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General government > 5. Financial Regulatory Structure

To reduce or better manage fragmentation and overlap, Congress should consider changes to the financial regulatory structure, and the Board of Governors of the Federal Reserve System and the Office of Financial Research should take steps to improve collaboration in monitoring systemic risk.

Why This Area Is Important

While a fully functioning financial system is critical to the well-being of our citizens and overall economic growth, financial services activities can, at times, cause significant harm. For example, mortgage and mortgage-related activity played a role in triggering the 2007-2009 financial crisis, which resulted in unprecedented federal support being provided to many firms, and many households suffered as a result of falling asset prices, tightening credit, and increasing unemployment. These events demonstrated that the fragmented U.S. financial regulatory system was in need of significant reform. In particular, the crisis highlighted gaps and weaknesses in the supervision and regulation of the U.S. financial system, including the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system and a shortage of timely information to facilitate this oversight. GAO has designated modernizing the U.S. financial regulatory system as a high-risk area.[1]

Financial regulation generally aims to ensure the safety and soundness of depository institutions, adequate consumer and investor protections, the integrity and fairness of markets, and the stability of the overall financial system. As GAO reported in February 2016, the U.S. financial regulatory structure is complex, with responsibilities fragmented among multiple agencies that have overlapping authorities. Responsibilities for overseeing the financial services industry are spread among over a dozen entities, including federal banking, securities, derivatives, and other regulatory agencies and entities; numerous self-regulatory organizations; and hundreds of state financial regulatory agencies (see figure).

U.S. Financial Regulatory Structure, 2016

U.S. Financial Regulatory Structure, 2016

Notes: This figure depicts the primary regulators in the U.S. financial regulatory structure, as well as their primary oversight responsibilities. “Regulators” generally refers to entities that have rule-making, supervisory, and enforcement authorities over financial institutions or entities. There are additional agencies involved in regulating the financial markets, and there may be other possible regulatory connections than those depicted in this figure.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted in 2010.[2] The Act made changes to the financial regulatory system to help address shortcomings identified by the 2007-2009 financial crisis. For example, it abolished the former regulator of thrifts and thrift holding companies, and transferred its authorities to other depository institution and holding company regulators; created the Bureau of Consumer Financial Protection (also known as the Consumer Financial Protection Bureau, or CFPB), a new federal consumer financial protection regulator; created the Financial Stability Oversight Council (FSOC), and two additional nonregulatory offices with mandates that include certain responsibilities related to monitoring systemic risk.[3] However, other than these changes, the Act it generally left the regulatory structure unchanged. Prior to the Dodd-Frank Act, GAO reported on numerous instances in multiple areas of the regulatory structure in which fragmentation and overlap created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.[4] While agencies have taken actions to help mitigate the negative effects of fragmentation and overlap that GAO identified in its previous work, more recent examples cited below demonstrate a pattern of inconsistencies and inefficiencies that continue to persist because of the fragmented regulatory structure.

[1] See GAO, High-Risk Series: An Update, GAO-15-290 (Washington, D.C.: Feb. 11, 2015).

[2] Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[3] The term “thrifts” refers to federal and state savings associations and “thrift holding companies” refers to savings and loan holding companies that control a thrift or another thrift holding company. FSOC is a council of the heads of the federal financial regulatory agencies, as well as representatives from state regulatory agencies and others, tasked with identifying and responding to systemic risks.

[4] For example, see GAO, Bank and Thrift Regulation: Improvements Needed in Examination Quality and Regulatory Structure, GAO/AFMD-93-15 (Washington, D.C.: Feb. 16, 1993); Financial Market Regulation: Benefits and Risks of Merging SEC and CFTC, GAO/T-GGD-95-153 (Washington, D.C.: May 3, 1995); Insurance Reciprocity and Uniformity: NAIC and State Regulators Have Made Progress in Producer Licensing, Product Approval, and Market Conduct Regulation, but Challenges Remain, GAO-09-372 (Washington, D.C.: Apr. 6, 2009); Fair Lending: Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts, GAO-09-704 (Washington, D.C.: July 15, 2009); and Financial Regulation: Clearer Goals and Reporting Requirements Could Enhance Efforts by CFTC and SEC to Harmonize Their Regulatory Approaches, GAO-10-410 (Washington, D.C.: Apr. 22, 2010).

