve, OTS, and SEC were providing supervision 
consistent with international standards for comprehensive, consolidated 
supervision for many of the largest, most complex financial services 
firms in the United States. While the agencies have articulated 
anticipated benefits or broad strategic goals for their supervision 
programs in testimony and other documents, the objectives for their 
consolidated supervision programs are not always clearly defined or 
distinguished from the objectives for their primary supervision 
programs. Without more specific program objectives, activities linked 
to these objectives, and performance measures identified to assess the 
extent to which these objectives are achieved, the agencies have a more 
difficult task of ensuring efficient and effective oversight. In 
particular, with the financial services industry's increased 
concentration and convergence in product offerings, paired with a 
regulatory structure that includes multiple agencies, it is more 
difficult to ensure that the agencies are providing oversight that is 
not duplicative and is consistent with that provided by primary, 
functional, or other consolidated supervisors. As a result, the 
agencies could better ensure that consolidated supervision was being 
provided efficiently, with the minimal regulatory burden consistent 
with maintaining safety and soundness, by more clearly articulating the 
objectives of their consolidated supervision programs, developing and 
tracking performance measures that are specific to the programs, and 
improving supervisory guidance. 

Developments in the Financial Services Industry Have Affected the 
Environment Facing Financial Supervisors: 

The environment in which the financial services industry operates, and 
the industry itself, have undergone dramatic changes.[Footnote 43] 
Financial services firms have greater capacity and increased regulatory 
freedom to cross state and national borders, and technological advances 
have also lessened the importance of geography. Increasingly, the 
industry is dominated by a relatively small number of large, complex 
conglomerates that operate in more than one of the traditional sectors 
of the industry. These conglomerates generally manage their risks on an 
enterprisewide, or consolidated, basis. 

Generally, the greater ability of firms to diversify into new 
geographic and product markets would be expected to reduce risk, with 
new products and risk management strategies providing new tools to 
manage risk. Because of linkages between markets, products, and the way 
risks interact, however, the net result of the changes on an individual 
institution or the financial system cannot be definitively predicted. 

Consolidated supervision provides a basis for the supervisory agencies 
to oversee the way in which financial services firms manage risks and 
to do so on the same basis that many firms' manage their risk. While 
primary bank and functional supervisors retain responsibility for the 
supervision of regulated banks, broker-dealers, or other entities, the 
consolidated supervisor's approach can encompass a broader, more 
comprehensive assessment of risks and risk management at the 
consolidated level. 

Agencies Are Providing Comprehensive Consolidated Supervision for Many 
Conglomerates with Depository Institutions: 

The international consensus on standards or "best practices" for 
supervising conglomerates that include banks includes the review of 
risks and controls at the consolidated level, capital requirements at 
the consolidated level, and the authority to take enforcement actions 
against the holding company. As described above, we found that the 
Federal Reserve generally met these standards for its LCBO firms. OTS 
meets these standards for those firms overseen by CIO. For other firms 
that might be considered conglomerates, OTS does a more limited review 
of the risk posed to insured thrifts by activities outside the thrift 
and does not require that holding companies meet specific capital 
standards. Officials at both the Federal Reserve and OTS emphasized 
that the agencies' authority to examine, obtain reports from, establish 
capital requirements for, and take enforcement actions against the 
holding company was separate from the authority that primary bank 
supervisors have. 

A full assessment of SEC's CSE program is difficult given the newness 
of the program; however, it appears that for the CSE firms dominated by 
broker-dealers, SEC is monitoring risks and controls on a consolidated 
basis and requires that CSEs meet risk-based capital standards at the 
holding company level. However, with regard to SEC's ability to take 
enforcement actions at the holding company level. SEC staff 
acknowledged that SEC does not have the same ability, under the CSE 
program, to take enforcement actions as the Federal Reserve or OTS. 
Nonetheless, they noted that the potential removal of a firm's 
exemption from the net capital rule and notification of EU regulators 
that a firm was no longer operating under the CSE program would serve 
as effective deterrents. SEC is also authorized to impose additional 
supervisory conditions or increase certain multiplication factors used 
by the CSE in its capital computation. 

Clear Program Objectives and Performance Measures Are Essential for 
Ensuring Accountability and Efficiency: 

Management literature on internal controls, enterprisewide risk 
management, and government accountability suggest that to achieve 
accountability and efficiency requires that agencies clearly state 
program objectives, link their activities to those objectives, and 
measure performance relative to those objectives.[Footnote 44] This 
literature also recognizes the increased importance of these management 
activities in the face of substantial change in the external 
environment or in the face of the adoption of new "products" 
internally. When applied to the consolidated supervision programs at 
the Federal Reserve, OTS, and SEC, clearly defined objectives of 
consolidated supervision programs, agency activities of these programs 
linked to those objectives, and performance measures to determine how 
well the programs are operating are the management approaches that 
would contribute to the desired accountability and efficiency for the 
programs. 

