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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

January 2013: 

Financial Regulatory Reform: 

Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act: 

GAO-13-180: 

GAO Highlights: 

Highlights of GAO-13-180, a report to congressional requesters. 

Why GAO Did This Study: 

The 2007-2009 financial crisis threatened the stability of the U.S. 
financial system and the health of the U.S. economy. To address 
regulatory gaps and other problems revealed by the crisis, Congress 
enacted the Dodd-Frank Act. Federal regulators will need to issue 
hundreds of rules to implement the act. Industry representatives, 
academics, and others generally have supported the act’s goal of 
enhancing U.S. financial stability, but implementation of certain of 
the act’s provisions has led to much debate. These experts have 
expressed a wide range of views on the potential positive and negative 
effects that the act could have on the U.S. financial system and 
broader economy. 

GAO was asked to examine the (1) losses associated with the recent 
financial crisis; (2) benefits of the act for the U.S. financial 
system and the broader economy; and (3) costs of the act’s reforms. 
GAO reviewed empirical and other studies on the impacts of financial 
crises and the Dodd-Frank reforms, as well as congressional 
testimonies, comment letters, and other public statements by federal 
regulators, industry representatives, and others. GAO obtained and 
analyzed data on agency resources devoted to the act’s implementation. 
GAO also obtained perspectives from regulators, academics, and 
representatives of industry and public interest groups through 
interviews and an expert roundtable held with the assistance of the 
National Academy of Sciences. GAO provided a draft of this report to 
the financial regulators for review and comment and received technical 
comments, which were incorporated as appropriate. 

What GAO Found: 

The 2007-2009 financial crisis has been associated with large economic 
losses and increased fiscal challenges. Studies estimating the losses 
of financial crises based on lost output (value of goods and services 
not produced) suggest losses associated with the recent crisis could 
range from a few trillion dollars to over $10 trillion. Also 
associated with the crisis were large declines in employment, 
household wealth, and other economic indicators. Some studies suggest 
the crisis could have long-lasting effects: for example, high 
unemployment, if persistent, could lead to skill erosion and lower 
future earnings for those affected. Finally, since the crisis began, 
federal, state, and local governments have faced greater fiscal 
challenges, in part because of reduced tax revenues from lower 
economic activity and increased spending to mitigate the impact of the 
recession. 

While the Dodd-Frank Wall Street Reform and Consumer Protection Act’s 
(Dodd-Frank Act) reforms could enhance the stability of the U.S. 
financial system and provide other benefits, the extent to which such 
benefits materialize will depend on many factors whose effects are 
difficult to predict. According to some academics, industry 
representatives, and others, a number of the act’s provisions could 
help reduce the probability or severity of a future crisis and thereby 
avoid or reduce the associated losses. These include subjecting large, 
complex financial institutions to enhanced prudential supervision, 
authorizing regulators to liquidate a financial firm whose failure 
could pose systemic risk, and regulating certain complex financial 
instruments. In contrast, some experts maintain these measures will 
not help reduce the probability or severity of a future crisis, while 
others note that their effectiveness will depend on how they are 
implemented by regulators, including through their rulemakings, and 
other factors, such as how financial firms respond to the new 
requirements. Quantifying the act’s potential benefits is difficult, 
but several studies have framed potential benefits of certain reforms 
by estimating output losses that could be avoided if the reforms 
lowered the probability of a future crisis. 

Federal agencies and the financial industry are expending resources to 
implement and comply with the Dodd-Frank Act. First, federal agencies 
are devoting resources to fulfill rulemaking and other new regulatory 
responsibilities created by the act. Many of these agencies do not 
receive any congressional appropriations, limiting federal budget 
impacts. Second, the act imposes compliance and other costs on 
financial institutions and restricts their business activities in ways 
that may affect the provision of financial products and services. 
While regulators and others have collected some data on these costs, 
no comprehensive data exist. Some experts stated that many of the act’
s reforms serve to impose costs on financial firms to reduce the risks 
they pose to the financial system. Third, in response to reforms, 
financial institutions may pass increased costs on to their customers. 
For example, banks could charge more for their loans or other 
services, which could reduce economic growth. Although certain costs, 
such as paperwork costs, can be quantified, other costs, such as the act
’s impact on the economy, cannot be easily quantified. Studies have 
estimated the economic impact of certain of the act’s reforms, but 
their results vary widely and depend on key assumptions. Finally, some 
experts expressed concern about the act’s potential unintended 
consequences and their related costs, adding to the challenges of 
assessing the benefits and costs of the act. 

View [hyperlink, http://www.gao.gov/products/GAO-13-180]. For more 
information, contact A. Nicole Clowers at (202) 512-8678 or 
clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

2007-2009 Financial Crisis Was Associated with Large Economic Losses 
and Increases in Government Debt: 

The Dodd-Frank Act May Enhance Financial Stability and Provide Other 
Benefits, with the Extent of the Benefits Depending on a Number of 
Factors: 

Significance of the Act's Costs Is Not Fully Known: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: International Financial Reform Efforts: 

Appendix III: Experts Participating in the GAO Roundtable on the 
Benefits and Costs of the Dodd-Frank Act: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Bibliography: 

Related GAO Products: 

Tables: 

Table 1: Federal Prudential Regulators and Their Basic Functions: 

Table 2: Overview of Income and Losses for Selected Federal Government 
Interventions to Assist the Financial Sector during the 2007-2009 
Financial Crisis: 

Table 3: Summary of 10 Federal Entities' Reported Funding Resources 
Associated with Implementation of the Dodd-Frank Act, 2010 through 
2013: 

Table 4: Summary of 10 Federal Entities' Reported New and Redirected 
Full-Time Equivalents Associated with Implementation of the Dodd-Frank 
Act, 2010 through 2013: 

Table 5: Selected Organizations Engaged in Coordination of 
International Financial Regulatory Reform Efforts: 

Figures: 

Figure 1: U.S. Real Gross Domestic Product in 2005 Dollars and 
Recession Periods, First Quarter 1947 through Third Quarter 2012: 

Figure 2: Examples Illustrating Sensitivity of Output Loss Estimates 
to Key Assumptions: 

Figure 3: National Unemployment Rate and Long-Term Unemployed as a 
Percentage of Labor Force, Seasonally Adjusted, and Recession Periods, 
1948 through November 2012: 

Figure 4: Home Prices and Recession Periods, January 1976 through June 
2011: 

Figure 5: Value of Home Equity and Aggregate Mortgage Debt and 
Recession Periods, 1945 through 2011: 

Figure 6: Aggregate Value of Corporate Equities Held in Retirement 
Funds, December 31, 2000, through December 31, 2011: 

Figure 7: Percentage of Loans in Default 90 Days or More or in 
Foreclosure and Recession Periods, March 1979 through September 2012: 

Figure 8: Overview of Clearing, Trading, and Reporting Requirements 
under Swaps Reforms: 

Abbreviations: 

AIG: American International Group, Inc. 

BCBS: Basel Committee on Banking Supervision: 

BIS: Bank for International Settlements: 

BLS: Bureau of Labor Statistics: 

CBO: Congressional Budget Office: 

CCP: central counterparty: 

CDS: credit default swaps: 

CFTC: Commodity Futures Trading Commission: 

CFPB: Bureau of Consumer Financial Protection: 

CPP: Capital Purchase Program: 

CPSS: Committee on Payment and Settlement Systems: 

DGP: Debt Guarantee Program: 

FDIC: Federal Deposit Insurance Corporation: 

FHFA: Federal Housing Finance Agency: 

FHFB: Federal Housing Finance Board: 

FRBNY: Federal Reserve Bank of New York: 

FSB: Financial Stability Board: 

FSOC: Financial Stability Oversight Council: 

FTE: full-time equivalent: 

GDP: gross domestic product: 

GSE: government-sponsored enterprise: 

HERA: Housing and Economic Recovery Act of 2008: 

HUD: Department of Housing and Urban Development: 

IAIS: International Association of Insurance Supervisors: 

IMF: International Monetary Fund: 

IOSCO: International Organization of Securities Commissions: 

MMMF: money market mutual fund: 

NAS: National Academy of Sciences: 

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

OFHEO: Office of Federal Housing Enterprise Oversight: 

OLA: orderly liquidation authority: 

OTC: over-the-counter: 

OTS: Office of Thrift Supervision: 

OFR: Office of Financial Research: 

QM: qualified mortgage: 

QRM: qualified residential mortgage: 

SEC: Securities and Exchange Commission: 

SEF: swap execution facility: 

SCAP: Supervisory Capital Assessment Program: 

S&L: savings and loan: 

SIFI: systemically important financial institutions: 

TAGP: Transaction Account Guarantee Program: 

TLGP: Temporary Liquidity Guarantee Program: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

January 16, 2013: 

The Honorable Tim Johnson:
Chairman:
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Michael E. Capuano:
Ranking Member:
Subcommittee on Oversight and Investigations: 
Committee on Financial Services:
House of Representatives: 

The 2007-2009 financial crisis threatened the stability of the U.S. 
financial system--composed of financial institutions, markets, and 
infrastructure--and the health of the U.S. economy.[Footnote 1] At the 
peak of the crisis, the federal government introduced unprecedented 
support for financial markets, providing hundreds of billions of 
dollars of capital and over a trillion dollars of emergency loans to 
financial institutions. Many households suffered as a result of 
falling asset prices, tightening credit, and increasing unemployment. 
While many factors likely contributed to the crisis and the relative 
role of these factors is subject to debate, gaps and weaknesses in the 
supervision and regulation of the U.S. financial system generally 
played an important role.[Footnote 2] To address such shortcomings, 
Congress enacted the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act).[Footnote 3] As summarized on the 
Senate Banking Committee's website, the act seeks to (1) address risks 
to the stability of the U.S. financial system, in part through the 
creation of the Financial Stability Oversight Council (FSOC), (2) end 
too-big-to-fail bailouts of large, complex financial institutions, (3) 
increase transparency and regulation for certain complex financial 
instruments, and (4) strengthen protections for consumers and 
investors.[Footnote 4] 

Federal financial regulators and other agencies are continuing to make 
progress in implementing the Dodd-Frank Act's numerous provisions, 
which may require hundreds of rulemakings. While the financial 
services industry, academics, and others generally have supported the 
Dodd-Frank Act's goal of enhancing the stability of the U.S. financial 
system, the act's implementation has not been free of controversy or 
debate. For example, a consensus exists neither on the extent to which 
the act will help to reduce the likelihood and severity of future 
financial crises nor on the magnitude of the costs that the act, 
generally, and its regulations, specifically, will impose on U.S. 
financial institutions and the U.S. economy. The Dodd-Frank Act has 
not yet been fully implemented; thus, its impacts have not fully 
materialized. Nonetheless, analyses of the potential and actual 
impacts can help inform policymakers about the ongoing implementation 
of the act's reforms. 

As requested, the objectives of this report are to describe what is 
known about: 

* the losses and related economic impacts associated with the 2007-
2009 financial crisis; 

* the benefits of the Dodd-Frank Act, particularly its key financial 
stability provisions, for the U.S. financial system and broader 
economy; and: 

* the costs associated with the act, particularly its key financial 
stability provisions. 

To address our objectives, we reviewed and analyzed academic and other 
studies that assess the economic impacts of financial crises or 
financial regulatory reforms, including the Dodd-Frank Act. We 
reviewed the methodological approaches of selected studies and 
determined that they were sufficient for our purposes. However, the 
results should not necessarily be considered as definitive, given the 
methodological or data limitations contained in the studies 
individually and collectively. To show changes in economic indicators 
following the start of the financial crisis, we obtained and analyzed 
data from the Bureau of Economic Analysis, Bureau of Labor Statistics, 
National Bureau of Economic Research, and other sources. We obtained 
and summarized data on the incremental budgetary costs associated with 
the act's implementation for 10 federal entities: the Board of 
Governors of the Federal Reserve System (Federal Reserve); Commodity 
Futures Trading Commission (CFTC); Federal Deposit Insurance 
Corporation (FDIC); Federal Housing Finance Agency (FHFA); Office of 
the Comptroller of the Currency (OCC); Securities and Exchange 
Commission (SEC); Department of the Treasury (Treasury); Bureau of 
Consumer Financial Protection, commonly known as the Consumer 
Financial Protection Bureau (CFPB); FSOC; and the Office of Financial 
Research (OFR). For parts of our methodology that involved the 
analysis of computer-processed data, we assessed the reliability of 
these data and determined that they were sufficiently reliable for our 
purposes. Through interviews and an expert roundtable we held with the 
assistance of the National Academy of Sciences, we obtained 
perspectives from academics; current and former federal financial 
regulators; representatives of industry, public interest, and investor 
groups; and other experts on the potential benefits and costs of the 
act's reforms. In addition, we reviewed relevant reports and public 
statements by these groups as well as Dodd-Frank Act rules and comment 
letters. Finally, we reviewed prior GAO work on the fiscal outlook for 
federal, state, and local governments and on financial regulatory 
reform. Appendix I contains additional information on our scope and 
methodology. 

We conducted this performance audit from November 2011 to January 2013 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

U.S. Financial Regulatory Framework: 

The financial regulatory framework in the United States was built over 
more than a century, largely in response to crises and significant 
market developments. As a result, the regulatory system is complex and 
fragmented.[Footnote 5] While the Dodd-Frank Act has brought 
additional changes, including the creation of new regulatory entities 
and the consolidation of some regulatory responsibilities that had 
been shared by multiple agencies, the U.S. financial regulatory 
structure largely remains the same. It is a complex system of multiple 
federal and state regulators, as well as self-regulatory 
organizations, that operates largely along functional lines. The U.S. 
regulatory system is described as "functional" in that financial 
products or activities are generally regulated according to their 
function, no matter who offers the product or participates in the 
activity. 

Banking Regulators: 

In the banking industry, the specific regulatory configuration depends 
on the type of charter the banking institution chooses. Depository 
institution charter types include: 

* commercial banks, which originally focused on the banking needs of 
businesses but over time have broadened their services; 

* thrifts, which include savings banks, savings associations, and 
savings and loans and were originally created to serve the needs--
particularly the mortgage needs--of those not served by commercial 
banks; and: 

* credit unions, which are member-owned cooperatives run by member-
elected boards with an historical emphasis on serving people of modest 
means. 

These charters may be obtained at the state or federal level. State 
regulators charter institutions and participate in their oversight, 
but all institutions that have federal deposit insurance have a 
federal prudential regulator. The federal prudential regulators--which 
generally may issue regulations and take enforcement actions against 
industry participants within their jurisdiction--are identified in 
table 1. The act eliminated the Office of Thrift Supervision (OTS) and 
transferred its regulatory responsibilities to OCC, the Federal 
Reserve, and FDIC.[Footnote 6] To achieve their safety and soundness 
goals, bank regulators establish capital requirements, conduct onsite 
examinations and off-site monitoring to assess a bank's financial 
condition, and monitor compliance with banking laws. Regulators also 
issue regulations, take enforcement actions, and close banks they 
determine to be insolvent. 

Table 1: Federal Prudential Regulators and Their Basic Functions: 

Agency: Office of the Comptroller of the Currency; 
Basic function: Charters and supervises national banks and federal 
thrifts. 

Agency: Board of Governors of the Federal Reserve System; 
Basic function: Supervises state-chartered banks that opt to be 
members of the Federal Reserve System, bank holding companies, thrift 
holding companies and the nondepository institution subsidiaries of 
those institutions, and nonbank financial companies designated by the 
Financial Stability Oversight Council. 

Agency: Federal Deposit Insurance Corporation; 
Basic function: Supervises FDIC-insured state-chartered banks that are 
not members of the Federal Reserve System, as well as federally 
insured state savings banks and thrifts; insures the deposits of all 
banks and thrifts that are approved for federal deposit insurance; and 
resolves all failed insured banks and thrifts and has been given the 
authority to resolve large bank holding companies and nonbank 
financial companies that are subject to supervision by the Board of 
Governors of the Federal Reserve System. 

Agency: National Credit Union Administration; 
Basic function: Charters and supervises federally chartered credit 
unions and insures savings in federal and most state-chartered credit 
unions. 

Sources: OCC, Federal Reserve Board, FDIC, and NCUA. 

[End of table] 

Holding companies that own or control a bank or thrift are subject to 
supervision by the Federal Reserve. The Bank Holding Company Act of 
1956 and the Home Owners' Loan Act set forth the regulatory frameworks 
for bank holding companies and savings and loan (S&L) holding 
companies, respectively.[Footnote 7] Before the Dodd-Frank Act, S&L 
holding companies had been subject to supervision by OTS and a 
different set of regulatory requirements from those of bank holding 
companies. The Dodd-Frank Act made the Federal Reserve the regulator 
of S&L holding companies and amended the Home Owners' Loan Act and the 
Bank Holding Company Act to create certain similar requirements for 
both bank holding companies and S&L holding companies.[Footnote 8] The 
Dodd-Frank Act also grants new authorities to FSOC to designate 
nonbank financial companies for supervision by the Federal Reserve. 

