Financial Market Regulation:

Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration

GAO-07-154: Published: Mar 15, 2007. Publicly Released: Mar 15, 2007.

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As financial institutions increasingly operate globally and diversify their businesses, entities with an interest in financial stability cite the need for supervisors to oversee the safety and soundness of these institutions on a consolidated basis. Under the Comptroller General's Authority, GAO reviewed the consolidated supervision programs at the Federal Reserve System (Federal Reserve), Office of Thrift Supervision (OTS), and Securities and Exchange Commission (SEC) to (1) describe policies and approaches that U.S. consolidated supervisors use to oversee large and small holding companies; (2) review the management of the consolidated supervision programs, including use of program objectives and performance measures; and (3) evaluate how well consolidated supervisors are collaborating with other supervisors and each other in their activities. In conducting this study, GAO reviewed agency policy documents and supervisory reports and interviewed agency and financial institution officials.

The Federal Reserve, OTS, and SEC have responded to the dramatic changes in the financial services industry and for many of the largest financial services firms the agencies focus on the firms' consolidated risks, controls, and capital. Reflecting in part differences in structure, traditional roles and responsibilities, and the length of time they have had to develop and refine their programs, the agencies employ somewhat differing policies and approaches for their consolidated supervision programs. Consolidated supervision becomes more important in the face of changes in the financial services industry, particularly with respect to the increased importance of enterprise risk management by large, complex financial services firms. Consolidated supervision provides a basis for the supervisors to oversee the risks of financial services firms on the same level that the firms manage those risks. GAO found that while all of these agencies were meeting international standards for effective oversight of large, internationally active conglomerates and have broad goals for supervision, they could more clearly articulate the specific objectives and performance measures for their evolving consolidated supervision programs. Both Federal Reserve and OTS, for example, focus on the safety and soundness of the depository institution but could take steps to better measure how consolidated supervision contributes to this in ways that differ from primary supervision of the depository institution. Such objectives and measures would help the agencies ensure consistent treatment of the firms that are subject to consolidated supervision. More effective collaboration can occur if agencies take a more systematic approach to agreeing on roles and responsibilities and establishing compatible goals, policies, and procedures on how to use available resources as efficiently as possible. While the three agencies coordinate and exchange information, they could take a more systematic approach to collaboration with respect to their consolidated supervision programs. For instance, SEC and OTS have authority for some of the same firms with no effective mechanism to prevent duplication, assign accountability, or resolve potential conflicts. Similarly, while the Federal Reserve and other federal bank supervisory agencies have taken steps to share information and examination activities when the Federal Reserve is not the primary supervisor of the lead bank in a bank holding company, some duplication and lack of accountability remain. As a result, consolidated supervision of U.S. financial institutions is not as efficient and effective as it could be if agencies collaborated more systematically. GAO has noted in the past that it is difficult to collaborate within the fragmented U.S. regulatory system and has recommended that Congress modernize or consolidate the regulatory system. However, if the current system is maintained, it is increasingly important for agencies to collaborate to ensure effective and efficient consolidated supervision, consistent treatment of financial services firms, and clear accountability of the agencies for their supervisory activities.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To better assess their agencies' achievements as consolidated supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should direct their staffs to develop program objectives and performance measures that are specific to their consolidated supervision programs.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: The Dodd Frank Wall Street Reform and Consumer Protection Act abolished the Office of Thrift Supervision and shifted responsibilities for savings and loans holding companies to the Federal Reserve.

    Recommendation: To better assess their agencies' achievements as consolidated supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should direct their staffs to develop program objectives and performance measures that are specific to their consolidated supervision programs.

    Agency Affected: United States Securities and Exchange Commission

    Status: Open

    Comments: When we confirm what actions have been taken in response to this recommendation, we will provide updated information.

    Recommendation: To better assess their agencies' achievements as consolidated supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should direct their staffs to develop program objectives and performance measures that are specific to their consolidated supervision programs.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In October 2008, the Federal Reserve Board issued new guidance on the Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations. This guidance laid out the objectives of consolidated or bank holding company supervision more clearly than the objectives had been laid out in the past. The guidance made clear, for example, that the objective of the Federal Reserve's supervision was to understand and assess bank holding companies on a consolidated basis. In its 2011 GPRA Annual Performance Report, although not directly focused on consolidated supervision, the Federal Reserve included the following metric: "Identify and resolve supervisory and financial problems in a timely manner, working alone or in cooperation with other authorities."