The importance of these management activities is heightened because all 
three agencies face substantial changes in the external environment, 
including rapid growth in the financial sector, greater consolidation 
of firms leading to larger, more complex firms, and greater linkages 
among financial sectors and markets. In addition, the Federal Reserve 
and OTS have made substantial changes in their consolidated supervisory 
programs--particularly with the CIO program at OTS--and SEC has adopted 
a program that for the first time has staff providing formal prudential 
oversight at the consolidated level. Adopting sound management and 
control activities will help ensure that agencies are accountable for 
exercising the authority for their consolidated supervision programs 
and achieving the objectives of consolidated supervision, in ways that 
are effective and efficient. As a result, the regulatory burden would 
be as low as possible, consistent with maintaining safety and soundness 
of financial institutions and markets. 

The agencies face challenges in devising performance measures for 
consolidated supervision, including rapid changes in the industry. U.S. 
financial institutions and their competitors increasingly operate 
worldwide and engage in a number of businesses. Consequently, the 
global financial system is highly integrated and ensuring financial 
stability is even more important than in the past. Developing sound 
measures in such an environment can be difficult, and it is a challenge 
for agencies to distinguish how much of their work contributes to 
financial stability, in contrast to other goals such as protecting 
insured depositories. Further, these objectives are concepts that are 
not easy to measure. Development and use of appropriate performance 
measures, however, are critical to efficiently managing the risks that 
the agencies have in their consolidated supervision programs. 

Goals and Performance Measures Address Supervision Broadly, Rather Than 
Consolidated Supervisory Programs Specifically: 

Generally we found that the three agencies stated goals for all of 
their supervision programs broadly or that specific objectives for 
consolidated supervision were the same as those for their primary 
supervision programs. As a result, the contributions consolidated 
supervision programs make to the safety and soundness of financial 
institutions and markets could not be assessed separately from other 
agency programs. Clearer objectives specific to the consolidated 
supervision programs would facilitate linking program activities to 
those objectives and the authority that the agencies have to conduct 
consolidated supervision. In addition, clear program objectives would 
facilitate the development of specific performance measures to measure 
the contribution of these programs to those objectives as well as 
broader agency goals. 

Federal Reserve: 

Agencies' strategic and performance plans sometimes contain objectives 
for important programs. In its strategic plan, the Federal Reserve 
identifies objectives for all of its supervision programs: promoting a 
safe, sound, competitive, and accessible banking system and stable 
financial markets. However, the only discussion specific to 
consolidated supervision in the Federal Reserve's strategic plan 
relates to how the program complements its central bank functions by 
providing the Federal Reserve with important knowledge, expertise, 
relationships, and authority. 

In other statements, Federal Reserve officials have identified a number 
of potential benefits of consolidated supervision that reflect the 
changed environment. The then-Chairman of the Federal Reserve Board 
testified before Congress in 1997 that the knowledge of the financial 
strength and risk inherent in a consolidated holding company can be 
critical to protecting an insured subsidiary bank and resolving 
problems once they arise.[Footnote 45] In 2006, he noted further that 
consolidated supervision provides a number of benefits, including 
protection for insured banks within holding companies, protection for 
the federal safety net[Footnote 46] that supports those banks, aiding 
the detection and prevention of financial crises, and, thus, mitigating 
the potential for systemic risk in the financial system.[Footnote 47] 
In congressional testimony delivered in 2006, a Board official noted 
that the goals of consolidated supervision are to understand the 
financial and managerial strengths and risks within the consolidated 
organization as a whole and to give the Federal Reserve the ability to 
address significant deficiencies before they pose a danger to the 
organization's insured banks and the federal safety net. An official at 
the New York District Bank identified the goals of consolidated 
supervision as protecting the safety and soundness of depository 
institutions in the holding company, promoting the health of the 
holding company itself, and mitigating systemic risk. 

In its Bank Holding Company Supervision Manual, the Federal Reserve 
says that the inspection process is intended to increase the flow of 
information to the Federal Reserve System concerning the soundness of 
financial and bank holding companies. The manual goes on to explain how 
the purpose of bank holding company supervision has evolved since the 
passage of the Bank Holding Company Act in 1956, whose primary 
objective was to ensure that bank holding companies did not become 
engaged in nonfinancial activities. According to the manual, an 
inspection is to be conducted to: 

1. inform the Board of the nature of the operations and financial 
condition of each bank holding company and its subsidiaries, including-
-: 

a. the financial and operational risks within the holding company 
system that may pose a threat to the safety and soundness of any 
depository institution subsidiary of such bank holding company, and: 

b. the systems for monitoring and controlling such financial and 
operational risks; and: 

2. monitor compliance by any entity with the provisions of the Bank 
Holding Company Act or any other federal law that the Board has 
specific jurisdiction to enforce against the entity, and to monitor 
compliance with any provisions of federal law governing transactions 
and relationships between any depository institution subsidiary of a 
bank holding company and its affiliates. 

