Financial Stability:

New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions

GAO-12-886: Published: Sep 11, 2012. Publicly Released: Sep 13, 2012.

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What GAO Found

These new organizations--the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR)--face challenges in achieving their missions. Key FSOC missions--to identify risks and respond to emerging threats to financial stability--are inherently challenging, in part, because risks to financial stability do not develop in precisely the same way in successive crises. Collaboration among FSOC members can also be challenging at times, as almost all of them represent independent agencies that retained existing authorities. OFR faces the challenge of trying to establish and build a world-class research organization while meeting shorter-term goals and responsibilities.

FSOC's and OFR's management mechanisms to carry out their missions could be enhanced to provide greater accountability and transparency. FSOC and OFR have taken steps toward establishing such mechanisms. FSOC has established seven standing committees generally composed of staff of its members and member agencies to support the council in carrying out its business and provide information to the council for decision making and adopted a memorandum of understanding on information sharing to help govern its activities. FSOC and OFR have also issued annual reports on their activities and created web pages that provide some information to the public. However, certain mechanisms could be strengthened. For instance:

  • FSOC's Systemic Risk Committee, which is responsible for identifying risks to financial stability, has procedures to facilitate analysis of risks raised by staff. However, without a more systematic approach and comprehensive information, FSOC member agencies, on their own, may not be well positioned to judge which potential threats will benefit from interagency discussions. GAO recommends that FSOC collect and share key financial risk indicators as part of a systematic approach to help identify potential threats to financial stability.
  • Public information on FSOC's and OFR's decision making and activities is limited, which makes assessing their progress in carrying out their missions difficult. GAO recommends that (1) FSOC keep detailed records of closeddoor sessions and (2) both entities develop a communication strategy to improve communications with the public.
  • FSOC's annual reports--which serve as its key accountability documents--do not consistently identify which entities should monitor or implement the identified recommendations or give time frames for specific actions. To hold FSOC accountable for its recommendations, GAO recommends that FSOC recommend a lead agency or agencies to monitor or implement each recommendation within specified time frames.
  • OFR issued a strategic framework in March 2012 as an important first step in adopting a strategic planning and performance management system. However, that document lacked some leading practices such as linking activities to strategic goals and performance measurement systems. GAO recommends that OFR further develop a strategic planning and performance management system that includes these elements and will allow it to be held accountable.

Although FSOC and OFR have taken steps to promote collaboration among FSOC members and external stakeholders, FSOC could further adopt key practices. FSOC member agency staff noted that agencies have leveraged their joint expertise and resources to produce FSOC’s mandated reports and rules. OFR has also taken steps to collaborate with external stakeholders by initiating a working paper series, moving to form an advisory committee, and coordinating U.S. efforts at the international level to help create a legal entity identifier for financial entities that could enable regulators to identify parties to financial transactions. However, FSOC could do more to promote collaboration. For instance, FSOC, and OFR are required to monitor risks to financial stability, but they have not yet clarified agency responsibilities for implementation—creating the potential for regulatory gaps or duplication of effort. In addition, FSOC could take better advantage of statutory mechanisms to leverage external resources, including developing advisory committees. To improve collaboration and coordination among its member agencies and with external stakeholders, GAO recommends that FSOC (1) develop policies to clarify when formal collaboration or coordination should occur and FSOC’s role in such efforts, (2) more fully incorporate key practices for successful collaboration that GAO has previously identified, and (3) clarify roles and responsibilities for implementing requirements to monitor risks to the financial system.

FSOC has issued rules that improve the transparency of its processes, and statutorily mandated reports but has not established processes to help ensure that these will have their intended results. While FSOC has issued rules on processes for designating nonbank financial entities for additional oversight and intends to review certain aspects of those rules, it has not developed plans for comprehensively evaluating whether designations are having their intended impact—reducing threats to financial stability. The impact of the designations on the economy and the financial entities will depend, in part, on a number of rules being issued by independent FSOC member agencies that will be applied to those being designated. Without a comprehensive assessment of the impact of these rules that will require the cooperation of individual FSOC members, understanding whether the designations are having their intended impact will be difficult. GAO recommends that FSOC develop a comprehensive framework for assessing the impact of its designation decisions. In addition, FSOC has not developed a systematic forward-looking process for identifying potential emerging threats in its mandated annual reporting process. In particular, FSOC does not have processes for consistently identifying such threats, separating them from more current threats, or prioritizing them. Identifying a large number of threats—the 2011 report identified over 30—without prioritizing them makes focusing on those that are most important difficult for decisionmakers. The 2012 report also included many threats, and neither report separates current threats from those that are potentially emerging. To improve FSOC’s annual reporting on potential emerging threats, GAO recommends that FSOC develop more systematic approaches that are forward looking and help to prioritize the threats.