Securities and Futures Regulators: 

The securities and futures markets are regulated under a combination 
of self-regulation (subject to oversight by the appropriate federal 
regulator) and direct oversight by SEC and CFTC, respectively. 
[Footnote 9] SEC regulates the securities markets, including 
participants such as securities exchanges, broker-dealers, investment 
companies, and investment advisers. SEC's mission is to protect 
investors; maintain fair, orderly, and efficient markets; and 
facilitate capital formation. In the securities industry, certain self-
regulatory organizations--including the securities exchanges and the 
Financial Industry Regulatory Authority--have responsibility for 
overseeing the securities markets and their members; establishing the 
standards under which their members conduct business; monitoring 
business conduct; and bringing disciplinary actions against members 
for violating applicable federal statutes, SEC's rules, and their own 
rules. 

CFTC is the primary regulator of futures markets, including futures 
exchanges and intermediaries, such as futures commission merchants. 
[Footnote 10] CFTC's mission is to protect market users and the public 
from fraud, manipulation, abusive practices, and systemic risk related 
to derivatives that are subject to the Commodity Exchange Act, and to 
foster open, competitive, and financially sound futures markets. Like 
SEC, CFTC oversees the registration of intermediaries and relies on 
self-regulatory organizations, including the futures exchanges and the 
National Futures Association, to establish and enforce rules governing 
member behavior. In addition, Title VII of the Dodd-Frank Act expands 
regulatory responsibilities for CFTC and SEC by establishing a new 
regulatory framework for swaps. The act authorizes CFTC to regulate 
"swaps" and SEC to regulate "security-based swaps" with the goals of 
reducing risk, increasing transparency, and promoting market integrity 
in the financial system.[Footnote 11] 

Consumer Financial Protection Bureau: 

The Dodd-Frank Act established CFPB as an independent bureau within 
the Federal Reserve System and provided it with rule-making, 
enforcement, supervisory, and other powers over many consumer 
financial products and services and many of the entities that sell 
them.[Footnote 12] Certain consumer financial protection functions 
from seven existing federal agencies were transferred to CFPB. 
[Footnote 13] Consumer financial products and services over which CFPB 
has primary authority include deposit taking, mortgages, credit cards 
and other extensions of credit, loan servicing, debt collection, and 
others. CFPB is authorized to supervise certain nonbank financial 
companies and large banks and credit unions with over $10 billion in 
assets and their affiliates for consumer protection purposes. CFPB 
does not have authority over most insurance activities or most 
activities conducted by firms regulated by SEC or CFTC. 

Federal Housing Finance Agency: 

The Housing and Economic Recovery Act of 2008 (HERA) created FHFA to 
oversee the government-sponsored enterprises (GSE): Fannie Mae, 
Freddie Mac, and the Federal Home Loan Banks.[Footnote 14] Fannie Mae 
and Freddie Mac were created by Congress as private, federally 
chartered companies to provide, among other things, liquidity to home 
mortgage markets by purchasing mortgage loans, thus enabling lenders 
to make additional loans. The system of 12 Federal Home Loan Banks 
provides funding to support housing finance and economic development. 
Until enactment of HERA, Fannie Mae and Freddie Mac had been overseen 
since 1992 by the Office of Federal Housing Enterprise Oversight 
(OFHEO), an agency within the Department of Housing and Urban 
Development (HUD), and the Federal Home Loan Banks were subject to 
supervision by the Federal Housing Finance Board (FHFB), an 
independent regulatory agency.[Footnote 15] In July 2008, HERA created 
FHFA to establish more effective and more consistent oversight of the 
three housing GSEs.[Footnote 16] Given their precarious financial 
condition, Fannie Mae and Freddie Mac were placed in conservatorship 
in September 2008, with FHFA serving as the conservator under powers 
provided in HERA. 

Federal Insurance Office: 

While insurance activities are primarily regulated at the state level, 
the Dodd-Frank Act created the Federal Insurance Office within 
Treasury to monitor issues related to regulation of the insurance 
industry.[Footnote 17] The Federal Insurance Office is not a regulator 
or supervisor, and its responsibilities include identifying issues or 
gaps in the regulation of insurers that could contribute to a systemic 
crisis in the insurance industry or the U.S. financial system. 

Financial Stability Oversight Council and Office of Financial Research: 

The Dodd-Frank Act established FSOC to identify risks to the financial 
stability of the United States, promote market discipline, and respond 
to emerging threats to the stability of the U.S. financial system. The 
Dodd-Frank Act also established OFR within Treasury to serve FSOC and 
its member agencies by improving the quality, transparency, and 
accessibility of financial data and information; conducting and 
sponsoring research related to financial stability; and promoting best 
practices in risk management.[Footnote 18] 

FSOC's membership consists of the Secretary of the Treasury, who 
chairs the council, and the heads of CFPB, CFTC, FDIC, the Federal 
Reserve, FHFA, the National Credit Union Administration, OCC, SEC, the 
directors of OFR and the Federal Insurance Office, representatives 
from state-level financial regulators, and an independent member with 
insurance experience. 

Financial Crises: 

There is no universally accepted definition of a financial crisis. 
Some academic studies identify three major types of financial crises: 
banking crises, public debt crises, and currency crises.[Footnote 19] 
The most recent financial crisis in the United States is widely 
considered to have been a banking crisis. While researchers have 
defined banking crises in different ways, their definitions generally 
focus on indicators of severe stress on the financial system, such as 
runs on financial institutions or large-scale government assistance to 
the financial sector. The large increases in public debt that tend to 
follow the onset of a banking crisis can make a country more 
susceptible to a public debt crisis. 

Studies reviewing historical banking crises in the United States and 
other countries found that such crises were associated with large 
losses in output (the value of goods and services produced in the 
economy) and employment that can persist for years. A disruption to 
the financial system can have a ripple effect through the economy, 
harming the broader economy through several channels. For example, 
some studies identify ways that strains in the financial system can 
negatively impact the cost and availability of credit and, in turn, 
reduce total output.[Footnote 20] During the recent crisis, certain 
securitization markets collapsed and households and businesses faced 
tightened credit conditions. Higher funding costs for firms in the 
form of higher interest rates and lower equity prices can contribute 
to declines in investment. Furthermore, as asset prices fall, declines 
in the wealth and confidence of consumers, businesses, and investors 
also can contribute to output declines. Historically, governments have 
provided substantial assistance to financial institutions during 
banking crises to avert more severe disruptions to the key functions 
performed by the financial system. 

The causes of the 2007-2009 crisis are complex and remain subject to 
debate and ongoing research. According to many researchers, around mid-
2007, losses in the mortgage market triggered a reassessment of 
financial risk in other debt instruments and sparked the financial 
crisis. Uncertainty about the financial condition and solvency of 
financial entities resulted in a liquidity and credit crunch that made 
the financing on which many businesses and individuals depend 
increasingly difficult to obtain.[Footnote 21] By late summer of 2008, 
the ramifications of the financial crisis ranged from the failure of 
financial institutions to increased losses of individual savings and 
corporate investments. 

Academics and others have identified a number of factors that may have 
helped set the stage for problems in the mortgage market and the 
broader financial system. These factors, in no particular order, 
include: 

* financial innovation in the form of asset securitization, which 
reduced mortgage originators' incentives to be prudent in underwriting 
loans and made it difficult to understand the size and distribution of 
loss exposures throughout the system; 

* imprudent business and risk management decisions based on the 
expectation of continued housing price appreciation; 

* faulty assumptions in the models used by credit rating agencies to 
rate mortgage-related securities; 

* gaps and weaknesses in regulatory oversight, which allowed financial 
institutions to take excessive risks by exploiting loopholes in 
capital rules and funding themselves increasingly with short-term 
liabilities; 

* government policies to increase homeownership, including the role of 
Fannie Mae and Freddie Mac in supporting lending to higher-risk 
borrowers; and: 

* economic conditions, characterized by accommodative monetary 
policies, ample liquidity and availability of credit, and low interest 
rates that spurred housing investment. 

The United States periodically has experienced banking crises of 
varying severity. The financial crisis that began in 2007 was the most 
severe banking crisis experienced by the United States since the 
1930s. While this most recent financial crisis may have had some new 
elements--such as the role of asset securitization in spreading risks 
across the financial system--studies have found that it followed 
patterns common to past crises in the United States and other 
countries. For example, experts have noted that the recent crisis, 
like many past crises, was preceded by an asset price boom that was 
accompanied by an excessive buildup in leverage.[Footnote 22] Another 
common pattern between the recent and past crises has been the buildup 
of risks and leverage in unregulated or less regulated financial 
institutions. While academic studies have used different criteria to 
identify and date banking crises, studies we reviewed identify the 
following episodes as U.S. banking crises since the Civil War: the 
banking panics of 1873, 1893, 1907, and the 1930s; the Savings and 
Loan Crisis that began in the1980s; and the 2007-2009 crisis. The 
studies do not consider the stock market crash of 1987 or the bursting 
of the technology bubble during 2000-2001 to be banking crises, 
because neither placed severe strains on the financial system that 
threatened the economy. 

2007-2009 Financial Crisis Was Associated with Large Economic Losses 
and Increases in Government Debt: 

Several studies measure the overall economic costs associated with 
past financial crises based on the decline in economic output (the 
value of goods and services produced in the economy) relative to some 
benchmark, such as the long-term trend in output. While using a 
variety of methods to quantify these output losses, the studies 
generally have found the losses from past financial crises to be very 
large. Some of these studies also analyze changes in unemployment, 
household wealth, and other economic indicators to show the effects of 
the crises at a more granular level. In addition, some studies use 
measures of fiscal costs--such as increases in government debt--to 
analyze the losses associated with financial crises. In the following 
section, we review what is known about the losses associated with the 
recent financial crisis based on these measures. 

Studies Generally Find That the Recent Crisis Was Associated with 
Large Losses in Economic Output, but Estimates of Such Losses Vary and 
Depend on Several Assumptions: 

The 2007-2009 financial crisis, like past financial crises, was 
associated with not only a steep decline in output but also the most 
severe economic downturn since the Great Depression of the 1930s (see 
figure 1). According to a study, in the aftermath of past U.S. and 
foreign financial crises, output falls (from peak to trough) an 
average of over 9 percent and the associated recession lasts about 2 
years on average.[Footnote 23] The length and severity of this 
economic downturn was roughly consistent with the experience of past 
financial crises. The U.S. economy entered a recession in December 
2007, a few months after the start of the financial crisis.[Footnote 
24] Between December 2007 and the end of the recession in June 2009, 
U.S. real gross domestic product (GDP) fell from $13.3 trillion to 
$12.7 trillion (in 2005 dollars), or by nearly 5 percent. As shown in 
figure 1, real GDP did not regain its pre-recession level until the 
third quarter of 2011. 

Figure 1: U.S. Real Gross Domestic Product in 2005 Dollars and 
Recession Periods, First Quarter 1947 through Third Quarter 2012: 

[Refer to PDF for image: line graph] 

GDP in billions of chained 2005 dollars: 

11 period of recession are indicated on the graph] 

Year: 1947; 
GDP: $1.771 billion. 

Year: 1948; [Period of Recession] 
GDP: $1.822 billion. 

Year: 1949; [Period of recession] 
GDP: $1.842 billion. 

Year: 1950; 
GDP: $1.913 billion. 

Year: 1951; 
GDP: $2.111 billion. 

Year: 1952; 
GDP: $2.214 billion. 

Year: 1953; [Period of recession] 
GDP: $2.348 billion. 

Year: 1954; [Period of Recession] 
GDP: $2.304 billion. 

Year: 1955; 
GDP: $2.448 billion. 

Year: 1956; 
GDP: $2.524 billion. 

Year: 1957; [Period of Recession] 
GDP: $2.598 billion. 

Year: 1958; [Period of recession] 
GDP: $2.519 billion. 

Year: 1959; 
GDP: $2.708 billion. 

Year: 1960; [Period of Recession] 
GDP: $2.845 billion. 

Year: 1961; [Period of recession] 
GDP: $2.817 billion. 

Year: 1962; 
GDP: $3.029 billion. 

Year: 1963; 
GDP: $3.138 billion. 

Year: 1964; 
GDP: $3.335 billion. 

Year: 1965; 
GDP: $3.513 billion. 

Year: 1966; 
GDP: $3.812 billion. 

Year: 1967; 
GDP: $3.915 billion. 

Year: 1968; 
GDP: $4.06 billion. 

Year: 1969; 
GDP: $4.241 billion. 

Year: 1970; [Period of recession] 
GDP: $4.253 billion. 

Year: 1971; 
GDP: $4.37 billion. 

Year: 1972; 
GDP: $4.522 billion. 

Year: 1973; 
GDP: $4.872 billion. 

Year: 1974; [Period of recession] 
GDP: $4.905 billion. 

Year: 1975; [Period of Recession] 
GDP: $4.791 billion. 

Year: 1976; 
GDP: $5.086 billion. 

Year: 1977; 
GDP: $5.247 billion. 

Year: 1978; 
GDP: $5.465 billion. 

Year: 1979; 
GDP: $5.821 billion. 

Year: 1980; [Period of recession] 
GDP: $5.903 billion. 

Year: 1981; 
GDP: $6.001 billion. 

Year: 1982; [Period of recession] 
GDP: $5.852 billion. 

Year: 1983; 
GDP: $5.939 billion. 

Year: 1984; 
GDP: $6.443 billion. 

Year: 1985; 
GDP: $6.735 billion. 

Year: 1986; 
GDP: $7.017 billion. 

Year: 1987; 
GDP: $7.187 billion. 

Year: 1988; 
GDP: $7.49 billion. 

Year: 1989; 
GDP: $7.8 billion. 

Year: 1990; 
GDP: $8.021 billion. 

Year: 1991; [Period of recession] 
GDP: $7.943 billion. 

Year: 1992; 
GDP: $8.151 billion. 

Year: 1993; 
GDP: $8.425 billion. 

Year: 1994; 
GDP: $8.721 billion. 

Year: 1995; 
GDP: $9.018 billion. 

Year: 1996; 
GDP: $9.239 billion. 

Year: 1997; 
GDP: $9.658 billion. 

Year: 1998; 
GDP: $10.095 billion. 

Year: 1999; 
GDP: $10.592 billion. 

Year: 2000; 
GDP: $11.034 billion. 

Year: 2001; [Period of recession] 
GDP: $11.288 billion. 

Year: 2002; 
GDP: $11.467 billion. 

Year: 2003; 
GDP: $11.639 billion. 

Year: 2004; 
GDP: $12.118 billion. 

Year: 2005; 
GDP: $12.515 billion. 

Year: 2006; 
GDP: $12.896 billion. 

Year: 2007; 
GDP: $13.056 billion. 

Year: 2008; [Period of recession] 
GDP: $13.267 billion. 

Year: 2009; [Period of recession] 
GDP: $12.711 billion. 

Year: 2010; 
GDP: $12.948 billion. 

Year: 2011; 
GDP: $13.184 billion. 

Year: 2012; 
GDP: $13.506 billion. 

Source: GAO analysis of Bureau of Economic Analysis and National 
Bureau of Economic Research data. 

[End of figure] 

Although the decline in the U.S. economy's real GDP during the 
recession may reflect some of the losses associated with the 2007-2009 
financial crisis, the decline does not capture the cumulative losses 
from the crisis. To quantify the overall losses associated with past 
financial crises, researchers have estimated output losses as the 
cumulative shortfall between actual GDP and estimates of what GDP 
would have been if the crisis had not occurred. Measuring the 
shortfall in GDP in the aftermath of a crisis requires making a number 
of assumptions, and the measurement will vary depending on what 
assumptions are used. Figure 2 provides two examples to show how 
estimates of output losses vary depending on the assumptions used. The 
output shortfall is shown in the shaded areas of the two examples, 
with the output shortfall larger in example 2 than in example 1. 
Important assumptions include the following: 

* Start date of the crisis: The first assumption involves selecting 
the date when the crisis began. The start date is shown as the 
vertical line in examples 1 and 2 and is assumed to be the same. 
However, researchers have used different assumptions to select the 
start date of the 2007-2009 financial crisis.[Footnote 25] 

* The path real GDP would have followed if the crisis had not 
occurred: The second assumption involves estimating the counterfactual 
for the path of GDP--that is, the path that real GDP would have 
followed in the absence of a crisis.[Footnote 26] This counterfactual 
is not observable. Studies have used different assumptions to estimate 
this path and one approach is to assume that this path would follow a 
precrisis trend in real GDP growth. For example, one study estimated 
trend output paths based on average GDP growth for the three years and 
ten years before the crisis. In figure 2, example 1 assumes a much 
lower (or less steep) trend rate of GDP growth than example 2. 
Assuming a higher growth trend results in a larger estimate of output 
losses. 