The Federal Reserve also noted that the objectives of consolidated 
supervision are discussed in its supervisory guidance on the Framework 
for Financial Holding Company supervision introduced after 
GLBA.[Footnote 48] In the guidance, the Federal Reserve says that the 
objective of overseeing financial holding companies (particularly those 
engaged in a broad range of financial activities) is to evaluate, on a 
consolidated or groupwide basis, the significant risks that exist in a 
diversified holding company in order to assess how these risks might 
affect the safety and soundness of depository institution subsidiaries. 

The Federal Reserve has also developed a quality management program to 
evaluate its supervision programs overall. Board officials told us that 
each of the District Banks has established a quality management 
department that include quality planning, control, and improvement. As 
part of its quality management program, the Board evaluates and reports 
on District Banks' supervision function in its operations reviews 
across the major supervision and support functions. According to a 
Board document, each review assesses how well the Reserve Bank carries 
out its supervisory responsibilities, focusing not only on the 
effectiveness and efficiency of individual functional areas but also on 
how well the Officer in Charge of Supervision organizes and allocates 
departmental resources, and facilitates integration among those 
resources. However, in the three operations review reports we reviewed, 
the performance of consolidated supervisory activities was not assessed 
independently from the performance of other supervisory activities. 

Not clearly establishing specific objectives for the consolidated 
supervision, however, potentially lessens the Federal Reserve's ability 
to ensure that its consolidated supervision program provides 
comprehensive and consistent oversight with minimal regulatory burden. 
The Federal Reserve has authority for holding company supervision 
distinct from that for supervision of the insured depository itself. 
Specific objectives and performance measures would enhance the Federal 
Reserve's ability to ensure its accountability and the efficiency of 
its consolidated supervisory activities. 

OTS: 

OTS consistently identifies the protection of insured depositories as 
the objective of consolidated supervision. However, like the Federal 
Reserve, OTS generally does not distinguish between the objectives for 
holding company supervision and those for primary thrift supervision. 
In addition, OTS's activities often vary significantly across firms, 
depending in part on the risk and complexity of the firms. While the 
varying activities largely reflect the differences among the 
institutions, a clear link between these activities and the objectives 
of its consolidated supervision program would enhance OTS's ability to 
provide effective and consistent oversight with minimal regulatory 
burden. 

OTS identifies several strategic goals in its strategic plan, placing 
particular emphasis on achieving a safe and sound thrift industry, and 
its Holding Companies Handbook identifies protection of insured thrifts 
as an objective of holding company supervision; however, these 
documents distinguish the objectives of the holding company supervision 
program from those of primary thrift supervision in only one area. The 
strategic plan says that one objective of OTS's cross-border 
discussions is to receive additional equivalency determinations under 
EU directives, including the FCD, and its handbook focuses on 
international standards in its discussion of changes in its 
conglomerate oversight. In its strategic plan, OTS has five performance 
measures for supervision, including the percentage of thrifts that are 
well-capitalized and the percentage of safety and soundness 
examinations started as scheduled, but these largely relate directly to 
OTS's authority as a primary bank supervisor rather than as a holding 
company supervisor. 

Because OTS is almost always both the lead bank supervisor and the 
holding company supervisor for the holding companies it supervises, 
accountability for its supervision of thrift institutions is clear. 
However, for those thrift holding companies whose primary business 
activities are not banking, accountability for parts of the institution 
may still not be clear. Further, whether an agency is providing 
consistent and efficient oversight with minimal regulatory burden for 
all firms is still at issue. For firms overseen by CIO, OTS devotes 
substantial resources to the oversight of risk and controls 
consolidated at the highest financial holding company level, and 
assesses capital at that level. However, for some other firms that had 
some similar characteristics to the CIO-supervised conglomerates, OTS 
uses relatively fewer resources in the oversight of these firms at the 
holding company level. For these firms, consistent with its standard 
CORE program, OTS looks to see that the holding company is not relying 
on the thrift to pay off debt or expenses and then limits its oversight 
to that part of the firm that might directly place the thrift at risk. 

SEC: 

Similarly, SEC identifies a number of objectives and performance 
measures for the agency in its strategic plan, annual performance 
reports, and annual budget documents. However, none of these is 
specific to the consolidated supervision program. Instead, these 
documents provide goals and performance measures for other areas such 
as enforcement. Enforcing compliance with federal securities laws is 
one of SEC's strategic goals, and it measures performance in that area 
by reporting the number of enforcement cases successfully resolved in 
its 2005 Performance and Accountability Report. The only mention of the 
new CSE program in these documents is a listing as a "milestone" for 
Market Regulation in SEC's 2004 Performance and Accountability Report. 
SEC 2006 and 2007 budget requests note that OCIE will examine CSEs 
under the strategic goal of enforcing compliance with federal 
securities laws. The 2006 budget request also includes the need to 
modify and interpret the rules for CSEs to maintain consistency with 
the Basel Standards, in light of amendments to the Basel Capital 
Accord, to meet the goal of sustaining an effective and flexible 
regulatory environment. 