What GAO Found

In January 2009, GAO established a framework for evaluating regulatory reform proposals that describes nine characteristics that should be reflected in a new regulatory system.[1] In a February 2016 report, GAO used this framework to evaluate the current regulatory structure and found that while changes made by the Dodd-Frank Act were consistent with some of the framework’s characteristics, the Act did not address three characteristics that would likely help to reduce the negative effects of fragmentation and overlap in the structure. In particular, the current regulatory structure does not always ensure (1) efficient and effective oversight, (2) consistent financial oversight, and (3) consistent consumer and investor protections. Because these characteristics have not been fully addressed, negative effects of fragmented and overlapping authorities persist throughout the system. In its February 2016 report, GAO found a number of instances of these negative effects, including the following examples:

  • While the Dodd-Frank Act helped to reduce fragmentation in consumer financial protection oversight by consolidating authority for a number of consumer financial protection laws that had been previously handled by seven different agencies, the Act also fragmented consumer protection supervision and enforcement for depository institutions, based on a depository institution’s size.[2] This fragmentation may result in inefficiencies, such as duplication in examinations, because while most consumer protection oversight responsibilities were transferred from the federal depository institution regulators to CFPB, federal depository institution regulators retained authority for certain consumer protection laws for depository institutions with more than $10 billion in assets. As a result, examiners from the federal depository institution regulators and CFPB examine the compliance management systems at the same depository institutions for their respective supervisory purposes.
  • The Dodd-Frank Act also created a new oversight regime for the swaps and security-based swaps markets and generally divided the oversight of these markets between the Commodity Futures Trading Commission and the Securities and Exchange Commission, respectively.[3] In GAO’s February 2016 report, market participants noted that regulation of these markets by separate agencies may create market inefficiencies because of differences in certain of the agencies’ rules that have been developed for each type of product.

The regulators coordinate in many areas and, in some cases, are required to coordinate, to help reduce the negative effects of fragmentation and overlap. However, the fragmented structure creates a significant responsibility and burden for regulators, which must cooperate and effectively coordinate their activities. GAO has previously made suggestions to Congress to modernize and improve the effectiveness of the financial regulatory structure.[4] Without congressional action, it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.

The 2007-2009 financial crisis also highlighted the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system. The Dodd-Frank Act tried to address this gap in systemic risk oversight by placing this responsibility on a collective group of financial regulators and other entities through the creation of FSOC and also gave the Office of Financial Research broad systemic risk monitoring mandates.[5] These reforms aim to create ways to monitor, identify, and mitigate systemic risks within a regulatory structure that is fragmented among numerous agencies. In February 2016, GAO reported that these reforms create the potential for unnecessary duplication in activities or gaps in systemic risk oversight.

For example, the Board of Governors of the Federal Reserve (Federal Reserve) and the Office of Financial Research both have developed broad-based systemic risk monitoring efforts that use quantitative and qualitative information to monitor the breadth of the financial system for potential threats to financial stability. GAO found that the agencies had articulated similar goals with respect to their systemic risk monitoringactivities; however, they have engaged in these efforts largely independently, leading to lost collaborative opportunities that could improve their ability to identify systemic risks and reduce the potential for unnecessary duplication. The Federal Reserve’s and the Office of Financial Research’s actions have not been consistent with key practices for collaboration that GAO has previously identified, such as establishing mutually reinforcing or joint strategies, leveraging resources, and agreeing on roles and responsibilities.[6] Both agencies told GAO that they believe the current nature and level of their collaboration is appropriate, and they stated that they believe that their participation in FSOC’s Systemic Risk Committee—its main staff-level committee for collaboration on systemic risk monitoring across the many federal and state financial regulators and other members—ensures communication between the two agencies about their systemic risk monitoring efforts. Separate entities monitoring systemic risk from different perspectives could help reduce the likelihood that potential systemic risks will not be identified in time. As such, systemic risk monitoring efforts need not be harmonized across agencies. However, failure to use some key collaboration practices could result in the Office of Financial Research and the Federal Reserve missing opportunities to leverage each other’s resources and identify important and mutually beneficial ways to improve their systemic risk monitoring activities.

Further, in February 2016 GAO reported that FSOC’s Systemic Risk Committee did not have full and consistent access to existing monitoring tools or other outputs developed by the Office of Financial Research and the Federal Reserve.Office of Financial Research officials told GAO that the use of disaggregated or otherwise confidential data in its systemic risk monitoring tools restricts the agency’s ability to share such information with Systemic Risk Committee participants. Officials from both the Office of Financial Research and the Federal Reserve stated that participation of key staff in the Systemic Risk Committee allows for the proper sharing of information on systemic risks identified by their respective efforts. However, federal internal control standards call for the use of relevant, reliable, and timely information to achieve the entity’s responsibilities, and international best practices for systemic risk oversight state thatefforts to monitor the financial system for systemic risks must be based on a continuous assessment of evolving risks that uses available qualitative and quantitative information.[7] Without better access to existing systemic risk monitoring tools or other outputs, the committee may miss some risks or not identify them in a timely manner.