* Projections of actual GDP: The third assumption involves determining 
when GDP regained or will regain its estimated precrisis trend path. 
With respect to the recent crisis, some studies find that real GDP 
remains below the estimated precrisis trend. Researchers reach 
different conclusions about when or whether GDP will regain its long-
term trend from before the crisis. Assumptions about the path of 
actual GDP and how it compares to the potential trend path can reflect 
different views on whether the output losses from the crisis are 
temporary or permanent. In contrast to example 1, where the economy 
regains its precrisis growth rate and level of output, example 2 
assumes the economy regains its precrisis rate of output growth but 
remains permanently below the level of output projected by 
extrapolating the precrisis growth trend. As a result, output losses 
in example 2 extend farther into the future and are considerably 
larger than in example 1. Some studies describe reasons why financial 
crises could be associated with permanent output losses. For example, 
sharp declines in investment during and following the crisis could 
result in lower capital accumulation in the long-term. In addition, 
persistent high unemployment could substantially erode the skills of 
many U.S. workers and reduce the productive capacity of the U.S. 
economy. 

Figure 2: Examples Illustrating Sensitivity of Output Loss Estimates 
to Key Assumptions: 

[Refer to PDF for image: 2 illustrated line graphs] 

Example 1: low-growth trend; GDP regains precrisis trend level). 

Graph plots GDP versus time and depicts the following: 
Low-growth trend; 
Crisis; 
GDP growth rate = precrisis GDP trend growth rate; 
Output losses (shaded in grey); 
GDP returns to precrisis trend levels. 

Example 2: high-growth trend; GDP does not regain precrisis trend 
level). 

Graph plots GDP versus time and depicts the following: 
High-growth trend; 
Crisis; 
GDP growth rate = precrisis GDP trend growth rate; 
Output losses (shaded in grey); 
Post-crisis trend. 

Source: GAO presentation of figure from Basel Committee on Banking 
Supervision, An Assessment of Long-Term Economic Impact of Stronger 
Capital and Liquidity Requirements (Basel, Switzerland; August 2010). 

Note: Example 2 assumes a higher trend rate of GDP growth than Example 
1, resulting in a higher estimate of output losses (shown as the 
region shaded in grey). In example 1, GDP catches up with its 
precrisis path, while in example 2 GDP remains on a permanently lower 
path, albeit one with the same growth rate as that prevailing before 
the crisis. 

[End of figure] 

Research suggests that U.S. output losses associated with the 2007-
2009 financial crisis could range from several trillion to over $10 
trillion. In January 2012, the Congressional Budget Office (CBO) 
estimated that the cumulative difference between actual GDP and 
estimated potential GDP following the crisis would amount to $5.7 
trillion by 2018.[Footnote 27] CBO defined potential output as the 
output level that corresponds to a high rate of use of labor and 
capital. CBO reported that recessions following financial crises, like 
the most recent crisis, tend to reduce not only output below what it 
otherwise would have been but also the economy's potential to produce 
output, even after all resources are productively employed. In its 
estimate, CBO assumed that GDP would recover to its potential level by 
2018, noting that it does not attempt to predict business cycle 
fluctuations so far into the future. Other studies have reported a 
wide range of estimates for the output losses associated with past 
financial crises, with some suggesting that output losses from the 
recent crisis could persist beyond 2018 or be permanent. In an August 
2010 study, a working group of the Basel Committee on Banking 
Supervision reviewed the literature estimating output losses.[Footnote 
28] According to the Basel Committee working group's review, studies 
calculating long-term output losses relative to a benchmark (such as 
an estimated trend in the level of GDP) estimated much larger losses 
than studies calculating output losses over a shorter time period. In 
a June 2012 working paper, International Monetary Fund (IMF) 
economists estimated the cumulative percentage difference between 
actual and trend real GDP for the 4 years following the start of 
individual banking crises in many countries.[Footnote 29] They found a 
median output loss of 23 percent of trend-level GDP for a historical 
set of banking crises and a loss of 31 percent for the 2007-2009 U.S. 
banking crisis. Other researchers who assume more persistent or 
permanent output losses from past financial crises estimate much 
larger output losses from these crises, potentially in excess of 100 
percent of precrisis GDP.[Footnote 30] While such findings were based 
on crisis events before 2007, if losses from the 2007-2009 crisis were 
to reach similar levels, the present value of cumulative output losses 
could exceed $13 trillion. 

Studies that estimate output losses can be useful in showing the rough 
magnitude of the overall costs associated with the 2007-2009 financial 
crisis, but their results have limitations. Importantly, real GDP is 
an imperfect proxy of overall social welfare. As discussed below, real 
GDP measures do not reveal the distributional impacts of the crisis, 
and the costs associated with a financial crisis can fall 
disproportionately on certain populations. In addition, it is 
difficult to separate out the economic costs attributable to the 
crisis from the costs attributable to other factors, such as federal 
government policy decisions before, during, and after the crisis. 

2007-2009 Crisis Was Also Associated with Large Declines in 
Employment, Household Wealth, and Other Economic Indicators: 

While studies often use output losses to measure the overall costs 
associated with financial crises, many researchers also discuss trends 
in unemployment, household wealth, and other economic indicators, such 
as the number of foreclosures, to provide a more granular picture of 
the effects of financial crises. As with trends in output losses, it 
is not possible to determine how much of the changes in these measures 
can be attributed to the financial crisis rather than to other 
factors. For example, analyzing the peak-to-trough changes in certain 
measures, such as home prices, can overstate the impacts associated 
with the crisis, as valuations before the crisis may have been 
inflated and unsustainable. The effects of the financial crisis have 
been wide-ranging, and we are not attempting to provide a 
comprehensive review of all components of the economic harm. Rather, 
the following highlights some of the most common types of measures 
used by academics and other researchers. 

Unemployment: 

As shown in figure 3, the unemployment rate rose substantially 
following the onset of the financial crisis and then declined, but it 
remains above the historical average as of November 2012. The monthly 
unemployment rate peaked at around 10 percent in October 2009 and 
remained above 8 percent for over 3 years, making this the longest 
stretch of unemployment above 8 percent in the United States since the 
Great Depression.[Footnote 31] The monthly long-term unemployment rate-
-measured as the share of the unemployed who have been looking for 
work for more than 27 weeks--increased above 40 percent in December 
2009 and remained above 40 percent as of November 2012. 

Figure 3: National Unemployment Rate and Long-Term Unemployed as a 
Percentage of Labor Force, Seasonally Adjusted, and Recession Periods, 
1948 through November 2012: 

[Refer to PDF for image: multiple line graph] 

Long-term Unemployment Rate: expressed as percentage of Labor 
Force.   

Year: 1948; [Period of Recession] 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 3.2%. 

Year: 1949; [Period of recession] 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 4.1%. 

Year: 1950; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 5.9%. 

Year: 1951; 
Long-term Unemployment Rate: 0.3%; 
Unemployment Rate: 3.4%. 

Year: 1952; 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 3%. 

Year: 1953; [Period of recession] 
Long-term Unemployment Rate: 0.1%; 
Unemployment Rate: 2.8%. 

Year: 1954; [Period of Recession] 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 4.7%. 

Year: 1955; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 4.2%. 

Year: 1956; 
Long-term Unemployment Rate: 0.4%; 
Unemployment Rate: 3.6%. 

Year: 1957; [Period of Recession] 
Long-term Unemployment Rate: 0.3%; 
Unemployment Rate: 3.9%. 

Year: 1958; [Period of recession] 
Long-term Unemployment Rate: 0.4%; 
Unemployment Rate: 5.4%. 

Year: 1959; 
Long-term Unemployment Rate: 1.2%; 
Unemployment Rate: 4.8%. 

Year: 1960; [Period of Recession] 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 4.5%. 

Year: 1961; [Period of recession] 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 5.7%. 

Year: 1962; 
Long-term Unemployment Rate: 1%; 
Unemployment Rate: 4.8%. 

Year: 1963; 
Long-term Unemployment Rate: 0.8%; 
Unemployment Rate: 4.9%. 

Year: 1964; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 4.9%. 

Year: 1965; 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 4.4%. 

Year: 1966; 
Long-term Unemployment Rate: 0.4%; 
Unemployment Rate: 3.6%. 

Year: 1967; 
Long-term Unemployment Rate: 0.3%; 
Unemployment Rate: 3.6%. 

Year: 1968; 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 3.5%. 

Year: 1969; 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 3.2%. 

Year: 1970; [Period of recession] 
Long-term Unemployment Rate: 0.2%; 
Unemployment Rate: 3.7%. 

Year: 1971; 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 5.4%. 

Year: 1972; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 5.1%. 

Year: 1973; [Period of Recession] 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 4.4%. 

Year: 1974; [Period of recession] 
Long-term Unemployment Rate: 0.4%; 
Unemployment Rate: 4.7%. 

Year: 1975; [Period of Recession] 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 7.4%. 

Year: 1976; 
Long-term Unemployment Rate: 1.6%; 
Unemployment Rate: 6.3%. 

Year: 1977; 
Long-term Unemployment Rate: 1.2%; 
Unemployment Rate: 6.3%. 

Year: 1978; 
Long-term Unemployment Rate: 0.8%; 
Unemployment Rate: 5.6%. 

Year: 1979; 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 5.4%. 

Year: 1980; [Period of recession] 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 5.8%. 

Year: 1981; [Period of Recession] 
Long-term Unemployment Rate: 1.2%; 
Unemployment Rate: 6.3%. 

Year: 1982; [Period of recession] 
Long-term Unemployment Rate: 1.1%; 
Unemployment Rate: 7.5%. 

Year: 1983; 
Long-term Unemployment Rate: 2.4%; 
Unemployment Rate: 8%. 

Year: 1984; 
Long-term Unemployment Rate: 1.8%; 
Unemployment Rate: 6.2%. 

Year: 1985; 
Long-term Unemployment Rate: 1.1%; 
Unemployment Rate: 6.2%. 

Year: 1986; 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 5.8%. 

Year: 1987; 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 5.7%. 

Year: 1988; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 5%. 

Year: 1989; 
Long-term Unemployment Rate: 0.6%; 
Unemployment Rate: 4.8%. 

Year: 1990; [Period of Recession] 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 4.9%. 

Year: 1991; [Period of recession] 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 5.7%. 

Year: 1992; 
Long-term Unemployment Rate: 1.3%; 
Unemployment Rate: 6%. 

Year: 1993; 
Long-term Unemployment Rate: 1.5%; 
Unemployment Rate: 5.8%. 

Year: 1994; 
Long-term Unemployment Rate: 1.3%; 
Unemployment Rate: 5.3%. 

Year: 1995; 
Long-term Unemployment Rate: 1%; 
Unemployment Rate: 4.6%. 

Year: 1996; 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 4.7%. 

Year: 1997; 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 4.4%. 

Year: 1998; 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 3.9%. 

Year: 1999; 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 3.8%. 

Year: 2000; 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 3.5%. 

Year: 2001; [Period of recession] 
Long-term Unemployment Rate: 0.5%; 
Unemployment Rate: 3.7%. 

Year: 2002; 
Long-term Unemployment Rate: 0.8%; 
Unemployment Rate: 4.9%. 

Year: 2003; 
Long-term Unemployment Rate: 1.2%; 
Unemployment Rate: 4.6%. 

Year: 2004; 
Long-term Unemployment Rate: 1.3%; 
Unemployment Rate: 4.4%. 

Year: 2005; 
Long-term Unemployment Rate: 1.1%; 
Unemployment Rate: 4.2%. 

Year: 2006; 
Long-term Unemployment Rate: 0.8%; 
Unemployment Rate: 3.9%. 

Year: 2007; [Period of Recession] 
Long-term Unemployment Rate: 0.7%; 
Unemployment Rate: 3.9%. 

Year: 2008; [Period of recession] 
Long-term Unemployment Rate: 0.9%; 
Unemployment Rate: 4.1%. 

Year: 2009; [Period of recession] 
Long-term Unemployment Rate: 1.8%; 
Unemployment Rate: 6%. 

Year: 2010; 
Long-term Unemployment Rate: 4%; 
Unemployment Rate: 5.7%. 

Year: 2011; 
Long-term Unemployment Rate: 4%; 
Unemployment Rate: 5.1%. 

Year: 2012; 
Long-term Unemployment Rate: 3.6%; 
Unemployment Rate: 4.7%. 

Source: GAO presentation of Bureau of Labor Statistics data. 

[End of figure] 

Persistent, high unemployment has a range of negative consequences for 
individuals and the economy. First, displaced workers--those who 
permanently lose their jobs through no fault of their own--often 
suffer an initial decline in earnings and also can suffer longer-term 
losses in earnings.[Footnote 32] For example, one study found that 
workers displaced during the 1982 recession earned 20 percent less, on 
average, than their nondisplaced peers 15 to 20 years later.[Footnote 
33] Reasons that unemployment can reduce future employment and 
earnings prospects for individuals include the stigma that some 
employers attach to long-term unemployment and the skill erosion that 
can occur as individuals lose familiarity with technical aspects of 
their occupation. Second, research suggests that the unemployed tend 
to be physically and psychologically worse off than their employed 
counterparts. For example, a review of 104 empirical studies assessing 
the impact of unemployment found that people who lost their job were 
more likely than other workers to report having stress-related health 
conditions, such as depression, stroke, heart disease, or heart 
attacks.[Footnote 34] Third, some studies find negative outcomes for 
health, earnings, and educational opportunities for the children of 
the unemployed. Fourth, periods of high unemployment can impact the 
lifetime earnings of people entering the workforce for the first time. 
For example, one study found that young people who graduate in a 
severe recession have lower lifetime earnings, on average, than those 
who graduate in normal economic conditions.[Footnote 35] In prior 
work, we reported that long-term unemployment can have particularly 
serious consequences for older Americans (age 55 and over) as their 
job loss threatens not only their immediate financial security but 
also their ability to support themselves during retirement.[Footnote 
36] Persistent high unemployment can also increase budgetary pressures 
on federal, state, and local governments as expenditures on social 
welfare programs increase and individuals with reduced earnings pay 
less in taxes. 

Household Wealth and Asset Prices: 

According to the Federal Reserve's Survey of Consumer Finances, median 
household net worth fell by $49,100 per family, or by nearly 39 
percent, between 2007 and 2010. The survey found that this decline 
appeared to be driven most strongly by a broad collapse in home 
prices. Another major component of net worth that declined was the 
value of household financial assets, such as stocks and mutual funds. 
Economists we spoke with noted that precrisis asset prices may have 
reflected unsustainably high (or "bubble") valuations and it may not 
be appropriate to consider the full amount of the overall decline in 
net worth as a loss associated with the crisis. Nevertheless, dramatic 
declines in net worth, combined with an uncertain economic outlook and 
reduced job security, can cause consumers to reduce spending. Reduced 
consumption, all else equal, further reduces aggregate demand and real 
GDP. 

As we reported in June 2012, decreases in home prices played a central 
role in the crisis and home prices continue to be well below their 
peak nationwide.[Footnote 37] According to CoreLogic's Home Price 
Index, home prices across the country fell nearly 29 percent between 
their peak in April 2006 and the end of the recession in June 2009 
(see figure 4).[Footnote 38] This decline followed a 10-Year: period 
of significant home price growth, with the index more than doubling 
between April 1996 and 2006. Since 2009, home prices have fluctuated. 

Figure 4: Home Prices and Recession Periods, January 1976 through June 
2011: 

[Refer to PDF for image: line graph] 

Year: 1976; 
Home price index: 23.2. 

Year: 1977; 
Home price index: 24.3. 

Year: 1978; 
Home price index: 29.4. 

Year: 1979; 
Home price index: 33.7. 

Year: 1980; [Period of Recession] 
Home price index: 38.9. 

Year: 1981; [Period of Recession] 
Home price index: 42.2. 

Year: 1982; [Period of Recession] 
Home price index: 44.6. 

Year: 1983; 
Home price index: 45.3. 

Year: 1984; 
Home price index: 47.9. 

Year: 1985; 
Home price index: 50.2. 

Year: 1986; 
Home price index: 54.0. 

Year: 1987; 
Home price index: 59.0. 

Year: 1988; 
Home price index: 65.0. 

Year: 1989; 
Home price index: 71.2. 

Year: 1990; [Period of Recession] 
Home price index: 75.1. 

Year: 1991; [Period of Recession] 
Home price index: 74.4. 

Year: 1992; 
Home price index: 74.4. 

Year: 1993; 
Home price index: 74.6. 

Year: 1994; 
Home price index: 76.7. 