On the Web site created by Market Regulation in June 2006, SEC says 
that the aim of the CSE program is to reduce the likelihood that 
weakness in the holding company or an unregulated affiliate endangers a 
regulated entity or the broader financial system. In addition, SEC 
officials have said that the purpose of the program was to provide 
consolidated oversight for firms required to meet the EU's FCD. 
However, CSE oversight activities are not always linked to these aims 
and the extent to which these activities contribute to the aims is not 
measured. 

SEC officials have told us they have developed a draft that would 
establish program objectives, link activities to these objectives, and 
establish criteria for assessing the performance of the CSE program. 

Agencies Have Opportunities to Better Ensure Effective and Consistent 
Supervision, with Minimal Regulatory Burden: 

Because the U.S. regulatory structure assigns responsibility for 
financial supervision to multiple agencies, and a single firm may be 
subject to consolidated and primary or functional supervision by 
different agencies, not having objectives and performance measures for 
consolidated supervision programs increases the difficulty of ensuring 
effective, efficient, and consistent supervision with minimal 
regulatory burden and ensuring that each agency is appropriately 
accountable for its activities.[Footnote 49] 

The potential for duplication was demonstrated in three financial 
holding companies where we discussed Federal Reserve oversight with 
Federal Reserve and OCC examiners and with bank officials. Based on our 
interviews with OCC examiners, we noted some duplication in Federal 
Reserve and OCC activities, despite efforts to coordinate supervision 
by the two agencies. In particular, since these institutions manage 
some risks on an enterprisewide basis, OCC needed to assess 
consolidated risk management or other activities outside the national 
bank to assess the banks' risks. Some OCC officials said that the 
consolidated supervisor structure created by GLBA was primarily 
designed for bank holding companies with insurance subsidiaries, but 
this structure is not prevalent. The primary value of consolidated 
supervision, they said, is to prevent gaps in supervision, but the 
benefit for firms that hold primarily bank assets is unclear. Federal 
Reserve officials, on the other hand, noted that because OCC is a bank 
supervisor, and not a consolidated supervisor, it does not have the 
same authority as the Federal Reserve to conduct examinations of, 
obtain reports from, establish capital requirements for, or take 
enforcement action against a bank holding company or its nonbank 
subsidiaries. With more clearly articulated objectives for consolidated 
supervision that distinguish this authority from the primary 
supervisor's authority, linking consolidated supervisory activities to 
those goals and measuring performance would clarify accountability and 
facilitate greater reliance by each agency on the other's work, 
lessening regulatory burden. 

According to officials of the Federal Reserve Board, it takes a number 
of actions to ensure that the large banking organizations they oversee 
are treated similarly in its consolidated supervision program. These 
include a review of LCBO supervisory plans and other elements of the 
supervisory process as well as some centralized staffing. However, we 
found that because of the autonomy of the District banks and the lack 
of detailed guidance, the four District Banks in our study differed in 
the ways they identified examination or supervisory findings, 
prioritized them, and communicated these findings to firm management. 

For example, the Federal Reserve Bank of Atlanta more clearly defines 
different types of findings, provides criteria to examiners for 
determining and prioritizing findings, and uses this framework to 
communicate findings to firm management. At some other District Banks 
we visited, examiners did not provide us with explicit criteria for 
determining and prioritizing findings. As a result, it is more 
difficult to ensure that bank holding companies operating in different 
Federal Reserve districts are subject to consistent oversight and 
receive consistent supervisory feedback and guidance. To mitigate this 
potential for inconsistency, as we noted above, for large, complex 
institutions, committees such as the LCBO management group review 
supervisory findings. In addition, a Board official said that the 
Federal Reserve was considering implementing Atlanta's framework across 
the system. Without objectives and performance measures specific to the 
consolidated supervision program, however, the Federal Reserve is less 
able to gauge the value of the Federal Reserve Bank of Atlanta's more 
specific guidance to its examination staff. 

In part, because OTS oversees a diverse set of firms and has been 
changing some of its consolidated supervisory activities, consistency 
is a difficult challenge. An OTS official told us that OTS created the 
CIO in its headquarters to promote more systematic and consistent 
supervision for certain holding companies. In addition, OTS has issued 
guidance to help standardize policies and procedures related to 
providing continuous supervision. However, the criteria are not clear 
for determining whether a firm is overseen by CIO with continuous 
comprehensive consolidated supervision or remains in the regional group 
where it receives more limited oversight under the CORE program. In a 
speech in November 2006, OTS's Director identified seven 
internationally active conglomerates OTS oversees at the holding 
company level.[Footnote 50] Of these, three are overseen by CIO, one 
receives oversight under the standard CORE program, and two others are 
overseen regionally but are receiving greater scrutiny than in the 
past. The three firms receiving comprehensive consolidated oversight by 
CIO are the firms that have designated OTS as their consolidated 
supervisor for meeting the EU equivalency requirements, while three of 
the others have opted to become CSEs. 