Finally, in February 2016 GAO also reported that while FSOC’s mission is to respond to systemic risks, it has limited authorities to do so. The Dodd-Frank Act left the responsibility for overseeing financial entities and activities with individual financial regulatory agencies.[8] FSOChas authorities to designate certain entities or activities for enhanced supervision by a specific regulator, but these authorities may not allow it to address certain broader risks that are not specific to a particular entity.[9] For such risks, FSOC can recommend but not compel action. GAO’s January 2009 framework states that financial systems should include a mechanism for managing risks regardless of the source of the risks, and international best practices for systemic risk oversight state that macroprudential entities require authorities to foster the ability to act and ensure regulatory responses.[10] Because of the limitations in FSOC’s authorities, without congressional action FSOC may not have the tools it needs to carry out its mission to comprehensively respond to systemic risks, and it may be difficult to hold the council accountable for responding to such risks.

[1] GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216 (Washington, D.C.: Jan. 8, 2009).

[2] The seven agencies were the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Federal Trade Commission, and the Department of Housing and Urban Development. The Dodd-Frank Act gave CFPB authority in connection with a number of federal consumer protection laws.

[3] In general, the Dodd-Frank Act defines a swap to include, among other things, an agreement that provides for the exchange of one or more payments based on the value or level of one or more assets, liabilities, or indices or other financial or economic interests or property of any kind that transfers, in whole or in part, the financial risk associated with a future change in the value or level without also conveying a current or future ownership interest in an asset or liability that incorporates the financial risk transferred. Pub. L. No. 111-203, § 721(a)(21), 124 Stat. 1376, 1666 (2010).

[4] For example, in 1996, GAO suggested that the regulatory structure could be modernizedby reducing the number of federal agencies with responsibility for the oversight of depository institutions, which GAO stated should help improve the consistency of oversight and reduce regulatory burden. In 2004, GAO suggested that Congress may want to consider some consolidation or modification of the regulatory structure to
(1) better address the risks posed by large, complex, internationally active firms and their consolidated risk management approaches; (2) promote competition domestically and internationally; and (3) contain systemic risk. Congress has not taken actions to significantly modify the regulatory structure since GAO made these suggestions, although through the Dodd-Frank Act, Congress did take some actions consistent with GAO’s suggestions. For example, the Dodd-Frank Act eliminated the former regulator of thrifts and thrift holding companies—the Office of Thrift Supervision—and transferred its responsibilities to other depository institution and holding company regulators. The Act also established the Financial Stability Oversight Council to monitor the stability of the U.S. financial system and take actions to mitigate risks that might destabilize the system. See GAO, Bank Oversight Structure: U.S. and Foreign Experience May Offer Lessons for Modernizing U.S. Structure, GAO/GGD-97-23 (Washington, D.C.: Nov. 20, 1996), and Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 6, 2004).

[5] The Office of Financial Research was created within the U.S. Department of the Treasury to support FSOC and its member agencies, in part, by performing financial research and collecting data.

[6] GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005).

[7] GAO, Standards for Internal Control in the Federal Government, GAO-14-704G (Washington, D.C.: September 2014) and GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999), and International Monetary Fund, Staff Guidance Note on Macroprudential Policy (Washington, D.C.: December 2014), and Key Aspects of Macroprudential Policy, IMF Policy Paper (Washington D.C.: June 2013).

[8] FSOC’s own authorities do not divest its members of their existing authorities.

[9] Pub. L. No. 111-203, §§ 113, 804, 124 Stat. 1376, 1398, 1807 (2010).

[10] International Monetary Fund, Staff Guidance Note on Macroprudential Policy; Key Aspects of Macroprudential Policy; and Macroprudential Policy: An Organizing Framework, IMF Policy Paper (Washington D.C.: March 2011).

Actions Needed

GAO suggested in its February 2016 report that to reduce or better manage fragmentation and overlap in the oversight of financial institutions, activities, and risks, Congress should take the following two actions:

  • Consider whether additional changes to the financial regulatory structure are needed to improve (1) the efficiency and effectiveness of oversight; (2) the consistency of consumer and investor protections; and (3) the consistency of financial oversight for similar institutions, products, risks, and services.
  • Consider whether legislative changes are necessary to align FSOC’s authorities with its mission to respond to systemic risks.

In February 2016, GAO also recommended the following three actions to help regulators address regulatory fragmentation and to improve the effectiveness of monitoring systemic risks:

  • The Office of Financial Research and the Federal Reserve should jointly articulate individual and common goals for their systemic risk monitoring activities, including a plan to monitor progress toward articulated goals, and formalize regular strategic and technical discussions around their activities and outputs to support those goals.
  • The Office of Financial Research should work with FSOC to determine ways in which to fully and regularly incorporate current and future monitors and assessments into Systemic Risk Committee deliberations, including, where relevant, those that present disaggregated or otherwise confidential supervisory information.
  • The Federal Reserve should work with FSOC to regularly incorporate the comprehensive results of its systemic risk monitoring activities into Systemic Risk Committee deliberations.