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include ensuring common understanding of how the respective roles and responsibilities of primary bank and functional supervisors and of consolidated supervisors are being applied and defined in decisions regarding the examination and supervision of institutions.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: Consistent with our recommendation, on July 7, 2008, the Chairman of the SEC and the Chairman of the Board of Governors of the Federal Reserve System signed a memorandum of understanding regarding coordination and information sharing in areas of common supervisory interest. This document lays out the roles of each entity and coordination regarding a variety of functions such as consolidated supervised entities, primary dealers, and capital, liquidity, and funding. It also addresses areas of common interest and identified where and what types of information will be exchanged and types of communication.

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include ensuring common understanding of how the respective roles and responsibilities of primary bank and functional supervisors and of consolidated supervisors are being applied and defined in decisions regarding the examination and supervision of institutions.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: Consistent with our recommendation, on July 7, 2008, the Chairman of the SEC and the Chairman of the Board of Governors of the Federal Reserve System signed a memorandum of understanding regarding coordination and information sharing in areas of common supervisory interest. This document lays out the roles of each entity and coordination regarding a variety of functions such as consolidated supervised entities, primary dealers, and capital, liquidity, and funding. It also addresses areas of common interest and identified where and what types of information will be exchanged and types of communication.

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include ensuring common understanding of how the respective roles and responsibilities of primary bank and functional supervisors and of consolidated supervisors are being applied and defined in decisions regarding the examination and supervision of institutions.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In March 2009, the Office of Thrift Supervision (OTS) revised its Holding Companies Handbook which guides the examination of Thrift Holding Companies to better focus on risk. Specifically, they revised their overall supervisory focus from--Capital, Organizational Structure, Relationship, and Earnings or CORE--to Capital, Organizational Structure, Risk Management, and Earnings. Under the risk management component examiners were directed to "Assess whether the board of directors and management identifies, understands, and controls the risks within the holding company enterprise." As a result, OTS's supervisory framework for all complex holding companies was brought in line with the framework being used by other regulators here and abroad and in line with their own framework for those companies active in the European Union that were required to have consolidated supervision equivalent to that provided by European regulators. Prior to this OTS provided more extensive guidance for the latter companies and for these companies, the guidance focused more on risk across the holding company. For other thrift holding companies, OTS had been focusing less on risk across the holding company and more on risks associated with the thrift itself. The new guidance focused on risk management of the consolidated entity. We did not evaluate the implementation of the new guidance.

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include developing appropriate mechanisms to monitor, evaluate, and report jointly on results.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: Consistent with the intent of this recommendation, SEC entered into a Memorandum of Understanding with the Federal Reserve System regarding collaboration and information sharing. SEC and the Federal Reserve as well as other functional regulators and international counterparties also engaged in joint regulatory activities including management of counterparty credit risk exposure to hedge funds and industry-wide operational issues related to credit derivatives. SEC also proposed periodic meetings with OTS. SEC's Consolidated Supervised Entities (CSE) program was subsequently terminated.

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include developing appropriate mechanisms to monitor, evaluate, and report jointly on results.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: Prior to dissolution of its consolidated supervised entity program, SEC proposed periodic meetings with OTS. It also entered into a memorandum of understanding with the Federal Reserve. Under the Dodd-Frank Act, the Federal Reserve assumed oversight responsibility for thrift holding companies in July 2011.

    Recommendation: To ensure they are promoting consistency with primary bank and functional supervisors and are avoiding duplicating the efforts of these supervisors, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should also direct their staffs to identify additional ways to more effectively collaborate with primary bank and functional supervisors. Some of the ways they might consider accomplishing this include developing appropriate mechanisms to monitor, evaluate, and report jointly on results.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: Consistent with the intent of this recommendation, SEC entered into a Memorandum of Understanding with the Federal Reserve System regarding collaboration and information sharing. SEC and the Federal Reserve as well as other functional regulators and international counterparties also engaged in joint regulatory activities including management of counterparty credit risk exposure to hedge funds and industry-wide operational issues related to credit derivatives. SEC also proposed periodic meetings with OTS. SEC's Consolidated Supervised Entities (CSE) program was subsequently terminated.

    Recommendation: To take advantage of the opportunities to promote better accountability and limit the potential for duplication and regulatory gaps, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should foster more systematic collaboration among their agencies to promote supervisory consistency, particularly for firms that provide similar services. In particular, the Chairman of the Securities and Exchange Commission and the Director of the Office of Thrift Supervision should jointly clarify accountability for the supervision of the consolidated supervised entities that are also thrift holding companies and work to reduce the potential for duplication.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: Prior to dissolution of the Consolidated Supervised Entities (CSE) program, SEC demonstrated a willingness and commitment to foster an improved working relationship with OTS on areas where their oversight overlapped with other entities. For example, SEC met with OTS and proposed quarterly meetings in November 2007. In addition, it entered into a memorandum of understanding with the Board of Governors of the Federal Reserve System in July 2008. Likewise, the Office of Thrift Supervision (OTS) said that it had tried to collaborate with the Securities and Exchange Commission (SEC) regarding the oversight of some investment companies with thrifts--Lehman Brothers, Merrill-Lynch, and Morgan Stanley--that were subject to consolidated supervision by both OTS and SEC. SEC's Consolidated Supervised Entity program was terminated and OTS's holding company oversight is being transferred to the Federal Reserve System.