Year: 1995; 
Home price index: 77.5. 

Year: 1996; 
Home price index: 79.5. 

Year: 1997; 
Home price index: 81.6. 

Year: 1998; 
Home price index: 86.0. 

Year: 1999; 
Home price index: 92.6. 

Year: 2000; 
Home price index: 100. 

Year: 2001; [Period of Recession] 
Home price index: 110.7. 

Year: 2002; 
Home price index: 120.0. 

Year: 2003; 
Home price index: 132.0. 

Year: 2004; 
Home price index: 147.8. 

Year: 2005; 
Home price index: 172.7. 

Year: 2006; 
Home price index: 198.3. 

Year: 2007; [Period of Recession] 
Home price index: 197.1. 

Year: 2008; [Period of Recession] 
Home price index: 176.7. 

Year: 2009; [Period of Recession] 
Home price index: 143.2. 

Year: 2010; 
Home price index: 143.3. 

Year: 2011; 
Home price index: 135.9. 

Source: CoreLogic Home Price Index, National Bureau of Economic 
Research. 

[End of figure] 

Similarly, we also reported that homeowners have lost substantial 
equity in their homes, because home values have declined faster than 
home mortgage debt.[Footnote 39] As shown in figure 5, households 
collectively lost about $9.1 trillion (in constant 2011 dollars) in 
national home equity between 2005 and 2011, in part because of the 
decline in home prices.[Footnote 40] Figure 5 also shows that between 
2006 and 2007, the steep decline in home values left homeowners 
collectively holding home mortgage debt in excess of the equity in 
their homes. This is the first time that aggregate home mortgage debt 
exceeded home equity since the data were kept in 1945. As of December 
2011, national home equity was approximately $3.7 trillion less than 
total home mortgage debt. 

Figure 5: Value of Home Equity and Aggregate Mortgage Debt and 
Recession Periods, 1945 through 2011: 

[Refer to PDF for image: multiple line graph] 

Constant 2011 dollars: 

Year: 1945; [Period of Recession] 
Home equity: $1.2 trillion; 
Aggregate mortgage debt: $0.2 trillion. 

Year: 1946; 
Home equity: $1.3 trillion; 
Aggregate mortgage debt: $0.3 trillion. 

Year: 1947; 
Home equity: $1.5 trillion; 
Aggregate mortgage debt: $0.3 trillion. 

Year: 1948; [Period of Recession] 
Home equity: $1.6 trillion; 
Aggregate mortgage debt: $0.3 trillion. 

Year: 1949; [Period of Recession] 
Home equity: $1.7 trillion; 
Aggregate mortgage debt: $0.4 trillion. 

Year: 1950; 
Home equity: $1.9 trillion; 
Aggregate mortgage debt: $0.4 trillion. 

Year: 1951; 
Home equity: $1.9 trillion; 
Aggregate mortgage debt: $0.4 trillion. 

Year: 1952; 
Home equity: $2.0 trillion; 
Aggregate mortgage debt: $0.5 trillion. 

Year: 1953; [Period of Recession] 
Home equity: $2.1 trillion; 
Aggregate mortgage debt: $0.6 trillion. 

Year: 1954; [Period of Recession] 
Home equity: $2.2 trillion; 
Aggregate mortgage debt: $0.6 trillion. 

Year: 1955; 
Home equity: $2.3 trillion; 
Aggregate mortgage debt: $0.7 trillion. 

Year: 1956; 
Home equity: $2.4 trillion; 
Aggregate mortgage debt: $0.8 trillion. 

Year: 1957; [Period of Recession] 
Home equity: $2.5 trillion; 
Aggregate mortgage debt: $0.9 trillion. 

Year: 1958; [Period of Recession] 
Home equity: $2.5 trillion; 
Aggregate mortgage debt: $0.9 trillion. 

Year: 1959; 
Home equity: $2.6 trillion; 
Aggregate mortgage debt: $1.0 trillion. 

Year: 1960; [Period of Recession] 
Home equity: $2.6 trillion; 
Aggregate mortgage debt: $1.1 trillion. 

Year: 1961; [Period of Recession] 
Home equity: $2.7 trillion; 
Aggregate mortgage debt: $1.2 trillion. 

Year: 1962; 
Home equity: $2.7 trillion; 
Aggregate mortgage debt: $1.3 trillion. 

Year: 1963; 
Home equity: $2.7 trillion; 
Aggregate mortgage debt: $1.4 trillion. 

Year: 1964; 
Home equity: $2.7 trillion; 
Aggregate mortgage debt: $1.5 trillion. 

Year: 1965; 
Home equity: $2.8 trillion; 
Aggregate mortgage debt: $1.6 trillion. 

Year: 1966; 
Home equity: $2.9 trillion; 
Aggregate mortgage debt: $1.6 trillion. 

Year: 1967; 
Home equity: $3.0 trillion; 
Aggregate mortgage debt: $1.7 trillion. 

Year: 1968; 
Home equity: $3.3 trillion; 
Aggregate mortgage debt: $1.7 trillion. 

Year: 1969; 
Home equity: $3.4 trillion; 
Aggregate mortgage debt: $1.7 trillion. 

Year: 1970; 
Home equity: $3.4 trillion; 
Aggregate mortgage debt: $1.7 trillion. 

Year: 1971; 
Home equity: $3.6 trillion; 
Aggregate mortgage debt: $1.7 trillion. 

Year: 1972; 
Home equity: $4.1 trillion; 
Aggregate mortgage debt: $1.8 trillion. 

Year: 1973; [Period of Recession] 
Home equity: $4.4 trillion; 
Aggregate mortgage debt: $1.9 trillion. 

Year: 1974; [Period of Recession] 
Home equity: $3.8 trillion; 
Aggregate mortgage debt: $1.9 trillion. 

Year: 1975; [Period of Recession] 
Home equity: $4.0 trillion; 
Aggregate mortgage debt: $1.9 trillion. 

Year: 1976; 
Home equity: $4.2 trillion; 
Aggregate mortgage debt: $2.0 trillion. 

Year: 1977; 
Home equity: $4.8 trillion; 
Aggregate mortgage debt: $2.2 trillion. 

Year: 1978; 
Home equity: $5.2 trillion; 
Aggregate mortgage debt: $2.4 trillion. 

Year: 1979; 
Home equity: $5.5 trillion; 
Aggregate mortgage debt: $2.6 trillion. 

Year: 1980; [Period of Recession] 
Home equity: $5.5 trillion; 
Aggregate mortgage debt: $2.5 trillion. 

Year: 1981; [Period of Recession] 
Home equity: $5.7 trillion; 
Aggregate mortgage debt: $2.5 trillion. 

Year: 1982; [Period of Recession] 
Home equity: $5.6 trillion; 
Aggregate mortgage debt: $2.4 trillion. 

Year: 1983; 
Home equity: $5.6 trillion; 
Aggregate mortgage debt: $2.5 trillion. 

Year: 1984; 
Home equity: $6.2 trillion; 
Aggregate mortgage debt: $2.7 trillion. 

Year: 1985; 
Home equity: $6.8 trillion; 
Aggregate mortgage debt: $3.0 trillion. 

Year: 1986; 
Home equity: $7.2 trillion; 
Aggregate mortgage debt: $3.4 trillion. 

Year: 1987; 
Home equity: $7.5 trillion; 
Aggregate mortgage debt: $3.6 trillion. 

Year: 1988; 
Home equity: $7.7 trillion; 
Aggregate mortgage debt: $3.9 trillion. 

Year: 1989; 
Home equity: $8.0 trillion; 
Aggregate mortgage debt: $4.1 trillion. 

Year: 1990; [Period of Recession] 
Home equity: $7.4 trillion; 
Aggregate mortgage debt: $4.3 trillion. 

Year: 1991; [Period of Recession] 
Home equity: $7.1 trillion; 
Aggregate mortgage debt: $4.4 trillion. 

Year: 1992; 
Home equity: $7.1 trillion; 
Aggregate mortgage debt: $4.6 trillion. 

Year: 1993; 
Home equity: $7.0 trillion; 
Aggregate mortgage debt: $4.7 trillion. 

Year: 1994; 
Home equity: $7.0 trillion; 
Aggregate mortgage debt: $4.8 trillion. 

Year: 1995; 
Home equity: $7.0 trillion; 
Aggregate mortgage debt: $4.9 trillion. 

Year: 1996; 
Home equity: $7.0 trillion; 
Aggregate mortgage debt: $5.1 trillion. 

Year: 1997; 
Home equity: $7.2 trillion; 
Aggregate mortgage debt: $5.2 trillion. 

Year: 1998; 
Home equity: $7.8 trillion; 
Aggregate mortgage debt: $5.6 trillion. 

Year: 1999; 
Home equity: $8.4 trillion; 
Aggregate mortgage debt: $6.0 trillion. 

Year: 2000; 
Home equity: $9.7 trillion; 
Aggregate mortgage debt: $6.3 trillion. 

Year: 2001; [Period of Recession] 
Home equity: $10.5 trillion; 
Aggregate mortgage debt: $6.7 trillion. 

Year: 2002; 
Home equity: $11.1 trillion; 
Aggregate mortgage debt: $7.5 trillion. 

Year: 2003; 
Home equity: $11.7 trillion; 
Aggregate mortgage debt: $8.4 trillion. 

Year: 2004; 
Home equity: $13.3 trillion; 
Aggregate mortgage debt: $9.3 trillion. 

Year: 2005; 
Home equity: $15.2 trillion; 
Aggregate mortgage debt: $10.2 trillion. 

Year: 2006; 
Home equity: $14.4 trillion; 
Aggregate mortgage debt: $11.0 trillion. 

Year: 2007; [Period of Recession] 
Home equity: $11.2 trillion; 
Aggregate mortgage debt: $11.4 trillion. 

Year: 2008; [Period of Recession] 
Home equity: $7.4 trillion; 
Aggregate mortgage debt: $11.0 trillion. 

Year: 2009; [Period of Recession] 
Home equity: $7.1 trillion; 
Aggregate mortgage debt: $10.8 trillion. 

Year: 2010; 
Home equity: $6.7 trillion; 
Aggregate mortgage debt: $10.4 trillion. 

Year: 2011; 
Home equity: $6.1 trillion; 
Aggregate mortgage debt: $9.8 trillion. 

Source: Federal Reserve. Flow of Funds Accounts of the United States; 
Bureau of Labor Statistics; and National Bureau of Economic Research. 

[End of figure] 

Declines in the value of household investments in stocks and mutual 
funds also contributed to significant declines in household wealth 
after the crisis began. In addition to experiencing a decline in the 
value of their stock and mutual fund investments, households also 
experienced a decline in their retirement funds. As shown in figure 6, 
the value of corporate equities held in retirement funds dropped 
sharply in late 2008. While equity prices and the value of retirement 
fund assets generally have recovered since 2009, investors and pension 
funds that sold assets at depressed prices experienced losses. For 
example, officials from a large pension fund told us that they were 
forced to sell equity securities at depressed prices during the crisis 
to meet their liquidity needs. Experts have different views on how the 
crisis may have changed investors' attitudes towards risk-taking. To 
the extent that investors are more risk averse and demand higher 
returns for the risks associated with certain investments, businesses 
could face increased funding costs that could contribute to slower 
growth. 

Figure 6: Aggregate Value of Corporate Equities Held in Retirement 
Funds, December 31, 2000, through December 31, 2011: 

[Refer to PDF for image: line graph] 

Year: 2000; 
Value of corporate equities: $4.4 trillion. 

Year: 2001; 
Value of corporate equities: $4 trillion. 

Year: 2002; 
Value of corporate equities: $3.4 trillion. 

Year: 2003; 
Value of corporate equities: $4.5 trillion. 

Year: 2004; 
Value of corporate equities: $5.1 trillion. 

Year: 2005; 
Value of corporate equities: $5.6 trillion. 

Year: 2006; 
Value of corporate equities: $6.4 trillion. 

Year: 2007; 
Value of corporate equities: $6.6 trillion. 

Year: 2008; 
Value of corporate equities: $3.9 trillion. 

Year: 2009; 
Value of corporate equities: $4.9 trillion. 

Year: 2010; 
Value of corporate equities: $5.6 trillion. 

Year: 2011; 
Value of corporate equities: $5.3 trillion. 

Source: GAO analysis of Federal Reserve Board Flow of Funds data. 

Note: This figure includes corporate equities held directly or 
indirectly through private pension funds and federal, state, and local 
retirement funds. 

[End of figure] 

Foreclosures: 

In 2006, the percentage of loans in default or in foreclosure began to 
increase (see figure 7).[Footnote 41] As we previously reported, a 
number of factors contributed to the increase in loan defaults and 
foreclosures, including a rapid decline in home prices throughout much 
of the nation and weak regional labor market conditions in some states 
where foreclosure rates were already elevated.[Footnote 42] During the 
2007-2009 recession, the elevated unemployment rate and declining home 
prices worsened the financial circumstances for many families, along 
with their ability to make their mortgage payments. Foreclosures have 
been associated with a number of adverse effects on homeowners, 
communities, the housing market, and the overall economy. Homeowners 
involved in a foreclosure often are forced to move out and may see 
their credit ratings plummet, making it difficult to purchase another 
home. A large number of foreclosures can have serious consequences for 
neighborhoods.[Footnote 43] For example, research has shown that 
foreclosures depress the values of nearby properties in the local 
neighborhood.[Footnote 44] Creditors, investors, and servicers can 
incur a number of costs during the foreclosure process (e.g., 
maintenance and local taxes) and a net loss, if there is a shortfall 
between the ultimate sales price and the mortgage balance and carrying 
costs. Large numbers of foreclosures can significantly worsen cities' 
fiscal circumstances, both by reducing property tax revenues and by 
raising costs to the local government associated with maintaining 
vacant and abandoned properties. 

Figure 7: Percentage of Loans in Default 90 Days or More or in 
Foreclosure and Recession Periods, March 1979 through September 2012: 

[Refer to PDF for image: multiple line graph] 

Year: 1979; 
In foreclosure: 0.31%; 
In default: 0.47%. 

Year: 1980; [Period of recession] 
In foreclosure: 0.32%; 
In default: 0.54%. 

Year: 1981; [Period of recession] 
In foreclosure: 0.44%; 
In default: 0.66%. 

Year: 1982; [Period of recession] 
In foreclosure: 0.53%; 
In default: 0.72%. 

Year: 1983; 
In foreclosure: 0.71%; 
In default: 0.86%. 

Year: 1984; 
In foreclosure: 0.68%; 
In default: 0.89%. 

Year: 1985; 
In foreclosure: 0.79%; 
In default: 0.98%. 

Year: 1986; 
In foreclosure: 0.87%; 
In default: 1.01%. 

Year: 1987; 
In foreclosure: 1.09%; 
In default: 1.04%. 

Year: 1988; 
In foreclosure: 1.07%; 
In default: 0.89%. 

Year: 1989; 
In foreclosure: 0.95%; 
In default: 0.83%. 

Year: 1990; [Period of recession] 
In foreclosure: 0.97%; 
In default: 0.7%. 

Year: 1991; [Period of recession] 
In foreclosure: 0.97%; 
In default: 0.78%. 

Year: 1992; 
In foreclosure: 1.04%; 
In default: 0.8%. 

Year: 1993; 
In foreclosure: 1%; 
In default: 0.77%. 

Year: 1994; 
In foreclosure: 0.94%; 
In default: 0.75%. 

Year: 1995; 
In foreclosure: 0.86%; 
In default: 0.7%. 

Year: 1996; 
In foreclosure: 0.95%; 
In default: 0.68%. 

Year: 1997; 
In foreclosure: 1.08%; 
In default: 0.55%. 

Year: 1998; 
In foreclosure: 1.17%; 
In default: 0.6%. 

Year: 1999; 
In foreclosure: 1.22%; 
In default: 0.6%. 

Year: 2000; 
In foreclosure: 1.17%; 
In default: 0.55%. 

Year: 2001; [Period of recession] 
In foreclosure: 1.24%; 
In default: 0.66%. 

Year: 2002; 
In foreclosure: 1.51%; 
In default: 0.8%. 

Year: 2003; 
In foreclosure: 1.43%; 
In default: 0.83%. 

Year: 2004; 
In foreclosure: 1.29%; 
In default: 0.85%. 

Year: 2005; 
In foreclosure: 1.08%; 
In default: 0.81%. 

Year: 2006; 
In foreclosure: 0.98%; 
In default: 0.95%. 

Year: 2007; [Period of recession] 
In foreclosure: 1.28%; 
In default: 0.95%. 

Year: 2008; [Period of recession] 
In foreclosure: 2.47%; 
In default: 1.56%. 

Year: 2009; [Period of recession] 
In foreclosure: 3.85%; 
In default: 3.39%. 