While the small size of SEC's CSE program limits opportunities for 
treating firms differently, the lack of more complete written guidance 
and the decision to keep guidance confidential limit the ability of 
industry participants, analysts, and policymakers to determine whether 
firms are being treated consistently. In addition, Market Regulation 
staff said that more complete written guidance would reduce the risks 
of inconsistency should staff turnover occur. We also found that SEC's 
lack of program objectives, performance measures, and written public 
guidance led to firms' receiving inconsistent feedback from SEC's 
divisions and offices. According to the CSEs and application 
examinations we reviewed, OCIE conducted highly detailed audits that 
resulted in many findings related to the firms' documentation of 
compliance with rules and requirements, while Market Regulation looked 
broadly at the risk management of the firm. OCIE shared its findings 
with the firms, but Market Regulation determined that many of them did 
not meet its criteria for materiality and did not include them in its 
summary memorandums to the SEC Commissioners recommending approval of 
the applications. However, either a full or summary OCIE examination 
report was included as an appendix to these memorandums. Market 
Regulation staff said they drew on their own knowledge in deciding 
which findings were material and explained that a finding is material 
when the issue threatens the viability of the holding company. Further, 
Market Regulation staff told us that because they rely on managements' 
openness in their ongoing reviews of CSE's risk management, they do not 
always share supervisory results with OCIE staff. Market Regulation and 
OCIE staff stated that they are working on an agreement to facilitate 
communication between the offices. 

Finally, even if each agency provided consistent treatment and feedback 
to firms, there would be no assurance that consistent consolidated 
supervision would be provided across the agencies. We have noted before 
that, over time, firms in different sectors increasingly face similar 
risks and compete to meet similar customer needs.[Footnote 51] Thus, 
competitive imbalances could be created by different regulatory 
regimes, including holding company supervision, both here and abroad. 

Systematic Collaboration Could Enhance Consolidated Supervision 
Programs: 

Providing consistent efficient, effective oversight of individual 
financial institutions has become more difficult as institutions 
increasingly manage their more complex operations on an enterprisewide 
basis, often under the oversight of multiple federal financial 
supervisors. And providing efficient and effective oversight across the 
financial sector has become more challenging as institutions in 
different sectors and countries increasingly take on similar risks that 
may pose issues for a broad swath of the developed world's financial 
institutions in a crisis. 

The industry's increased concentration and convergence in product 
offerings, paired with a regulatory structure with multiple agencies, 
means that different large financial services firms, offering similar 
products, may be subject to supervision by different agencies. This 
leads to risks that the agencies may provide inconsistent supervision 
and regulation not warranted by differences in the regulated 
institutions. Supervisors in different agencies engaged in the 
oversight of a single institution take some steps to share information, 
avoid duplication, and jointly conduct some examination activities. 
However, these agencies did not consistently and systematically 
collaborate in these efforts, thus limiting the efficiency and 
effectiveness of consolidated supervision. For the three agencies 
engaged in consolidated supervision, changes in the firms they oversee 
have led to the firms facing similar risks and competing with each 
other across industry segments. As a result, it is essential for 
consolidated supervisors to systematically collaborate so that 
competitive imbalances are not created. 

Systematic Collaboration Is Essential for Multiple Agencies Sharing 
Common Responsibilities: 

In a system that is characterized by multiple supervisory agencies 
providing supervision for a single holding company and its subsidiaries 
as well as several agencies providing consolidated supervision for 
firms that provide similar services, collaboration among the 
supervisory agencies is essential for ensuring that the supervision is 
effective, efficient, and consistent. 

Through a review of government programs and the literature on effective 
collaboration, we have identified some key collaborative elements, 
which are listed in table 6.[Footnote 52] These elements stress the 
need to ensure, to the extent possible, that the agencies are working 
toward a common goal, that they minimize resources expended by 
leveraging resources and establishing compatible policies and 
procedures, and that they establish accountability for various aspects 
of these programs and for their efforts to collaborate. 

Table 6: Key Elements of Collaboration: 

Key elements of collaboration: Define and articulate a common outcome; 
Description: Agency staff must commit and devote resources to working 
across agency lines to define and articulate the common outcome they 
are seeking to achieve. 

Key elements of collaboration: Establish mutually reinforcing or joint 
strategies; 
Description: Agencies need to align the partner agencies' activities, 
core processes, and resources to accomplish the common outcome. 

Key elements of collaboration: Identify and address needs by leveraging 
resources; 
Description: Agencies should identify and leverage the human, 
information technology, physical, and financial resources needed to 
initiate or sustain their collaborative effort. 