While it is possible that restructuring the financial regulatory system could result in savings to the federal government, such restructuring would involve many unknown variables and would depend on a number of congressional decisions. As such, the financial benefits cannot be quantified. However, the 2007-2009 financial crisis—in which the fragmented regulatory structure contributed to failures by regulators to adequately protect consumers and ensure financial stability—demonstrated the high costs of inefficiency and ineffectiveness in regulation and, conversely, the enormous benefits that can be achieved by promoting consistency, efficiency, and effectiveness in the regulatory structure.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the February 2016 product in the related GAO products section. To identify fragmentation and overlap in the U.S. financial regulatory structure and their effects, GAO reviewed relevant financial statutes, agencies’ documents on their oversight activities, and previous GAO reports and other reports on financial regulatory reform. GAO also interviewed agency officials and industry and policy groups that represented the different areas of the financial system or had expertise in evaluating areas of the financial regulatory structure. GAO also held four discussion groups on areas where the Dodd-Frank Act altered the regulatory structure and on issues widely identified as potential causes of the 2007-2009 financial crisis. The groups consisted of former regulatory officials, industry and advocacy group representatives, and experts. GAO also reviewed agendas and presentations from monthly meetings of FSOC’s Systemic Risk Committee from July 2012 through August 2014 and interviewed relevant FSOC member agency staff. GAO did not include assessments of fragmentation and overlap in two areas within the financial regulatory structure: housing finance oversight and the farm credit system.

Agency Comments & GAO Contact

GAO provided a draft of its February 2016 report on which this analysis is based to 12 federal financial regulators or entities for their review and comment. The National Credit Union Administration stated that it believes the report’s substance did not support GAO’s conclusions leading to the suggestion that Congress consider whether additional changes are needed to the regulatory structure and believes that consideration of changes to the regulatory structure would need to include a careful review of the costs and benefits. The National Credit Union Administration also emphasized that it is the only federal agency with regulatory and supervisory authority over federal credit unions, in contrast with the federal banking regulators. GAO maintains that changes to the regulatory structure could help to reduce and better manage fragmentation and overlap in the oversight of financial institutions and activities. The report documents several instances where the current structure produced inconsistent, inefficient, and ineffective oversight. The costs and benefits of any options for improving and modernizing the structure would have to be part of any consideration of additional changes to the regulatory structure but would not preclude considering other options as GAO suggested.

The Commodity Futures Trading Commission noted that while the securities and derivatives markets are interconnected, they remain separate and serve distinct functions within the financial system. In addition, it stated that it has worked and continues to work closely with the Securities and Exchange Commission. The report discusses areas in which these agencies have worked together in the past to resolve jurisdictional disputes and address areas of overlap in the oversight of their respective markets, as well as recent examples of their coordination efforts on the swaps and security-based swaps rulemakings. GAO also notes that despite these efforts there were still substantive differences between certain of the agencies’ rules, which create the potential for inefficiencies in the way the markets are overseen.

Both the Federal Reserve and Office of Financial Research agreed with GAO’s recommendations to the agencies. The Federal Reserve stated that close collaboration with FSOC is essential to improving the council’s ability to identify emerging systemic risks and that communication with the Office of Financial Research is a key aspect of monitoring the financial system for systemic risks. The Office of Financial Research stated that it has initiated conversations with both FSOC staff and the Federal Reserve in response to GAO’s recommendations.

GAO provided a draft of this report section to 11 federal financial regulators or entities for review and comment. In response, CFPB noted that GAO should acknowledge the benefits associated with the creation of CFPB, including that the agency reduced fragmentation in consumer protection responsibilities by consolidating consumer protection responsibilities from multiple agencies into one. To address this concern, GAO added language on additional benefits created by the Dodd-Frank Act. In addition, the National Credit Union Administration noted that the way in which GAO summarized the agency’s response to the February 2016 report was not consistent with its intent. The National Credit Union Administration stated that it did not disagree with GAO’s suggestion that Congress should consider if additional changes are needed to the regulatory structure but rather that it believed the report’s substance did not support GAO’s conclusion. GAO’s February 2016 report, however, documented multiple instances of inconsistent, inefficient, and ineffective oversight produced by the current regulatory structure. GAO adjusted its summary of the agency’s response in this report section to reflect these concerns. In addition, the Federal Deposit Insurance Corporation, Federal Trade Commission, Financial Stability Oversight Council, Office of the Comptroller of the Currency, Office of Financial Research, and Securities and Exchange Commission provided technical comments, which were incorporated as appropriate.

For additional information about this area, contact Lawrance Evans, Jr. at (202) 512-8678 or

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