Year: 2010; 
In foreclosure: 4.63%; 
In default: 4.91%. 

Year: 2011; 
In foreclosure: 4.52%; 
In default: 3.58%. 

Year: 2012; 
In foreclosure: 4.39%; 
In default: 3.06%. 

Source: Mortgage Bankers Association; National Bureau of Economic 
Research. 

[End of figure] 

Federal, State, and Local Governments Have Faced Increased Fiscal 
Challenges Since the Start of the 2007-2009 Financial Crisis: 

Some studies consider measures of fiscal costs--such as increases in 
federal government debt--when analyzing the losses associated with 
financial crises. Like past financial crises, the 2007-2009 financial 
crisis has been associated with large increases in the federal 
government's debt and heightened fiscal challenges for many state and 
local governments. Factors contributing to these challenges include 
decreased tax revenues from reduced economic activity and increased 
spending associated with government efforts to mitigate the effects of 
the recession. 

Federal Government's Fiscal Challenges: 

In prior work, we have reported that the economic downturn and the 
federal government's response caused budget deficits to rise in recent 
years to levels not seen since World War II.[Footnote 45] While the 
structural imbalance between spending and revenue paths in the federal 
budget predated the financial crisis, the size and urgency of the 
federal government's long-term fiscal challenges increased 
significantly following the crisis's onset. From the end of 2007 to 
the end of 2010, federal debt held by the public increased from 
roughly 36 percent of GDP to roughly 62 percent. Key factors 
contributing to increased deficit and debt levels following the crisis 
included (1) reduced tax revenues, in part driven by declines in 
taxable income for consumers and businesses; (2) increased spending on 
unemployment insurance and other nondiscretionary programs that 
provide assistance to individuals impacted by the recession; (3) 
fiscal stimulus programs enacted by Congress to mitigate the 
recession, such as the American Recovery and Reinvestment Act of 2009 
(Recovery Act);[Footnote 46] and (4) increased government assistance 
to stabilize financial institutions and markets. 

While deficits during or shortly after a recession can support an 
economic recovery, increased deficit and debt levels could have 
negative effects on economic growth. For example, rising federal debt 
can "crowd out" private investment in productive capital as the 
portion of savings that is used to buy government debt securities is 
not available to fund such investment. Lower levels of private 
investment can reduce future economic growth. In addition, increased 
debt increases the amount of interest the government pays to its 
lenders, all else equal. Policy alternatives to offsetting increased 
interest payments include increasing tax rates and reducing government 
benefits and services, which also can reduce economic growth. 
Moreover, increased fiscal challenges could make the United States 
more vulnerable to a fiscal crisis should investors lose confidence in 
the ability of the U.S. government to repay its debts. Such a crisis 
could carry enormous costs because the federal government would face a 
sharp increase in its borrowing costs. 

The following discussion focuses on the costs associated with the 
federal government's actions to assist the financial sector. Fiscal 
stimulus programs, such as the Recovery Act, and the Federal Reserve's 
monetary policy operations were major components of the federal 
government's efforts to mitigate the recession that coincided with the 
2007-2009 financial crisis. However, given our focus on the Dodd-Frank 
Act reforms, the potential short-term and long-term impacts of these 
efforts are beyond the scope of this report. Furthermore, our review 
did not consider the benefits or costs of government policy 
interventions relative to alternatives that were not implemented. 

With respect to the most significant government programs and other 
actions to assist the financial sector, the following discussion 
reviews (1) expert perspectives on how these policy responses could 
have reduced or increased the severity of the financial crisis and the 
associated economic losses; (2) the potential costs associated with 
increased moral hazard; and (3) the financial performance (including 
income and losses) of the largest of these policy interventions. 

Federal financial regulators and several academics and other experts 
we spoke with highlighted several interventions that they maintain 
likely helped to mitigate the severity of the 2007-2009 financial 
crisis. These interventions included: 

* providing emergency funding to support several key credit markets 
through the Federal Reserve's emergency credit and liquidity programs; 
[Footnote 47] 

* extending federal government guarantees to a broader range of 
private sector liabilities through FDIC's Temporary Liquidity 
Guarantee Program (TLGP) and Treasury's Money Market Fund Guarantee 
Program; 

* recapitalizing financial firms through Treasury's Troubled Asset 
Relief Program's Capital Purchase Program; and: 

* taking actions with respect to individual firms, such as Fannie Mae, 
Freddie Mac, American International Group (AIG), Citigroup, and Bank 
of America, to avert further destabilization of financial markets. 

Many experts maintain that these large-scale interventions, in 
combination with other government actions, such as the stress tests, 
helped to restore confidence in the financial system and bring about a 
recovery in certain private credit markets in 2009.[Footnote 48] In 
contrast, other experts argue that certain federal government actions 
worsened, rather than mitigated, the severity of the financial crisis. 
For example, some experts maintain that the federal government's 
rescue of Bear Stearns but not Lehman Brothers sent a conflicting 
signal to the market and contributed to a more severe panic. Some 
experts also have commented that government assistance to the 
financial and housing sectors may have slowed the economic recovery by 
preventing a full correction of asset prices. Many experts agree that 
several (if not all) of the federal government's policy interventions 
likely averted a more severe crisis in the short-run and that the long-
term implications of these interventions remain to be seen. 

Experts generally agree that the government actions to assist the 
financial sector may have increased moral hazard--that is, such 
actions may have encouraged market participants to expect similar 
emergency actions in the future, thus weakening private incentives to 
properly manage risks and creating the perception that some firms are 
too big to fail. Increased moral hazard could result in future costs 
for the government if reduced private sector incentives to manage 
risks contribute to a future financial crisis. 

Although the financial performance of the federal government's 
assistance to the financial sector can be measured in different ways, 
most of the federal government's major programs earned accounting 
income in excess of accounting losses and the net losses for some 
interventions are expected to be small relative to the overall 
increase in the federal debt.[Footnote 49] For example, the Federal 
Reserve reported that all loans made under its emergency programs that 
have closed were repaid with interest and does not project any losses 
on remaining loans outstanding. Under FDIC's TLGP, program 
participants, which included insured depository institutions and their 
holding companies, paid fees on debt and deposits guaranteed by the 
program; these fees created a pool of funds to absorb losses. 
According to FDIC data, as of November 30, 2012, FDIC had collected 
$11.5 billion in TLGP fees and surcharges, and this amount is expected 
to exceed the losses from the program.[Footnote 50] In contrast, 
Treasury's investments in Fannie Mae and Freddie Mac under the Senior 
Preferred Stock Purchase Agreements program represent the federal 
government's single largest risk exposure remaining from its emergency 
actions to assist the financial sector.[Footnote 51] Cumulative cash 
draws by the GSEs under this program totaled $187.4 billion as of 
September 30, 2012, and Treasury reported a contingent liability of 
$316.2 billion for this program as of September 30, 2011.[Footnote 52] 
As of September 30, 2012, Fannie Mae and Freddie Mac had paid Treasury 
a total of $50.4 billion in dividends on these investments.[Footnote 
53] The amount that Treasury will recoup from these investments is 
uncertain. Table 2 provides an overview of income and losses from 
selected federal government interventions to assist the financial 
sector. 

Table 2: Overview of Income and Losses for Selected Federal Government 
Interventions to Assist the Financial Sector during the 2007-2009 
Financial Crisis: 

Programs with Broad-Based Eligibility: 

Program or Type of Assistance: Federal Reserve System's emergency 
credit and liquidity programs[A]; 
Dollar Amount: more than $1 trillion peak loans outstanding[B]; 
Accounting Income/Losses: Approximately $19.7 billion in gross 
interest and fee income as of June 30, 2012, according to estimates 
published on the Federal Reserve Bank of New York's (FRBNY) 
website.[C] The Federal Reserve has reported no losses on the programs 
that have closed. FRBNY projects that the remaining facility with 
loans outstanding will not incur losses. 

Program or Type of Assistance: FDIC's Temporary Liquidity Guarantee 
Program; 
Accounting Income/Losses: Over $11 billion in total fee income is 
expected to exceed projected losses of around $2.4 billion. 

Program or Type of Assistance: FDIC's Temporary Liquidity Guarantee 
Program; 
* Debt Guarantee Program (DGP); 
Dollar Amount: Approximately $834.5 billion (peak deposits guaranteed); 
Accounting Income/Losses: All debt guaranteed by DGP was scheduled to 
mature by the end of 2012. FDIC collected $10.4 billion in DGP income 
from fees and surcharges. As of Dec. 31, 2011, FDIC reported estimated 
DGP losses of $152 million and projected that it would pay $682 
thousand in interest payments on defaulting DGP-guaranteed notes in 
2012. 

Program or Type of Assistance: FDIC's Temporary Liquidity Guarantee 
Program; 
* Transaction Account Guarantee Program (TAGP); 
Dollar Amount: Approximately $345.8 billion (peak debt guaranteed); 
Accounting Income/Losses: TAGP closed on Dec. 31, 2010. FDIC collected 
$1.2 billion in fees. Cumulative estimated losses totaled $2.2 billion 
as of Dec. 31, 2011. 

Program or Type of Assistance: Treasury's Guarantee Program for Money 
Market Funds; 
Dollar Amount: more than $3 trillion money market fund shares 
guaranteed at $1 per share; 
Accounting Income/Losses: $1.2 billion of fee income and no losses. 
The program closed on Sept. 18, 2009. 

Program or Type of Assistance: Treasury's Capital Purchase Program 
(CPP)[D]; 
Dollar Amount: $204.9 billion disbursed; 
Accounting Income/Losses: Programs with Broad-Based Eligibility: As of 
Oct. 31, 2012, Treasury had received almost $220 billion from its CPP 
investments, exceeding the $204.9 billion it disbursed. Of that 
disbursed amount, $8.3 billion remained outstanding as of Oct. 31, 
2012. As of Sept. 30, 2012, Treasury estimated that CPP would have a 
lifetime income of approximately $14.9 billion after all institutions 
exit the program. 

Assistance to Individual Institutions: 

Program or Type of Assistance: Fannie Mae and Freddie Mac (Treasury); 
Dollar Amount: $187.4 billion drawn from Treasury as of Sept. 30, 2012; 
Accounting Income/Losses: $316.2 billion contingent liability reported 
as of Sept. 30, 2011, which is based on the value of projected 
investments in the GSEs as of this date. 

Program or Type of Assistance: American International Group, Inc. 
(AIG) (Treasury and Federal Reserve System)[E]; 
Dollar Amount: $182 billion peak commitment by Treasury and FRBNY; 
Accounting Income/Losses: $17.7 billion total net profit on all FRBNY 
assistance to AIG. FRBNY was repaid in full on all loans it provided 
to assist AIG. 
Treasury's preferred stock investments of $20.3 billion were fully 
repaid with interest income of $0.9 billion. Treasury's sales of all 
of its AIG common stock have yielded total proceeds of about $51.6 
billion. Together with its preferred stock investments in AIG, 
Treasury has recouped the total value of its assistance extended to 
AIG with a net gain of $5.0 billion. 

Program or Type of Assistance: Assistance to Bank of America 
Corporation and Citigroup, Inc. (Treasury, FDIC, and Federal Reserve 
System); 
Dollar Amount: $40 billion in additional capital ($20 billion for each 
firm) and agreements with regulators to protect against larger-than-
expected losses on asset portfolios; 
Accounting Income/Losses: $4.0 billion in net income earned by 
Treasury on its investments in Bank of America Corporation and 
Citigroup, Inc. under its Targeted Investment Program. 
Bank of America Corporation and Citigroup, Inc. paid fees of $425 
million and $50 million, respectively, to federal government parties 
to terminate the loss sharing agreements, and government parties 
received $5.3 billion in Citigroup preferred stock. 

Source: GAO presentation of information from FDIC, Federal Reserve 
System, and Treasury documents. 

Note: The financial performance of these programs can be measured in 
different ways. Accounting measures of financial performance have 
limitations. For example, they do not capture information about 
whether the interest, dividend, or other income the federal government 
received provided appropriate compensation for the risks it assumed. 

[A] The Federal Reserve System consists of the Board of Governors of 
the Federal Reserve System (Federal Reserve)--a federal agency--and 12 
regional Reserve Banks. The Federal Reserve Bank of New York operated 
most of the Federal Reserve System's emergency programs. For more 
information about these emergency programs, see GAO, Federal Reserve 
System: Opportunities Exist to Strengthen Policies and Processes for 
Managing Emergency Assistance, GAO-11-696 (Washington, D.C.: July 21, 
2011). 

[B] Total lending under these emergency programs peaked at over $1 
trillion in December 2008. 

[C] This estimate includes income from the broad-based emergency 
programs authorized under Section 13(3) of the Federal Reserve Act, 
the Term Auction Facility, and the swap lines with foreign central 
banks. See Fleming, "Federal Reserve Liquidity Facilities Gross $22 
Billion for U.S. Taxpayers", accessed December 17, 2012, [hyperlink, 
http://libertystreeteconomics.newyorkfed.org/2012/11/federal-reserve-
liquidity-facilities-gross-22-billion-for-us-taxpayers.html]. 

[D] Created in 2008, the Capital Purchase Program was the primary 
initiative under the Troubled Asset Relief Program to help stabilize 
the financial markets and banking system by providing capital to 
qualifying regulated financial institutions through the purchase of 
senior preferred shares and subordinated debt. 

[E] For more information about the assistance to AIG, see GAO, 
Troubled Asset Relief Program: Government's Exposure to AIG Lessens as 
Equity Investments Are Sold, GAO-12-574 (Washington, D.C.: May 7, 
2012). 

[End of table] 

State and Local Governments: 

In our prior work, we have described how the national recession that 
coincided with the 2007-2009 financial crisis added to the fiscal 
challenges facing the state and local sectors.[Footnote 54] Declines 
in output, income, and employment caused state and local governments 
to collect less revenue at the same time that demand for social 
welfare services they provide was increasing. During the most recent 
recession, state and local governments experienced more severe and 
long-lasting declines in revenue than in past recessions. Because 
state governments typically face balanced budget requirements and 
other constraints, they adjust to this situation by raising taxes, 
cutting programs and services, or drawing down reserve funds, all but 
the last of which amplify short-term recessionary pressure on 
households and businesses. Local governments may make similar 
adjustments, unless they can borrow to make up for reduced revenue. 
The extent to which state and local governments took such actions was 
impacted by the federal government's policy responses to moderate the 
downturn and restore economic growth. Under the Recovery Act, the 
federal government provided $282 billion in direct assistance to state 
and local governments to help offset significant declines in tax 
revenues. 

States have been affected differently by the 2007-2009 recession. For 
example, the unemployment rate in individual states increased by 
between 1.4 and 6.8 percentage points during the recession. Recent 
economic research suggests that while economic downturns within states 
generally occur around the same time as national recessions, their 
timing and duration vary. States' differing characteristics, such as 
industrial structure, contribute to these differences in economic 
activity. 

Declines in state and local pension asset values stemming from the 
2007-2009 recession also could affect the sector's long-term fiscal 
position. In March 2012, we reported that while most state and local 
government pension plans had assets sufficient to cover benefit 
payments to retirees for a decade or more, plans have experienced a 
growing gap between assets and liabilities.[Footnote 55] In response, 
state and local governments have begun taking a number of steps to 
manage their pension obligations, including reducing benefits and 
increasing member contributions. 

The Dodd-Frank Act May Enhance Financial Stability and Provide Other 
Benefits, with the Extent of the Benefits Depending on a Number of 
Factors: 

The Dodd-Frank Act contains several provisions that may benefit the 
financial system and the broader economy, but the realization of such 
benefits depends on a number of factors. Our review of the literature 
and discussions with a broad range of financial market regulators, 
participants, and observers revealed no clear consensus on the extent 
to which, if at all, the Dodd-Frank Act will help reduce the 
probability or severity of a future crisis. Nevertheless, many of 
these experts identified a number of the same reforms that they expect 
to enhance financial stability, at least in principle, and help reduce 
the probability or severity of a future crisis. At the same time, such 
experts generally noted that the benefits are not assured and depend 
on, among other things, how regulators implement the provisions and 
whether the additional regulations result in financial activity moving 
to less regulated institutions or markets. Several experts also 
commented that the act also could enhance consumer and investor 
protections. While estimating the extent to which the act may reduce 
the probability of a future crisis is difficult and subject to 
limitations, studies have found statistical evidence suggesting that 
certain reforms are associated with a reduction in the probability of 
a crisis. 