Key elements of collaboration: Agree on roles and responsibilities; 
Description: Agencies should define and agree on their respective roles 
and responsibilities, including how to organize their joint and 
individual efforts. 

Key elements of collaboration: Establish compatible policies, 
procedures, and other means to operate across agency boundaries; 
Description: Agencies need to address the compatibility of standards, 
policies, procedures, and data systems that will be used, as well as 
cultural differences. 

Key elements of collaboration: Develop mechanisms to monitor, evaluate, 
and report on results; 
Description: Agencies should create the means to monitor and evaluate 
their efforts to enable them to identify areas for improvement. 

Key elements of collaboration: Reinforce accountability for 
collaborative efforts through agency plans and reports; 
Description: Agencies should ensure that goals are consistent and 
program efforts are mutually reinforcing. Accountability for 
collaboration is reinforced through public reporting of agency results. 

Key elements of collaboration: Reinforce individual accountability for 
collaborative efforts through performance management systems; 
Description: As a first step in reinforcing individual accountability 
for collaborative efforts, agencies set expectations for collaboration 
within and across organizational boundaries in staff performance plans. 

Source: GAO. 

[End of table] 

We have noted in our previous work that running throughout these 
elements are a number of factors, including leadership, trust, and 
organizational culture, that are necessary for a collaborative working 
relationship. We have also noted that agencies may encounter a range of 
barriers when they attempt to collaborate, including missions that are 
not mutually reinforcing, or may conflict, and agencies' concerns about 
protecting jurisdiction over missions and control over resources. 

As we have noted in the past, the U.S. financial regulatory agencies 
meet in a number of venues to improve coordination.[Footnote 53] These 
venues include the President's Working Group, the Federal Financial 
Institutions Examination Council, and the Financial and Banking 
Information Infrastructure Committee. In addition, the agencies told us 
they have frequent informal contact with each other. These contacts 
address several of the key elements of collaboration identified above, 
but opportunities remain to enhance collaboration in response to the 
changes in the financial services industry. These opportunities exist 
both for agencies that could collaborate in oversight of individual 
firms where agencies share supervisory responsibility as well as for 
collaboration among the consolidated supervisors to ensure consistent 
approaches to common risks. 

In the Oversight of Individual Firms, Supervisors from Different 
Agencies Take Steps to Work Together but Could Collaborate More 
Systematically: 

Enterprisewide risk management in large financial firms has complicated 
the task of regulating them, since agency jurisdiction is defined by 
legal entities. When an agency oversees both the ultimate holding 
company and its major bank or broker-dealer subsidiary, examination 
activities tend to be well-integrated. When consolidated and primary 
bank or functional supervisors of a firm's major subsidiaries are from 
different agencies, they take some actions to work together and share 
information. However, we found instances of duplication and regulatory 
gaps that could be minimized through more systematic collaboration. 

Moving to Enterprisewide Management and Other Organizational Changes 
Increases the Potential for Several Agencies to Share Responsibilities: 

Large, complex firms are increasingly managing themselves on an 
enterprisewide basis, further blurring the distinctions between 
regulated subsidiaries and their holding companies. Many of the banking 
and securities firms included in our review were managing by business 
lines that cut across legal entities, especially those institutions 
engaged primarily in banking or securities. At least three of the 
companies in our review primarily engaged in banking were simplifying 
their corporate structures, either by reducing the number of bank 
charters or bringing activities that had been outside an insured 
depository into the depository or its subsidiaries. Some of these 
entities had been unregulated by a primary federal bank or functional 
supervisor and thus had been the primary responsibility of the holding 
company supervisor or were regulated by a primary bank supervisor 
different from the supervisor overseeing the lead bank. Finally, we 
found that several firms that are CSEs, thrift holding companies, or 
both were conducting extensive banking operations out of a structure 
that includes an ILC and a thrift and that these entities, which are 
overseen by different primary bank supervisors, might not be receiving 
similar oversight from a holding company perspective. 

As a result of changes in corporate structures and management 
practices, there are increasing opportunities for collaboration among 
supervisors with safety and soundness objectives at the subsidiary 
level and holding company supervisors. For example, primary bank and 
functional supervisors involved in safety and soundness supervision 
need to review the organizational structure of the holding company and 
have to evaluate increasingly centralized risk management activities 
and the controls around those activities as they may apply to the 
regulated subsidiary, but the consolidated supervisor is responsible 
for understanding the organizational structure and monitoring risks and 
controls at the holding across the entire organization. 