Why GAO Did This Study

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to the stability of the U.S. financial system and OFR to support FSOC and Congress by providing financial research and data. GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR's efforts to establish management structures and mechanisms to carry out their missions, (3) FSOC and OFR's activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR's budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.

What GAO Recommends

GAO makes 10 recommendations to strengthen the accountability and transparency of FSOC and OFR's decisions and activities as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said, as Chairperson, that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators. However, stronger and more systematic actions are still needed in these areas.

For more information, contact A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: As of October 2015, FSOC staff reiterated that FSOC and OFR work well together and that there was no need to make formal distinctions when both entities were statutorily required to monitor risks to financial stability. They confirmed that although some overlap existed in the roles of the council and member agencies in terms of overseeing threats to financial stability, the council provided a forum for sharing and working together on these issues, and documentation they provided indicated that agencies did define specific roles and responsibilities for themselves when developing analyses of identified threats on a voluntary basis. However, we maintain that more specific action from FSOC and OFR, including FSOC members and member agencies, is needed to address this recommendation that ensures clarity of roles and responsibilities in proactively and comprehensively monitoring for potential emerging threats in the financial system.

    Recommendation: FSOC and OFR should clarify responsibility for implementing requirements to monitor threats to financial stability across FSOC and OFR, including FSOC members and member agencies, to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: FSOC and OFR should clarify responsibility for implementing requirements to monitor threats to financial stability across FSOC and OFR, including FSOC members and member agencies, to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council: Office of Financial Research

  3. Status: Open

    Comments: The Financial Stability Oversight Council (FSOC) has made progress in developing an approach to facilitate how it monitors threats to financial stability. The Office of Financial Research (OFR)has developed a monitoring tool to facilitate sharing of key financial risk indicators among the FSOC membership. This tool, the Financial Stability Monitor, is designed to provide a high level assessment of risks to financial stability. The prototype of the Financial Stability Monitor was discussed in November 2013 at the Council's Systemic Risk Committee in advance of OFR publishing the prototype as part of its annual report. This discussion provided an opportunity for OFR to share its methodology and to answer staff-level questions in advance of publishing the prototype. Once OFR had finalized the Financial Stability Monitor, it was presented and discussed at a Council meeting in December 2014. The next update of the Financial Stability Monitor was in June 2015 and was discussed at the Council's Deputies June 2015 meeting. We will continue to track how FSOC uses OFR's Financial Stability Monitor and any other systemic risk monitoring tools during 2016.

    Recommendation: As FSOC continues to develop approaches for monitoring threats to financial stability, FSOC should develop an approach that includes systematic sharing of key financial risk indicators across FSOC members and member agencies to assist in identifying potential threats for further monitoring or analysis.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  4. Status: Closed - Implemented

    Comments: In May 2014, FSOC updated its transparency policy to reflect improvements in communicating with the public. For example, the policy now states that the council will publicly announce its meetings at least seven days in advance of the meeting and will have a live web stream of its open meetings. In addition, the provision for releasing summaries of the meetings as soon as practicable afterwards is an effort to provide information in a timelier manner. Prior to the change (providing these summaries), the public would have to wait until the next FSOC meeting when the minutes were approved for the prior meeting. In addition, the FSOC website now offers the public the ability to sign up for email updates.

    Recommendation: To improve the transparency of FSOC and OFR operations, FSOC and OFR should each develop a communication strategy to improve communications with the public. The strategy could include using technology more effectively to communicate, such as having fully developed websites, sending regular notices to interested parties, and developing methods to communicate with the public.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  5. Status: Closed - Implemented

    Comments: As part of its communication strategy, in February 2015, OFR launched a new website to provide policy makers and the public better access to OFR information and analysis that can help to promote financial stability. The new website contains a "Directors Blog," biographies of senior managers, and information about OFR initiatives to collect financial data and improve data quality. The site also provides OFR's annual reports, working papers, staff discussion papers, and other research and analysis. The new website also offers the public the ability to sign up for email updates.