Several Dodd-Frank Provisions May Help Reduce the Probability or 
Severity of a Future Crisis, but Uncertainty Exists about Their 
Effectiveness: 

Through our review of the literature and discussions with a broad 
range of financial market regulators, academics, and industry and 
public interest group experts, we found no clear consensus on the 
extent to which, if at all, the Dodd-Frank Act will help reduce the 
probability or severity of a future financial crisis. However, 
representatives of these groups identified many of the same provisions 
in the act that they expect to enhance financial stability, at least 
in principle, and help reduce the probability or severity of a future 
crisis. These provisions include the following: 

* Creation of FSOC and OFR: The act created FSOC and OFR to monitor 
and address threats to financial stability. 

* Heightened prudential standards for systemically important financial 
institutions (SIFI): The act requires that all SIFIs be subjected to 
Federal Reserve supervision and enhanced capital and other prudential 
standards. SIFIs include bank holding companies with $50 billion or 
more in total consolidated assets and nonbank financial companies 
designated by FSOC for such supervision.[Footnote 56] 

* Orderly Liquidation Authority: The act provides regulators with new 
authorities and tools to manage the failure of a large financial 
company in a way designed to avoid taxpayer-funded bailouts and 
mitigate the potential for such failures to threaten the stability of 
the financial system. 

* Regulation of swaps: The act establishes a comprehensive regulatory 
framework for swaps. 

* Mortgage-related and other reforms: The act includes provisions to 
modify certain mortgage lending practices, increase regulation of 
asset-backed securitizations, and restrict proprietary trading by 
large depository institutions. 

Experts had differing views on these provisions, but many expect some 
or all of the provisions to improve the financial system's resilience 
to shocks and reduce incentives for financial institutions to take 
excessive risks that could threaten the broader economy. While 
acknowledging these potential financial stability benefits, experts 
generally were cautious in their assessments for several reasons. 
Specifically, the effectiveness of certain provisions will depend not 
only on how regulators implement the provisions through rulemaking or 
exercise their new authorities but also on how financial firms react 
to the new rules, including whether currently regulated financial 
activity migrates to less regulated institutions or markets. In 
addition, a few experts with whom we spoke said that some of the act's 
provisions could increase systemic risk and, thus, have adverse 
effects on financial stability.[Footnote 57] Further, it may be 
neither possible nor necessarily desirable for the Dodd-Frank Act or 
any other legislation to prevent all future financial crises, in part 
because of the tradeoff inherent between financial stability and 
economic growth. 

Creation of FSOC and OFR to Monitor and Address Threats to Financial 
Stability: 

The 2007-2009 financial crisis highlighted the lack of an agency or 
mechanism responsible for monitoring and addressing risks across the 
financial system and a shortage of readily available information to 
facilitate that oversight.[Footnote 58] We reported in July 2009 that 
creating a new body or designating one or more existing regulators 
with the responsibility to oversee systemic risk could serve to 
address a significant gap in the current U.S. regulatory system. 
[Footnote 59] Before the Dodd-Frank Act's passage, federal financial 
regulators focused their oversight more on individual financial firms 
(called microprudential regulation) and less on market stability and 
systemic risk (called macroprudential regulation). However, the recent 
crisis illustrated the potential for one financial firm's distress to 
spill over into the broader financial system and economy. For example, 
the failures and near-failures of Lehman Brothers, AIG, Fannie Mae, 
Freddie Mac, and other large financial institutions contributed to the 
instability experienced in the financial system during the crisis. The 
crisis also illustrated the potential for systemic risk to be 
generated and propagated outside of the largest financial firms (such 
as by money market mutual funds), in part because of interconnections 
not only between firms but also between markets.[Footnote 60] 
According to some academics and other market observers, a significant 
market failure revealed by the recent crisis was that the market did 
not discourage individual financial firms from taking excessive risks 
that could impose costs on others, including the public.[Footnote 61] 
Such spillover costs imposed on others are known as negative 
externalities, and government intervention may be appropriate to 
address such externalities. 

The Dodd-Frank Act established FSOC to provide, for the first time, an 
entity charged with the responsibility for monitoring and addressing 
sources of systemic risk.[Footnote 62] The act also created OFR to 
support FSOC and Congress by providing financial research and data. 
[Footnote 63] FSOC is authorized, among other things, to: 

* collect information across the financial system from member agencies 
and other government agencies, so that regulators will be better 
prepared to address emerging threats; 

* designate certain nonbank financial companies for supervision by the 
Federal Reserve and subject them to enhanced prudential standards; 

* designate as systemically important certain financial market 
utilities and payment, clearing, or settlement activities, and subject 
them to enhanced regulatory oversight; 

* recommend stricter standards for the large, interconnected bank 
holding companies and nonbank financial companies designated for 
enhanced supervision; 

* vote on any determination by the Federal Reserve that action should 
be taken to break up a SIFI that poses a "grave threat" to U.S. 
financial stability; 

* facilitate information sharing and coordination among the member 
agencies to eliminate gaps in the regulatory structure; and: 

* make recommendations to enhance the integrity, efficiency, 
competitiveness, and stability of U.S. financial markets, promote 
market discipline, and maintain investor confidence. 

Financial market regulators, academics, and industry and public 
interest groups with whom we spoke generally view the creation of FSOC 
and OFR as positive steps, in principle, to address systemic risk and 
help identify or mitigate a future crisis for several reasons. First, 
FSOC and its member agencies now have explicit responsibility for 
taking a macroprudential approach to regulation, along with tools and 
authority to help identify and address threats to the financial 
stability of the United States. For example, certain nonbank financial 
companies posed systemic risk during the crisis but were subject to 
less regulation than bank holding companies. To close this regulatory 
gap, FSOC has the authority to designate a nonbank financial company 
for supervision by the Federal Reserve and subject it to enhanced 
prudential standards, if the material distress of that firm could pose 
a risk to U.S. financial stability.[Footnote 64] In addition, although 
the Dodd-Frank Act does not address all sources of systemic risk, the 
act authorizes FSOC to make recommendations to address regulatory gaps 
or other issues that threaten U.S. financial stability. For example, 
FSOC's 2011 and 2012 annual reports discuss financial stability 
threats not directly addressed by the Dodd-Frank Act (e.g., money 
market mutual funds, tri-party repurchase agreements, and the GSEs) 
and make recommendations to address some of them.[Footnote 65] 
Finally, OFR may play an important role in gathering and analyzing 
data that FSOC and its members will be able to use to identify and 
address emerging risks to the financial system. OFR may also 
facilitate data sharing among the regulators, which may enable 
regulators to identify risks in areas emerging from beyond their 
immediate jurisdictions. Market participants also may benefit from the 
ability to use OFR data to analyze risks. 

Experts also identified a number of factors that could limit FSOC's or 
OFR's effectiveness. First, it is inherently challenging for a 
regulator to identify and address certain sources of systemic risk. 
For example, while asset price bubbles often become clear in 
hindsight, when such risks appear to be building, policymakers may 
disagree over whether any intervention is warranted. Second, FSOC's 
committee structure cannot fully resolve the difficulties inherent in 
the existing, fragmented regulatory structure. For example, FSOC could 
encounter difficulties coming to decisions or advancing a reform if it 
faces resistance from one or more of its members. In addition, FSOC's 
committee structure, including the Treasury Secretary's role as FSOC 
chair, could subject FSOC's decision making to political influence. 
According to a number of experts, establishing FSOC and OFR as 
independent entities could have better insulated them from political 
pressures that could dissuade them from recommending or taking actions 
to promote long-term financial stability, if such actions imposed 
short-term political costs. On the other hand, the selection of the 
Treasury Secretary as FSOC chair reflects the Treasury Secretary's 
traditional role in financial policy decisions. 

In a recent report, we identified a number of potential challenges for 
FSOC, some of which are similar to those discussed above.[Footnote 66] 
Specifically, we noted that key components of FSOC's mission--to 
identify risks to U.S. financial stability and respond to emerging 
threats to stability--are inherently challenging. Risks to the 
stability of the U.S. financial system are difficult to identify 
because commonly used indicators, such as market prices, often do not 
reflect these risks and threats may not develop in precisely the same 
way as they did in past crises. Although the act created FSOC to 
provide for a more comprehensive view of threats to U.S. financial 
stability, it left most of the pre-existing fragmented and complex 
arrangement of independent federal and state regulators in place and 
generally preserved their statutory responsibilities. Further, we 
noted that FSOC does not have the authority to force agencies to 
coordinate or adopt compatible policies and procedures. However, we 
also reported that FSOC and OFR have made progress in establishing 
their operations and approaches for monitoring threats to financial 
stability, but these efforts could be strengthened. We made 
recommendations to strengthen the accountability and transparency of 
FSOC's and OFR's decisions and activities as well as to enhance 
collaboration among FSOC members and with external stakeholders. In 
response to our recommendations, Treasury emphasized the progress that 
FSOC and OFR have made since their creation and noted that more work 
remains, as they are relatively new organizations. 

Heightened Capital and Other Prudential Standards for SIFIs: 

The 2007-2009 financial crisis also revealed weaknesses in the 
existing regulatory framework for overseeing large, interconnected, 
and highly leveraged financial institutions. Such financial firms were 
subject to some form of federal supervision and regulation, but these 
forms of supervision and regulation proved inadequate and 
inconsistent. For example, fragmentation of supervisory responsibility 
allowed owners of banks and other insured depository institutions to 
choose their own regulator. In addition, regulators did not require 
firms to hold sufficient capital to cover their trading and other 
losses or to plan for a scenario in which liquidity was sharply 
curtailed. Moreover, the regulatory framework did not ensure that 
banks fully internalized the costs of the risks that their failure 
could impose on the financial system and broader economy. 

The Dodd-Frank Act requires the Federal Reserve to supervise and 
develop enhanced capital and other prudential standards for SIFIs, 
which include bank holding companies with $50 billion or more in 
consolidated assets and any nonbank financial company that FSOC 
designates.[Footnote 67] The act requires the enhanced prudential 
standards to be more stringent than standards applicable to other bank 
holding companies and financial firms that do not present similar 
risks to U.S. financial stability. The act further allows the enhanced 
standards to increase in stringency based on the systemic footprint 
and risk characteristics of each firm. The Federal Reserve plans to 
implement some of its enhanced standards in conjunction with its 
implementation of Basel III, a new capital regime developed by the 
Basel Committee on Banking Supervision.[Footnote 68] The act's 
provisions related to SIFIs include the following: 

* Risk-based capital requirements and leverage limits: The Federal 
Reserve must establish capital and leverage standards, which as 
proposed would include a requirement for SIFIs to develop capital 
plans to help ensure that they maintain capital ratios above specified 
standards, under both normal and adverse conditions. In addition, the 
Federal Reserve has announced its intention to apply capital 
surcharges to some or all SIFIs based on the risks SIFIs pose to the 
financial system. 

* Liquidity requirements: The Federal Reserve must establish SIFI 
liquidity standards, which as proposed would include requirements for 
SIFIs to hold liquid assets that can be used to cover their cash 
outflows over short time periods. 

* Single-counterparty credit limits: The Federal Reserve must propose 
rules that, in general, limit the total net credit exposure of a SIFI 
to any single unaffiliated company to 25 percent of its total capital 
stock and surplus. 

* Risk management requirements: Publicly traded SIFIs must establish a 
risk committee and be subject to enhanced risk management standards. 

* Stress testing requirements: The Federal Reserve is required to 
conduct an annual evaluation of whether SIFIs have sufficient capital 
to absorb losses that could arise from adverse economic 
conditions.[Footnote 69] 

* Debt-to-equity limits: Certain SIFIs may be required to maintain a 
debt-to-equity ratio of no more than 15-to-1. 

* Early remediation: The Federal Reserve is required to establish a 
regulatory framework for the early remediation of financial weaknesses 
of SIFIs in order to minimize the probability that such companies will 
become insolvent and the potential harm of such insolvencies to the 
financial stability of the United States. 

A broad range of financial market regulators, academics, and industry 
and public interest group experts generally expect the enhanced 
prudential standards to help increase the resilience of SIFIs and 
reduce the potential for a SIFI's financial distress to spill over to 
the financial system and broader economy. Higher capital levels 
increase a firm's resilience during times of financial stress because 
more capital is available to absorb unexpected losses. Similarly, 
increased liquidity (e.g., holding more liquid assets and reducing 
reliance on short-term funding sources) can reduce the likelihood that 
a firm will have to respond to temporary strains in credit markets by 
cutting back on new lending or selling assets at depressed prices. 
Increased capital and liquidity levels together can limit the 
potential for large, unexpected losses in the financial system to 
disrupt the provision of credit and other financial services to 
households and businesses, which occurred in the most recent financial 
crisis. Finally, limiting counterparty credit exposures also can help 
to minimize spillover effects. 

A number of experts viewed the act's enhanced prudential standards for 
SIFIs as particularly beneficial, because such institutions pose 
greater risks to the orderly functioning of financial markets than 
less systemically significant institutions, and subjecting SIFIs to 
stricter standards can cause them to internalize the costs of the 
risks they pose to the system. For example, the Federal Reserve 
intends to issue a proposal that would impose capital surcharges on 
SIFIs based on a regulatory assessment of the systemic risk they pose, 
consistent with a framework agreed to by the Basel Committee.[Footnote 
70] In addition, the Dodd-Frank Act's enhanced prudential standards 
provisions allow federal regulators to impose more stringent risk 
management standards and oversight of SIFIs' activities, including by 
conducting stress tests, to help ensure that weaknesses are addressed 
before they threaten the financial system. Experts noted that these 
stricter standards, including the surcharges, could serve as a 
disincentive to financial firms to become larger or otherwise increase 
the risks they pose to the broader financial system. 

Despite generally supporting an increase in the capital requirements, 
experts questioned the potential effectiveness of certain aspects of 
the enhanced prudential standards for SIFIs: 

* Impact on "too-big-to-fail" perceptions: Experts suggested that the 
market may view SIFIs as too big to fail, paradoxically giving such 
firms an implicit promise of government support if they run into 
financial difficulties. As discussed below, perceptions that SIFIs are 
too big to fail can weaken incentives for creditors to restrain 
excessive risk-taking by SIFIs and could give such firms a funding 
advantage over their competitors. However, others noted that the 
heightened standards were specifically designed to address these 
issues and view the act as explicitly prohibiting federal government 
support for SIFIs. For example, the act revises the Federal Reserve 
Act to prohibit the Federal Reserve from providing support to 
individual institutions in financial distress and, as discussed below, 
the act creates a new option for liquidating such firms. 

* Limits of Basel approach to capital standards: The Federal Reserve 
will base its enhanced regulatory capital standards, in part, on 
Basel's approach, which several experts view as having limitations. 
They recognized that the Basel III standards address some of the 
limitations that the financial crisis revealed in the regulatory 
capital framework, but maintain that Basel III continues to place too 
much reliance on risk-based approaches to determining capital 
adequacy.[Footnote 71] During the 2007-2009 crisis, some banks 
experienced capital shortages, in part because they suffered large 
losses on assets that were assigned low risk weights under Basel's 
standards but posed greater risk than their risk weights. The Basel 
III framework will increase risk weights for certain asset classes--
and includes a leverage ratio as a safeguard against inaccurate risk 
weights--but experts noted that the potential remains for financial 
institutions to "game" the Basel risk weights by increasing holdings 
of assets that carry risk-weights that are lower than their actual 
risks. In addition, some experts maintain that the Basel standards 
overall may not provide a sufficient buffer to protect firms during 
times of stress. However, one regulator noted that the leverage ratio, 
and the higher requirements for common equity and tier 1 capital 
called for in the Basel III standards, represent a significant 
tightening of capital regulation (in combination with the imposition 
of some higher risk weights and better quality of capital). 

Implementation of these SIFI provisions is ongoing. In January 2012, 
the Federal Reserve proposed rules to implement the enhanced 
prudential standards, but has not yet finalized all of these rules. 
[Footnote 72] In addition, the Federal Reserve and other federal 
prudential regulators are continuing to work to implement Basel III. 
[Footnote 73] As of December 2012 FSOC had not yet designated any 
nonbank financial companies for Federal Reserve supervision; the 
Federal Reserve will subsequently be responsible for developing rules 
for the heightened capital and other prudential standards for these 
entities.[Footnote 74] 

Orderly Liquidation Authority: 

Faced with the impending failure of a number of large financial 
companies during the 2007-2009 financial crisis, federal financial 
regulators generally had two options: (1) allowing these companies to 
file for bankruptcy at the risk of exacerbating the crisis (e.g., 
Lehman Brothers) or (2) providing such companies with emergency 
funding from the government at the risk of increasing moral hazard 
(e.g., AIG). As we previously reported, traditional bankruptcy may not 
be effective or appropriate for financial companies for a variety of 
reasons.[Footnote 75] For example, in bankruptcy proceedings for 
companies that hold derivatives or certain other qualified financial 
contracts, creditors may terminate such contracts, even though 
creditors generally may not terminate other contracts because they are 
subject to automatic stays. Termination of derivative contracts can 
lead to large losses for the failed firm and other firms through fire 
sales and other interconnections.[Footnote 76] For example, the 
insolvency of Lehman Brothers had a negative effect on financial 
stability by contributing to a run on money market mutual funds and 
disrupting certain swaps markets.[Footnote 77] Further, bankruptcy is 
a domestic legal process that varies by jurisdiction. Thus, the 
bankruptcy of a financial company with foreign subsidiaries, such as 
Lehman Brothers, can raise difficult international coordination 
challenges. 