When the large enterprises we reviewed had the same agency overseeing 
their ultimate holding company and its lead bank (or its broker-dealer, 
in the case of CSEs), supervisory activities tended to be well- 
integrated. For the financial holding company that was dominated by a 
state member bank and the thrift holding company dominated by a federal 
thrift institution, we found that the oversight of the dominant 
financial subsidiary and the ultimate holding company were conducted 
jointly with the same examination team, a single planning document, and 
the same timeline. In the case of the CSEs dominated by a broker- 
dealer, SEC supervises both the holding company and the broker-dealer; 
NERO completed targeted examinations of one firm in 2006 on an 
integrated basis. 

The relationship between the consolidated supervisor and other agencies 
that serve as primary or functional supervisors for subsidiaries is 
governed by law, which does provide for some information exchange among 
the agencies. Under the regulatory structure established by GLBA, the 
Federal Reserve and OTS are to rely on the primary supervisors of bank 
subsidiaries in holding companies (the appropriate federal and state 
supervisory authorities) and the appropriate supervisors of nonbank 
subsidiaries that either are functionally regulated or are determined 
by the consolidated regulator to be comprehensively supervised by a 
federal or state authority.[Footnote 54] Consistent with this scheme, 
GLBA limits the circumstances under which the Federal Reserve Board and 
OTS may exercise their examination and monitoring authorities with 
respect to functionally regulated subsidiaries and depository 
institutions that are not subject to primary supervision by the Board 
or OTS. GLBA also provides that the consolidated supervisor is to rely 
on reports that holding companies and their subsidiaries are required 
to submit to other regulators and on examination reports made by 
functional regulators, unless circumstances described in the act 
exist.[Footnote 55] Among other things, GLBA specifically directs the 
Federal Reserve and OTS, to the fullest extent possible, to use the 
reports of examinations of depository institutions made by the 
appropriate federal and state depository institution supervisory 
authority. Also, consolidated supervisors are directed to rely, to the 
extent possible, on the reports of examination made of a broker-dealer, 
investment adviser, or insurance company by their functional regulators 
and defer to the functional regulators' examinations of these entities. 
GLBA also provides for the sharing of information between federal 
consolidated supervisors and bank supervisors on the one hand and state 
insurance regulators on the other hand. The act authorizes these 
regulators to share information pertaining to the entities they 
supervise within a holding company. For example, with respect to the 
holding company, the act authorizes the Board to share information 
regarding the financial condition, risk management policies, and 
operations of the holding company and any transaction or relationship 
between an insurance company and any affiliated depository 
institution.[Footnote 56] The consolidated supervisor also may provide 
the insurance regulator any other information necessary or appropriate 
to permit the state insurance regulator to administer and enforce 
applicable state insurance laws. 

Consistent with GLBA, consolidated supervisors have negotiated MOUs or 
other formal information sharing agreements with functional supervisors 
and were reviewing reports from them. The supervisors had also entered 
into MOUs with relevant foreign supervisors. For example, OTS had 
negotiated MOUs with 48 state insurance departments, 7 foreign 
supervisors, and with the EU. Similarly, the Federal Reserve has a 
number of MOUs with regulators. One provides for SEC to share 
information concerning broker-dealer examinations for broker-dealers 
owned by financial holding companies. Most MOUs include agreements to 
share information on an informal basis. For example, the Federal 
Reserve and SEC have a "pilot program" that allows the Federal Reserve 
to share information on a particular holding company with SEC staff on 
an ongoing basis. Examination information from the functional 
supervisors was being provided to the consolidated supervisor, and to 
some extent, the consolidated supervisor was relying on that 
information in planning and reporting. 

Supervisors do communicate when developing holding company supervisory 
programs. For example, staff at SEC, especially in OCIE, noted that 
they communicated regularly with the supervisory management at the 
Federal Reserve Bank of New York when setting up their CSE program. In 
addition, the agencies gave us examples of when they communicated with 
regard to specific issues, and the Federal Reserve and SEC have taken 
opportunities to learn from the firms under each other's jurisdiction. 
SEC said the Federal Reserve had asked to meet with some of CSEs 
regarding peer valuation, and SEC had facilitated such meetings. 

Following the enactment of GLBA, OCC and the Federal Reserve agreed on 
how they would coordinate in the supervision of LCBOs. While some 
duplication remains, we found examples of that agreement being 
implemented. For example, OCC and the Federal Reserve share supervisory 
planning documents for LCBOs when OCC is the primary bank supervisor 
for the lead bank in the bank holding company. As a result, the Federal 
Reserve is able to factor OCC's planned work into its supervisory plan 
process. 

In addition, we found that OCC and Federal Reserve examiners at some 
institutions shared information informally over the course of the 
examination cycle, allowing them to conduct joint or shared target 
examination activities that might not have been part of the original 
plan. OCC examiners told us they are now also receiving information 
about the Federal Reserve's horizontal reviews in a timelier manner and 
can thus make better decisions about the extent to which they want to 
participate in those reviews. Federal Reserve officials said that when 
OCC has conducted examination activities related to horizontal reviews, 
they rely on OCC's information. OCC and Federal Reserve examiners also 
told us that when they disagree on examination findings, they attempt 
to work out those disagreements before presenting conflicting 
information to management. Finally, OCC and Federal Reserve examiners 
jointly attend meetings with management and the Boards of Directors of 
the financial institutions where they have primary and consolidated 
supervisory responsibilities. They invite other relevant bank examiners 
to attend some of these meetings as well. Finally, the Federal Reserve 
provides OCC and FDIC full online access to its supervisory database, 
which contains examination reports and other supervisory information 
for bank holding companies. 