    Recommendation: To take advantage of the opportunities to promote better accountability and limit the potential for duplication and regulatory gaps, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should foster more systematic collaboration among their agencies to promote supervisory consistency, particularly for firms that provide similar services. In particular, the Chairman of the Securities and Exchange Commission and the Director of the Office of Thrift Supervision should jointly clarify accountability for the supervision of the consolidated supervised entities that are also thrift holding companies and work to reduce the potential for duplication.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: Prior to dissolution of the Consolidated Supervised Entities (CSE) program, SEC demonstrated a willingness and commitment to foster an improved working relationship with OTS on areas where their oversight overlapped with other entities. For example, SEC met with OTS and proposed quarterly meetings in November 2007. In addition, it entered into a memorandum of understanding with the Board of Governors of the Federal Reserve System in July 2008.

    Recommendation: To take advantage of the opportunities to promote better accountability and limit the potential for duplication and regulatory gaps, the Chairman of the Federal Reserve System's Board of Governors, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission should foster more systematic collaboration among their agencies to promote supervisory consistency, particularly for firms that provide similar services. In particular, the Chairman of the Securities and Exchange Commission and the Director of the Office of Thrift Supervision should jointly clarify accountability for the supervision of the consolidated supervised entities that are also thrift holding companies and work to reduce the potential for duplication.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: Prior to dissolution of the Consolidated Supervised Entities (CSE) program, the Board of Governors of the Federal Reserve and SEC entered into a memorandum of understanding in July 2008. Under Dodd-Frank, OTS's oversight responsibility for thrift holding companies has been transferred to the Federal Reserve.

    Recommendation: The Chairman of the Securities and Exchange Commission should direct SEC staff to develop and publicly release explicit written guidance for supervision of Consolidated Supervised Entities. This guidance should clarify the responsibilities and activities of the Office of Compliance Inspections and Examinations and the Division of Market Regulation's responsibilities for administering the Consolidated Supervised Entity program.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: Upon the dissolution of the Consolidated Supervised Entities (CSE) program in 2008, the CSEs that remained became bank holding companies negating the need for SEC to develop such guidance. Consistent with the recommendation made to SEC, the Federal Reserve Reserve has written supervisory guidance for the oversight of bank holding companies.

    Recommendation: The Director of the Office of Thrift Supervision should direct OTS staff to revise the capital, organization structure, relationship, and earnings, supervisory framework to focus more explicitly and transparently on risk management and controls so that it more effectively captures evolving standards for consolidated supervision and is more consistent with activities of other supervisory agencies and facilitates consistent treatment of OTS's diverse population of holding companies.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: In March 2009, the Office of Thrift Supervision (OTS) revised its Holding Companies Handbook which guides examinations of Thrift Holding Companies so that the guidance better addressed the risks and controls of the consolidated entity. Specifically, OTS changed its focus from capital, organizational structure, relationship, and earnings to capital, organizational structure, risk assessment, and earnings. For the risk assessment component, OTS directed examiners to "Assess whether the board of directors and management identifies, understands, and controls the risks within the holding company enterprise." These changes brought OTS's guidance more in line with the guidance of other regulators here and abroad and made it more consistent with OTS's own guidance for those thrift holding companies that were active in the European Union and were required to have consolidated supervision similar to that provided by European supervisors.

    Recommendation: The Chairman of the Federal Reserve should direct Federal Reserve Board and District Bank staff to look for ways to further reduce operational differences in bank supervision among the District Banks, such as developing additional guidance related to developing and communicating examination findings.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In January 2008, the Federal Reserve Board issued a supervisory letter on Communication of Examination/Inspection Findings (SR 08-1). This supervisory letter said that "To improve the consistency and clarity of written communications, the Federal Reserve will use standardized terminology to differentiate among" matters requiring immediate attention, matters requiring attention, and observations. Prior to this the Federal Reserve Board provided little guidance on communicating examination findings. Some district banks provided guidance while others did not so that examiner practice varied from institution to institution. The new guidance was effective immediately upon issuance, and in July 2008, the Federal Reserve updated its Bank Holding Company Handbook to the new guidance on communicating examination findings. Similarly, in October 2008, the Federal Reserve Board issued a supervisory letter on Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations (SR 08-9). This document says "The primary objectives of this letter and the attached supervisory guidance are to specify principal areas of focus for consolidated supervision activities and thereby provide for consistent Federal Reserve supervisory practices and assessments across organizations with similar activities and risks."

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