In contrast to the Lehman case, the government provided support to 
some financial firms, such as AIG, because of concerns that their 
failures would further disrupt the broader financial system. A number 
of experts maintain this government assistance increased moral hazard 
by encouraging market participants to expect similar emergency actions 
in future crises for large, interconnected financial institutions--in 
effect, reinforcing perceptions that some firms are too big to fail. 
The perception of certain firms as too big to fail weakens market 
discipline by reducing the incentives of shareholders, creditors, and 
counterparties of these companies to discipline excessive risk taking. 
[Footnote 78] For example, creditors and shareholders may not demand 
that firms they view as too big to fail make adequate disclosures 
about these risks, which could further undermine market discipline. 
[Footnote 79] Perceptions that firms are too big to fail also can 
produce competitive distortions because companies perceived as 'too 
big to fail' may be able to fund themselves at a lower cost than their 
competitors. 

The Dodd-Frank Act's Title II provides the federal government with a 
new option for resolving failing financial companies by creating a 
process under which FDIC has the authority to liquidate large 
financial companies, including nonbanks, outside of the bankruptcy 
process--called orderly liquidation authority (OLA). In general, under 
this authority, FDIC may be appointed receiver for a financial firm if 
the Treasury Secretary determines that the firm's failure would have a 
serious adverse effect on U.S. financial stability. Under OLA, FDIC 
must maximize the value of the firm's assets, minimize losses, 
mitigate systemic risk, and minimize moral hazard. OLA also 
establishes additional authorities for FDIC as receiver, such as the 
ability to set up a bridge financial company and to borrow funds from 
the Treasury to carry out the liquidation.[Footnote 80] FDIC can 
subsequently collect funding for the OLA process from the financial 
industry after a company has been liquidated. 

A range of financial market regulators, academics, and industry and 
public interest group experts identified a number of ways in which the 
Dodd-Frank Act's OLA provisions could help mitigate threats to the 
financial system posed by the failure of SIFIs or other large, 
complex, interconnected financial companies. First, the OLA framework 
may be effective in addressing the limitations of the bankruptcy 
process. For example, experts noted that under OLA, FDIC will be able 
to control the liquidation process and can temporarily prevent 
creditors from terminating their qualified financial contracts, the 
termination of which could prompt fire sales that could be 
destabilizing.[Footnote 81] Second, under its rules, FDIC has 
indicated that it will ensure that creditors and shareholders of a 
company in OLA will bear the losses of the company. By helping to 
ensure that creditors and shareholders will bear losses in the event 
of a failure, OLA could strengthen incentives for creditors and 
shareholders to monitor these firms' risks. Finally, OLA could help 
convince market participants that government support will no longer be 
available for SIFIs, which could increase investors' incentives to 
demand that SIFIs become more transparent and refrain from taking 
excessive risks. 

Experts also identified a number of potential challenges and 
limitations of OLA. OLA is new and untested, and its effectiveness in 
reducing moral hazard will depend on the extent to which the market 
believes FDIC will use OLA to make creditors bear losses of any SIFI 
failure. Experts identified a conflict between OLA's goal of 
eliminating government bailouts on one hand and minimizing systemic 
risk on the other. For example, if FDIC imposes losses on some 
creditors of a failed SIFI, these losses could cause other SIFIs to 
fail.[Footnote 82] In that regard, some experts observed that 
governments historically have not allowed potentially systemically 
important financial firms to fail during a crisis and question whether 
a different outcome can be expected in the future. Moreover, experts 
questioned whether FDIC has the capacity to use OLA to handle multiple 
SIFI failures, which might occur during a crisis. Another concern is 
that OLA will be applied to globally active financial institutions, 
and how FDIC and foreign regulators will handle the non-U.S. 
subsidiaries of a failed SIFI remains unclear. 

In addition, SIFIs must formulate and submit to their regulators 
resolution plans (or "living wills") that detail how they could be 
resolved in bankruptcy should they encounter financial difficulties. 
[Footnote 83] Experts noted that resolution plans may provide 
regulators with critical information about a firm's organizational 
structure that could aid the resolution process. The plans also could 
motivate SIFIs to simplify their structures, and this simplification 
could help facilitate an orderly liquidation. However, other experts 
commented that while resolution plans may assist regulators in gaining 
a better understanding of SIFI structures and activities, the plans 
may not be useful guides during an actual liquidation--in part because 
of the complex structures of the institutions or because the plans may 
not be helpful during a crisis. Resolution plans also may provide 
limited benefits in simplifying firm structures, in part because tax, 
jurisdictional, and other considerations may outweigh the benefits of 
simplification. 

FDIC has finalized key OLA rules and is engaged in a continuing 
process of clarifying how certain aspects of the OLA process would 
work.[Footnote 84] For example, FDIC officials have clarified that the 
OLA process will focus on the holding company level of the firm, and 
stated that the creation of the bridge institution will help ensure 
that solvent subsidiaries may continue to function. In addition, FDIC 
and the Federal Reserve are in the process of reviewing the first set 
of resolution plans, which were submitted in July 2012. 

Regulation of Swaps: 

Except for credit default swaps (CDS)--a type of derivative used to 
hedge or transfer credit risk--other over-the-counter (OTC) swaps and 
derivative contracts generally were not central to the systemwide 
problems encountered during the financial crisis, according to 
FSOC.[Footnote 85] Nonetheless, FSOC noted that OTC derivatives 
generally were a factor in the propagation of risks during the recent 
crisis because of their complexity and opacity, which contributed to 
excessive risk taking, a lack of clarity about the ultimate 
distribution of risks, and a loss in market confidence. In contrast to 
other OTC derivatives, credit default swaps exacerbated the 2007-2009 
crisis, particularly because of AIG's large holdings of such swaps, 
which were not well understood by regulators or other market 
participants. Furthermore, the concentration of most OTC derivatives 
trading among a small number of dealers created the risk that the 
failure of one of these dealers could expose counterparties to sudden 
losses and destabilize financial markets. While some standardized 
swaps, such as interest rate swaps, have traditionally been cleared 
through clearinghouses--which stand between counterparties in assuming 
the risk of counterparty default--most CDS and most other swaps have 
been traded in the OTC market where holders of derivatives contracts 
bear the risk of counterparty default.[Footnote 86] In addition, swaps 
traded in the OTC market have typically featured an exchange of margin 
collateral to cover current exposures between the two parties, but not 
"initial" margin to protect a nondefaulting party against the cost of 
replacing the contract if necessary. As of the end of the second 
quarter of 2012, the outstanding notional value of derivatives held by 
insured U.S. commercial banks and savings associations totaled more 
than $200 trillion.[Footnote 87] 

As noted earlier, Title VII of the Dodd-Frank Act, also known as the 
Wall Street Transparency and Accountability Act of 2010, establishes a 
new regulatory framework for swaps to reduce risk, increase 
transparency, and promote market integrity in swaps markets. Among 
other things, Title VII generally: 

* provides for the registration and regulation of swap dealers and 
major swap participants, including subjecting them to (1) prudential 
regulatory requirements, such as minimum capital and minimum initial 
and variation margin requirements and (2) business conduct 
requirements to address, among other things, interaction with 
counterparties, disclosure, and supervision;[Footnote 88] 

* imposes mandatory clearing requirements on swaps but exempts certain 
end users that use swaps to hedge or mitigate commercial risk; 
[Footnote 89] 

* requires swaps subject to mandatory clearing to be executed on an 
organized exchange or swap execution facility, which promotes pre-
trade transparency (unless no facility offers the swap for trading); 
[Footnote 90] and: 

* requires all swaps to be reported to a registered swap data 
repository or, if no such repository will accept the swap, to CFTC or 
SEC, and subjects swaps to post-trade transparency requirements (real-
time public reporting of swap data). 

Figure 8 illustrates some of the differences between swaps traded on 
exchanges and cleared through clearinghouses and swaps traded in the 
OTC market.[Footnote 91] 

Figure 8: Overview of Clearing, Trading, and Reporting Requirements 
under Swaps Reforms: 

[Refer to PDF for image: illustration] 

Exchange-traded and centrally cleared swaps: 

Generally, swaps that can be centralized may be required to be traded 
on an exchange or swap execution facility (SEF) and then cleared 
through a central counterparty (CCP, or clearinghouse). 

Trade: 
Counterparty 1: 
Counterparty 2: 
Exchange or SEF: 
Executing trades through an exchange or SEF could improve pretrade 
price transparencies. In OTC markets, customers had limited ability to 
observe swap prices. 

Margin ($): 
Counterparty 1: 
Counterparty 2: 
Central Counterparty (CCP): 
The CCP stands between the counterparties and guarantees all trades. A 
single transaction between two counterparties in effect becomes two 
contracts: one between each trader and the CCP. Credit risk remains as 
the CCP must meet its obligations. Counterparties are required to post 
margin with the CCP to protect against losses. 

Reporting: 
Swap data repositories: 
Swaps, whether centrally cleared or traded OTC, must be reported to a 
data repository, CFTC, or SEC. Reporting and collection of swap data 
are intended to give CFTC and SEC a more complete picture of the 
derivatives markets. 

Over-the-counter (OTC) swaps: 

Bilateral trade and margin ($): 
Counterparty 1: 
Counterparty 2: 
Swap dealer: 
In the OTC market, a network of dealers stand ready to take either 
long or short positions and earn income on spreads and fees. The 
dealer assumes the risk of customer default and the customer assumes 
the risk of dealer default. 

End user exemption: 
The Dodd-Frank Act provides exceptions to the clearing requirement for 
cases where one of the counterparties to a trade is a "nonfinancial 
entity" and meets certain other requirements. 

Reporting: 
Swap data repositories: 
Swaps, whether centrally cleared or traded OTC, must be reported to a 
data repository, CFTC, or SEC. Reporting and collection of swap data 
are intended to give CFTC and SEC a more complete picture of the 
derivatives markets. 

Source: GAO analysis of the Dodd-Frank Act. 

[End of figure] 

A broad range of financial market regulators, participants, and 
observers expect various provisions under Title VII to help promote 
financial stability, but they also identified potential obstacles or 
challenges.[Footnote 92] 

* Clearing through clearinghouses: According to experts, the clearing 
of swaps through clearinghouses could be beneficial. Clearing can 
reduce the vulnerability of the financial system to the failure of one 
or a few of the major swap dealers by transferring credit risk from 
the swap counterparties to the clearinghouse.[Footnote 93] By becoming 
the central counterparty in every trade, a clearinghouse can provide 
multilateral netting efficiencies to reduce counterparty credit and 
liquidity risks faced by market participants. Unlike dealers, 
clearinghouses do not take positions on the trades they clear and may 
have stronger incentives to develop effective risk management measures 
and monitor their members' financial condition. In addition, 
clearinghouses have tools to mitigate counterparty credit risk, for 
instance, initial and variation margin, as well as the ability to 
assess their members for additional financial contributions. At the 
same time, experts have pointed out that clearinghouses concentrate 
credit risk and thus represent a potential source of systemic risk. 
[Footnote 94] For example, a former regulatory official told us that, 
in her opinion, clearinghouses essentially are too big to fail, given 
that the Dodd-Frank Act includes provisions mandating centralized 
clearing of standardized swaps and authorizing the Federal Reserve to 
provide emergency liquidity to systemically important clearinghouses 
provided certain conditions are met. Others commented that 
clearinghouses may be engaged in clearing less standardized or 
illiquid products, which could pose risk-management challenges for 
clearinghouses and expose them to greater risks. 

* Margin requirements: Experts expect the margin requirements for 
uncleared swaps with swap dealers and major swap participants to help 
promote financial stability by helping to ensure that market 
participants have enough collateral to absorb losses. For example, 
imposing both initial and variation margin requirements on uncleared 
swaps could help prevent the type of build-up of large, 
uncollateralized exposures experienced by AIG. Some experts commented 
that margin requirements, depending how they are implemented, could 
have a negative impact on liquidity if there is not a sufficient 
supply of quality securities that can be posted as collateral to meet 
margin requirements. 

* Reporting requirements: Many experts generally expect the swaps 
reforms that improve transparency to benefit the financial system. For 
example, the requirement for regulatory reporting of swaps 
transactions may provide regulators with a better understanding of the 
current risks in the swaps market and help enhance their oversight of 
the market. Similarly, public reporting of swap data could benefit 
market participants by providing them with data on prices and other 
details about swaps that they can use to better assess their risks. A 
number of industry representatives noted that the public reporting 
requirement could lead some market participants to reduce their 
participation out of fear that others can take advantage of such 
information. In their view, this could result in a loss of liquidity 
to the system. 

CFTC and SEC have finalized many of the regulations needed to 
implement Title VII, though several had yet to be finalized as of 
December 2012. OTC derivatives are globally traded, and many other 
jurisdictions are in the process of developing new regulatory regimes. 
However, the United States is one of the first jurisdictions to have 
enacted legislation in this area. Indeed, the implementation of at 
least one derivatives-related provision has already been delayed 
because of the importance of coordinating with international entities. 
The outcome of the reform process in other jurisdictions will 
determine the extent to which U.S. firms could be at a competitive 
advantage or disadvantage. (See appendix II for a description of 
international coordination efforts.) 

Mortgage-Related and Other Reforms That Could Enhance Financial 
Stability: 

While the previously discussed Dodd-Frank Act provisions were commonly 
cited as the most important ones for enhancing U.S. financial 
stability, several financial market regulators, participants, and 
observers we spoke with identified other provisions that they expect 
to help enhance financial stability. As with the provisions discussed 
above, certain key rules implementing the following provisions have 
not yet been finalized. 

* Mortgage-related reforms: According to experts, problems in the 
mortgage market, particularly with subprime mortgages, played a 
central role in the recent financial crisis, and the act's mortgage-
related reforms may help prevent such problems in the future.[Footnote 
95] Some bank and nonbank mortgage lenders weakened their underwriting 
standards and made mortgage loans to homebuyers who could not afford 
them or engaged in abusive lending practices before the crisis. These 
factors, along with the decline in housing prices, contributed to the 
increase in mortgage defaults and foreclosures. A number of the act's 
provisions seek to reform the mortgage market--for example, by 
authorizing CFPB to supervise nonbank mortgage lenders and by 
prohibiting certain mortgage lending practices, such as issuing 
mortgage loans without making a reasonable and good faith effort to 
determine that the borrower has a reasonable ability to repay. 
[Footnote 96] Some industry representatives have expressed concerns 
that these reforms could prevent certain potential homebuyers from 
being able to obtain mortgage loans. However, other experts noted that 
before the crisis some loans had rates that did not fully reflect 
their risks, which contributed to an excess of credit, and the act's 
reforms may help ensure that loans are accurately priced to reflect 
risks. Many of the Dodd-Frank Act's mortgage reforms have not yet been 
implemented through rulemaking. 

* Risk retention for asset securitizations: According to experts, the 
securitization of residential mortgages into mortgage-backed 
securities that subsequently were part of other securitizations also 
played a central role in the crisis, and the act contains provisions 
to reform the market.[Footnote 97] Experts also noted that 
institutions that created mortgage-backed securities in the lead-up to 
the crisis engaged in a number of practices that undermined the 
quality of their securities, including not adequately monitoring the 
quality of the mortgages underlying their securities, because they did 
not bear the risk of significant losses if those mortgages defaulted. 
[Footnote 98] The act contains provisions that require securitizers of 
asset-backed securities to retain some "skin in the game" in the form 
of a certain percentage of the credit risk in asset-backed securities 
they create.[Footnote 99] However, experts have different views on the 
extent to which the level of risk retention for securitizations was 
central to the problems encountered during the recent crisis, and a 
few do not view these provisions as potentially beneficial for 
financial stability. Regulators proposed implementing rules for the 
provision in 2011 but had yet to finalize the rules as of December 
2012. 

