Financial System Stability and Reform
In response to the worst financial crisis in more than 75 years, U.S. policymakers have created programs involving billions of dollars to stabilize the financial system, and are in the process of implementing wide-ranging reforms across numerous areas of the financial regulatory system.
GAO initially designated modernization of the U.S. financial regulatory system as a high-risk area in 2009 because the system failed to adapt to significant changes ahead of the recent financial crisis. GAO expanded this high-risk area to include the federal role in housing finance because key housing finance entities (Fannie Mae, Freddie Mac, and the Federal Housing Administration) face interconnected and asyet-unresolved challenges relating to their future structures, roles, and financial conditions. During the financial crisis, the federal government offered substantial support to the financial sector, including guarantees and other support through the Federal Reserves emergency programs and the Treasury Departments Troubled Asset Relief Program (TARP). In 2010, Congress passed and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which aims to address regulatory gaps revealed during the crisis and may better position the financial regulatory system to address the recent changes to the financial system and associated risks. The Dodd-Frank Acts reforms include
- Creation of a new Financial Stability Oversight Council made up representatives of the various financial regulators to identify risks to U.S. financial stability, including risks posed by large, interconnected financial conglomerates.
- New requirements for and enhanced oversight over markets such as over-the-counter derivatives markets, and market participants such as non-bank mortgage lenders, hedge fund advisers, and credit rating agencies, which were previously subject to less regulation.
- Creation of a new Bureau of Consumer Financial Protection with broad regulatory responsibilities for providers of residential mortgage loans and other consumer financial products and services.
Implementation of the act has been challenging, and many reform areas remain to be addressed.