    Recommendation: To improve the transparency of FSOC and OFR operations, FSOC and OFR should each develop a communication strategy to improve communications with the public. The strategy could include using technology more effectively to communicate, such as having fully developed websites, sending regular notices to interested parties, and developing methods to communicate with the public.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council: Office of Financial Research

  6. Status: Closed - Implemented

    Comments: OFR has taken steps to strengthen strategic planning and performance measurement that address our recommendation. In February 2015, OFR publicly released a new strategic plan for FY 2015 through 2019 that describes its strategic goals and how it will measure progress. In addition, in its fiscal year 2015 budget request, OFR reported several performance measures and targets for measuring progress.

    Recommendation: To support the growth of OFR into a viable and sustainable entity, OFR should build on its strategic framework by further developing its strategic planning and performance management system so that it links its activities to its goals and uses publicly available performance measures to measure its progress.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council: Office of Financial Research

  7. Status: Open

    Comments: The Council undertook a review of its governance and transparency policies in 2013 and early 2014. The review included consideration of the practices of other organizations with similar structures, memberships, or responsibilities as the Council. In May 2014, FSOC issued a transparency policy that stated the intent to issue council minutes on a more timely basis and include more detail as appropriate. While the minutes of FSOC's meetings have increased the level of detail of discussions during the open sessions, the policy has not resulted in more detailed records of the closed door sessions of the principals meetings.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should keep detailed records (for example, detailed minutes or transcripts) of closed door sessions of principals meetings and to the extent possible make them publicly available after an amount of time has passed sufficient to avoid the release of market-sensitive information or information that would limit deliberations.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  8. Status: Closed - Implemented

    Comments: The Financial Stability Oversight Council (FSOC) has taken several actions to formalize how it will collaborate and coordinate its work. In May 2014, FSOC issued bylaws that govern the Deputies Committee. Specifically, these bylaws state that the Deputies Committee is responsible for coordinating the activities of the Council's other committees, such as the Systemic Risk Committee, and coordinating with the Office of Financial Research. In addition, in May 2015, FSOC completed charters for its other five committees (Data, Financial Markets Utilities, Nonbank Financial Companies Designations, Regulation and Resolution, and Systemic Risk). These charters describe how member agencies and members of FSOC will coordinate and share information, among other things.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should establish formal collaboration and coordination policies that clarify issues such as when collaboration or coordination should occur and what role FSOC should play in facilitating that coordination.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  9. Status: Open

    Comments: FSOC has taken some steps to incorporate key collaboration practices beyond its own internal operations and current committee structure. For example, in December 2013, an FSOC meeting included an industry expert as part of the agenda item on cybersecurity, but subsequent meetings have not included industry or academic experts. We will continue to follow up with FSOC on actions taken in this area.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should more fully incorporate key practices for successful collaboration that we have previously identified. Internally, this could include working with agencies to rationalize schedules for rulemakings and conducting collaborative system-wide stress testing. Externally, this could include using professional and technical advisors including state regulators, industry experts, and academics.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  10. Status: Open

    Comments: FSOC officials have said that the section 123 report required by the Dodd-Frank Act is due in 2016 and they plan to examine the impact of designations as part of that report. We will follow up on this reporting requirement during 2016.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should establish a collaborative and comprehensive framework for assessing the impact of its decisions for designating FMUs and nonbank financial companies on the wider economy and those entities. This framework should include assessing the effects of subjecting designated FMUs and nonbank financial companies to new regulatory standards, requirements, and restrictions; establishing a baseline from which to measure the effects; and documenting the approach.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  11. Status: Open

    Comments: When we complete our review of FSOC's actions to address this recommendation, we will provide updated information.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should develop more systematic forward-looking approaches for reporting on potential emerging threats to financial stability in annual reports. Such an approach should provide methodological insight into why certain threats to financial stability are included or excluded over time, separate current or past threats from those that are potentially emerging, and prioritize the latter.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  12. Status: Closed - Implemented

    Comments: The 2014 and 2015 annual reports identified member agencies associated with monitoring or implementing certain recommendations, as appropriate. In addition, FSOC's Systemic Risk Committee has assigned responsibility for tracking individual recommendations over the year to specific member agencies of the Council. While the annual report recommendations have not yet included timeframes for specific recommendations, we continue to believe that FSOC should include timeframes going forward, as appropriate.

    Recommendation: To strengthen accountability and collaboration in FSOC's decision making, FSOC should make recommendations in the annual report more specific by identifying which FSOC member agency or agencies, as appropriate, are recommended to monitor or implement such actions within specified time frames.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

 

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