The supervision of one firm, headquartered abroad but with significant 
U.S. operations, including substantial securities activities, is an 
example of coordination between the Federal Reserve, the holding 
company supervisor for the firm's U.S. operations, two foreign 
supervisory agencies involved in the oversight of the ultimate holding 
company, and operations in their countries, and the SEC, which is the 
functional supervisor of firm's most important U.S. operations. The 
Federal Reserve meets with supervisors from the other countries 
formally twice a year to coordinate activities. A representative of the 
firm said the three agencies meet jointly with representatives of the 
firm prior to developing a supervisory plan. The lead examiner at the 
Federal Reserve said that including representatives from other 
governments on examination teams makes it easier to access information 
across international borders. While SEC is not included in these 
meetings, the Federal Reserve and SEC agreed to a "pilot program" for 
the Federal Reserve to regularly share holding company information with 
OCIE staff that oversee the firm's U.S. broker-dealers and investment 
advisers. 

Collectively, these efforts to coordinate do address several of the key 
elements of collaboration identified in table 6, above. In particular, 
the agreements among the supervisors provide a basis for joint 
strategies, for agreements on roles and responsibilities, and for 
operating across agency boundaries. Joint examination activities 
between the Federal Reserve and OCC, for instance, address these 
elements and are a way to leverage resources. Similarly, coordination 
between SEC offices and the Federal Reserve promote efforts to learn 
from each other despite agency boundaries. 

Opportunities remain for the agencies to collaborate more 
systematically, however, and thus enhance their ability to provide 
effective and consistent oversight when they share responsibility for a 
holding company and its subsidiaries. More consistent collaboration 
between OCC as the lead bank examiner and the Federal Reserve as the 
holding company supervisor, for instance, would allow the agencies to 
take advantage of opportunities to supervise some large, complex, 
banking organizations as effectively and efficiently as possible. 
Conducting some examinations and meetings on a joint basis--the 
solution adopted by the Federal Reserve and OCC--is a positive step but 
does not ensure that the agencies develop consistent mechanisms to 
evaluate the results of joint examinations or to judge the extent to 
which such examinations or other approaches lessen duplication, promote 
consistency, or otherwise enable more efficient supervision. 

In addition, we found that coordination between these agencies did not 
always run smoothly. OCC examiners at some of the institutions we 
reviewed and officials at headquarters told us that they see some 
coordination issues, especially with regard to the horizontal 
examinations the Federal Reserve conducts across some systemically 
important institutions. OCC examiners at one LCBO said that some cases 
could lead to the Federal Reserve and OCC providing inconsistent 
feedback to the firm. They also noted that when the Federal Reserve 
collects information for these examinations, they do not always rely on 
OCC for that information when OCC is the primary bank examiner of the 
lead bank. Finally, while OCC and the Federal Reserve follow the 
procedures they have laid out for resolving differences, the potential 
still exists for the two to give conflicting information to management. 
We found one firm that had initially received conflicting information 
from the Federal Reserve, its consolidated supervisor, and OCC, its 
primary bank supervisor, about sufficient business continuity 
provisions. 

While the holding company supervisor for thrift holding companies (OTS) 
or CSEs (SEC) is often the supervisor of the dominant regulated 
subsidiary, opportunities to reduce regulatory burden and improve 
accountability through better collaboration continue to exist. While an 
OTS official told us that one of the main responsibilities of a holding 
company supervisor is to improve efficiency by serving as a source of 
information about the holding company to the functional supervisors, 
this opportunity to leverage information is not fully utilized. FDIC 
examiners, for instance, could collect information on the 
organizational structure of the holding company from OTS, but obtained 
this information from bank officials when examining an ILC that was 
part of a thrift holding company. 

In other instances, OTS and the Federal Reserve have taken some steps 
to work collaboratively with other supervisors in supervising a 
particular firm, but the results are incomplete. A decision by the 
United Kingdom's Financial Services Authority to include the German and 
French regulators in a meeting with OTS led OTS to call a November 2005 
meeting that included a broader range of supervisors. OTS officials 
said they invited insurance, FDIC, and SEC supervisors in the United 
States. Officials at the company told us, however, that FDIC did not 
attend the 2005 meeting because the meeting had been arranged hastily. 
OTS held a similar meeting in November 2006, and FDIC staff attended 
this meeting; SEC, however, did not attend and senior staff at Market 
Regulatio