* The Volcker rule: The role that proprietary trading--trading 
activities conducted by banking entities for their own account as 
opposed to those of their clients--played in the recent crisis is a 
matter of debate.[Footnote 100] However, a number of experts maintain 
that the ability of banking entities to use federally insured deposits 
to seek profits for their own account provides incentives for them to 
take on excessive risks. In particular, some have noted that 
commercial banks that benefit from the federal financial safety net 
enjoy access to subsidized capital and thus do not bear the full risks 
of their proprietary trading activities. To address these concerns, 
section 619 of the Dodd-Frank Act, referred to as the Volcker rule, 
generally prohibits a banking entity from engaging in proprietary 
trading or acquiring or retaining more than a certain maximum 
percentage of any equity, partnership, or other ownership interest in, 
or sponsoring, a hedge fund or a private equity fund, among other 
restrictions involving transactions between covered banking entities 
and sponsored hedge funds and private equity funds.[Footnote 101] A 
number of experts view these restrictions as enhancing financial 
stability by discouraging excessive risk-taking by these institutions. 
Others, however, have noted that the Volcker rule, by prohibiting 
certain proprietary activities of these institutions, could have 
adverse effects on liquidity and, in turn, the unintended effect of 
undermining financial stability. In 2011, regulators proposed rules to 
implement the Volcker rule but had not yet finalized them as of 
December 2012. 

Other Dodd-Frank Provisions May Lead to Additional Consumer and 
Investor Benefits: 

Financial market regulators, participants, and observers whom we 
interviewed also identified provisions that may result in benefits 
beyond increased financial stability. For example, the act may enhance 
consumer and investor protections and improve economic efficiency. As 
with the provisions previously noted, the realization of such benefits 
will depend, in part, on how regulators implement the provisions. 
Benefits beyond financial stability that experts highlighted include 
the following: 

* Enhanced consumer protections: The Dodd-Frank Act's Title X 
consolidates rulemaking and other authorities over consumer financial 
products and services under CFPB. The new agency assumes authority to 
implement consumer protection laws, such as the Truth in Lending Act 
and Home Ownership and Equity Protection Act of 1994. CFPB could 
assist consumers by improving their understanding of financial 
products and services.[Footnote 102] For example, experts noted that 
consumers could benefit from CFPB's efforts, which include providing 
information on consumer financial products and simplifying disclosures 
for mortgages, credit cards, and other consumer financial products. 

* Enhanced investor protections: Certain provisions in the act could 
provide shareholders with greater influence over, and insight into, 
the activities of publicly traded companies. For example, the act 
contains provisions that require shareholder advisory votes on 
executive compensation, disclosure of the ratio between the chief 
executive officer's annual total compensation and median annual total 
compensation for all other employees, and clawback policies for 
erroneously awarded incentive-based compensation.[Footnote 103] 

* Improving resource allocation in the economy: Some experts noted 
that mortgages and related credit instruments were not accurately 
priced before the crisis to reflect their risks. As a result, the 
economy experienced a credit bubble that facilitated a misallocation 
of resources to the housing sector. For example, one expert noted that 
residential housing construction during the 2000s was excessive and 
inefficient. To the extent that the act contributes to a more accurate 
pricing of credit, the economy could benefit from a more efficient 
allocation of resources across the broader economy. 

Quantifying Potential Benefits Is Difficult, but Some Approaches May 
Provide Useful Insights: 

The Dodd-Frank Act's potential benefit of reducing the probability or 
severity of a future financial crisis cannot be readily observed and 
this potential benefit is difficult to quantify. Any analyses must be 
based on assumptions about, or models of, the economy. Consequently, 
the results of such analyses are subject to substantial uncertainty. 
Nonetheless, as we noted previously in this report, a working group of 
the Basel Committee on Banking Supervision summarized several studies 
that analyze the costs of financial crises, and that used different 
macroeconomic models of the economy to estimate the impact of more 
stringent capital and liquidity standards on the annual likelihood of 
a financial crisis, and the benefits of avoiding associated output 
losses.[Footnote 104] 

The Basel Committee report suggests that increases in capital and 
liquidity ratios are associated with a reduction in the probability 
that a country will experience a financial crisis. Higher capital and 
liquidity requirements may generate social benefits by reducing the 
frequency and severity of banking crises and the consequent loss of 
economic output. The Basel Committee working group found that although 
there is considerable uncertainty about the exact magnitude of the 
effect, the evidence suggests that higher capital and liquidity 
requirements can reduce the probability of banking crises. For 
example, the models suggest, on average, that if the banking system's 
capital ratio--as measured by the ratio of tangible common equity to 
risk-weighted assets--is 7 percent, then a 1 percentage point increase 
in the capital ratio is associated with a 1.6 percentage point 
reduction in the probability of a financial crisis--from 4.6 percent 
to 3.0 percent per year. The working group also found that if the 
capital ratio was 7 percent, then a 12.5 percent increase in the ratio 
of liquid assets to total assets in the banking system is associated 
with a 0.8 percentage point reduction in the probability of a crisis 
per year, on average. In addition, the incremental benefits of higher 
capital requirements are greater when bank capital ratios are 
increased from lower levels and they decline as standards become 
progressively more stringent. For example, the models suggest, on 
average, that the reduction in the likelihood of a crisis is three 
times larger when the capital ratio is increased from 7 percent to 8 
percent than it is when the capital ratio is increased from 10 percent 
to 11 percent. The further away banks are from insolvency, the lower 
their marginal benefit is from additional protection. 

Estimates of the reduced probability of a financial crisis are subject 
to a number of limitations. For example, researchers note that the 
reduction in the probability of a crisis depends on the baseline 
assumptions about the average probability of a crisis before the 
policy changes--in this case, before the increase in capital 
requirements. In addition, overall economic conditions, or factors 
outside of the financial system, also may affect the probability of a 
financial crisis. 

The Basel Committee working group also summarized the studies' 
estimates of the potential benefits from higher capital and liquidity 
requirements in terms of economic output gains that could result from 
a lower probability of a crisis. The studies used estimates of the 
costs of a crisis to estimate that a 1 percent decrease in the annual 
probability of a crisis could have a benefit of 0.2 percent to 1.6 
percent per Year: of increased economic output, depending on the 
extent to which the crisis losses are temporary or permanent. If, for 
example, annual GDP were $15 trillion (around the size of U.S. GDP) 
these estimates suggest that the economic benefit in terms of 
increased GDP could range from approximately $29 billion to about $238 
billion per year. These estimates also are subject to limitations, 
however. As we previously discussed in this report, estimates of 
financial crisis losses have varied widely depending on the 
assumptions made. In addition, these models did not take into account 
variations in responses to higher capital and liquidity requirements 
among institutions and regulatory environments. 

Given the difficulty of measuring the extent to which the Dodd-Frank 
Act may reduce the probability of a future crisis, a few academics 
have proposed a more conceptual approach for comparing the act's 
potential benefits and costs.[Footnote 105] According to these 
experts, the benefits of the act can be framed by determining the 
percent by which the cost of a financial crisis needs to be reduced to 
be equal to the act's costs. If the cost of a future crisis is 
expected to be in the trillions of dollars, then the act likely would 
need to reduce the probability of a future financial crisis by only a 
small percent for its expected benefit to equal the act's expected 
cost. Although an academic told us this thought exercise helped put 
the benefits and costs of the Dodd-Frank Act into perspective, it 
provides no insight into whether the act reduces the probability of a 
future crisis by even a small percent. 

Significance of the Act's Costs Is Not Fully Known: 

The Dodd-Frank Act requires federal agencies and the financial 
services industry to expend resources to implement or comply with its 
requirements, and some of its reforms are expected to impose costs on 
the economy. First, federal agencies are devoting resources to fulfill 
rule-making and other new regulatory responsibilities created by the 
act. A large portion of these agency resources are funded by fees paid 
by industry participants or other revenue sources outside of 
congressional appropriations, limiting the impact of these activities 
on the federal budget deficit. Second, the act contains a broad range 
of reforms that generally are imposing or will impose additional 
regulations and costs on a correspondingly broad range of financial 
institutions, including banks, broker-dealers, futures commission 
merchants, investment advisers, and nonbank financial companies. Given 
the act's focus on enhancing financial stability, large, complex 
financial institutions will likely bear the greatest costs, but 
smaller financial institutions and other financial market participants 
also will incur costs.[Footnote 106] Third, by imposing costs on the 
financial services industry, the act also may impose costs on the 
broader economy and reduce output. For example, financial institutions 
may charge their customers more for credit or other financial 
services. While the act's costs can be viewed as the price to be paid 
to achieve a more resilient financial system and other benefits, some 
industry representatives question whether the costs, individually or 
cumulatively, are excessive. Furthermore, observers have also 
expressed concerns about potential unintended consequences of the act, 
such as reducing the competitiveness of U.S. financial institutions in 
the global financial marketplace. 

Resources Devoted to the Dodd-Frank Act's Implementation Vary Widely 
across Federal Agencies: 

The amount of funding that 10 federal financial entities have reported 
as associated with their implementation of the Dodd-Frank Act varied 
significantly from 2010 through 2013, and the amounts have been 
increasing for some of these entities. Funding resources associated 
with the Dodd-Frank Act's implementation from 2010 through 2012 ranged 
from a low of $4.3 million for FHFA to a high of $432.3 million for 
CFPB (see table 2). In addition, funding associated with the act's 
implementation increased from 2011 through 2012 for all but one of the 
agencies, FHFA, and more than doubled for four entities: OFR, FSOC, 
CFPB, and OCC. Three of these four entities--OFR, FSOC, and CFPB--were 
created through the Dodd-Frank Act and thus are in the process of 
establishing management structures and mechanisms to carry out their 
missions. Likewise, according to CFPB and OFR, while some of their 
funding was used for recurring staffing costs, other funding was used 
for start-up costs, such as systems development, contractor support, 
and data purchases. According to FSOC and OFR, the increase in funding 
is directly proportional to the growth in their staffing and reflects 
an increase in the size and scope of their organizations. Some new 
funding resources reported by agencies may represent transfers between 
entities rather than new funding resources. For example, the large 
increase in Dodd-Frank-related funding for OCC between 2011 and 2012 
reflects OCC's integration of OTS responsibilities and staff, 
according to OCC officials. In addition, new funding resources for 
CFPB include some funding resources transferred from the Federal 
Reserve. In such cases, these new funding resources do not represent 
an incremental cost of the act's implementation. 

Table 3: Summary of 10 Federal Entities' Reported Funding Resources 
Associated with Implementation of the Dodd-Frank Act, 2010 through 
2013: 

Agency/Entity: FSOC[A]; 
2010: $0.0; 
2011: $2.9 million; 
2012: $6.0 million; 
2010-2012 Total: $8.9 million; 
2013 Projections: $8.7 million. 

Agency/Entity: OFR[A]; 
2010: $0.0; 
2011: $11.3 million; 
2012: $39.5 million; 
2010-2012 Total: $50.8 million; 
2013 Projections: $78.1 million. 

Agency/Entity: CFPB[A]; 
2010: $9.2 million; 
2011: $123.3 million; 
2012: $299.8 million; 
2010-2012 Total: $432.3 million; 
2013 Projections: $447.7 million. 

Agency/Entity: Federal Reserve; 
2010: $7.3 million; 
2011: $62.7 million; 
2012: $93.1 million; 
2010-2012 Total: $163.1 million; 
2013 Projections: Not available. 

Agency/Entity: CFTC; 
2010: $0.0; 
2011: $15.4 million; 
2012: $21.9 million; 
2010-2012 Total: $37.3 million; 
2013 Projections: $80.0 million. 

Agency/Entity: SEC; 
2010: $0.0; 
2011: $23.5 million; 
2012: $39.5 million; 
2010-2012 Total: $63.0 million; 
2013 Projections: $129.0 million. 

Agency/Entity: FDIC; 
2010: $2.3 million; 
2011: $19.9 million; 
2012: $38.1 million; 
2010-2012 Total: $60.3 million; 
2013 Projections: Not available. 

Agency/Entity: FHFA; 
2010: $0.0; 
2011: $2.2 million; 
2012: $2.1 million; 
2010-2012 Total: $4.3 million; 
2013 Projections: $2.1 million. 

Agency/Entity: OCC; 
2010: $0.0; 
2011: $34.9 million; 
2012: $235.0 million; 
2010-2012 Total: $269.9 million; 
2013 Projections: Not available. 

Agency/Entity: Treasury; 
2010: $0.0; 
2011: $5.6 million; 
2012: $9.2 million; 
2010-2012 Total: $14.8 million; 
2013 Projections: $9.4 million. 

Source: GAO presentation of data from individual entities. 

Note: For 2010, 2011, and 2012, FSOC, OFR, CFPB, and Treasury provided 
estimates of actual resources expended on Dodd-Frank-related 
activities, and the other agencies provided estimates of the total 
resources made available or requested for Dodd-Frank-related 
activities. Federal Reserve and FDIC data are reported on a calendar 
Year: basis, but the other agency data are reported on a fiscal Year: 
basis. At the time of this review, the Federal Reserve, FDIC and OCC 
did not provide projections for 2013. 

[A] New entity. 

[End of table] 

To meet their Dodd-Frank-related responsibilities, federal entities 
reported that they have hired new staff, redirected staff from other 
areas, or used staff transferred from other entities. The number of 
full-time equivalents (FTE) reported by the 10 federal entities as 
associated with their implementation of the act also varied 
significantly from 2010 through 2013, and the amounts have been 
increasing for some entities (see table 3). The entities' estimates of 
new FTEs related to implementing the Dodd-Frank provisions for 2010 
through 2012 ranged from a low of 18 for FHFA to a high of 964 for the 
Federal Reserve. Some new FTEs reported by agencies represent 
transfers of staff between agencies rather than new hires. New FTEs 
for OCC in 2011 include staff transferred from OTS. In addition, new 
FTEs for CFPB include staff transferred from the agencies whose 
consumer protection responsibilities were transferred to CFPB. In such 
cases where new FTEs for an entity have resulted from a transfer of 
existing regulatory responsibilities between entities, these new FTEs 
do not represent an incremental cost of the act's implementation. 

Table 4: Summary of 10 Federal Entities' Reported New and Redirected 
Full-Time Equivalents Associated with Implementation of the Dodd-Frank 
Act, 2010 through 2013: 

Agency/Entity: FSOC; 
2010: 0; 
2011: 17; 
2012: 7; 
2010-2012 Total: 24; 
2013 Projections: 0. 

Agency/Entity: OFR; 
2010: 0; 
2011: 13; 
2012: 47; 
2010-2012 Total: 60; 
2013 Projections: 167. 

Agency/Entity: CFPB; 
2010: 0; 
2011: 178; 
2012: 653; 
2010-2012 Total: 831; 
2013 Projections: 528. 

Agency/Entity: Federal Reserve; 
2010: 69; 
2011: 367; 
2012: 528; 
2010-2012 Total: 964; 
2013 Projections: Not available. 

Agency/Entity: CFTC; 
2010: 0; 
2011: 121; 
2012: 126; 
2010-2012 Total: 247; 
2013 Projections: 268. 

Agency/Entity: SEC; 
2010: 0; 
2011: 14; 
2012: 51; 
2010-2012 Total: 65; 
2013 Projections: 227. 

Agency/Entity: FDIC; 
2010: 0; 
2011: 55; 
2012: 91; 
2010-2012 Total: 146; 
2013 Projections: Not available. 

Agency/Entity: FHFA; 
2010: 0; 
2011: 16; 
2012: 2; 
2010-2012 Total: 18; 
2013 Projections: 9. 

Agency/Entity: OCC; 
2010: 0; 
2011: 133; 
2012: 0; 
2010-2012 Total: 133; 
2013 Projections: 0. 

Agency/Entity: Treasury; 
2010: 0; 
2011: 33; 
2012: 10; 
2010-2012 Total: 43; 
2013 Projections: 3. 

Source: GAO presentation of data from individual entities. 

Note: Federal Reserve and FDIC data are reported on a calendar Year: 
basis, and the other agency data are reported on a fiscal-Year: basis. 
At the time of this review, the Federal Reserve and FDIC did not 
provide projections for 2013. OCC reported that 131 FTEs for fiscal 
Year: 2011 were transferred from OTS, which the Dodd-Frank Act 
dissolved as of July 21, 2011. Because these FTEs were already on 
board at the beginning of fiscal Year: 2012, they are not considered 
new Dodd-Frank-related FTEs in fiscal Year: 2012. OCC also noted that 
the ongoing aspects of the Dodd-Frank Act, such as rulemakings and 
participating in FSOC-related activities, have been integrated into 
the agency's ongoing programs and activities and thus are not shown as 
separate initiatives related to the act's implementation. 

[End of table] 

A large portion of the federal entities' resources devoted to the 
act's implementation are funded by fees paid by regulated institutions 
or other sources outside the congressional appropriations process, 
limiting the impact of these activities on the federal budget deficit. 
Seven of the entities (CFPB, FSOC, OFR, FDIC, FHFA, OCC, and the 
Federal Reserve) are funded in full through assessments, fees, or 
other revenue sources and, thus, have not received any congressional 
appropriations. Moreover, FSOC and OFR are funded by assessments on 
large bank holding companies and nonbank financial companies 
designated by FSOC for supervision by the Federal Reserve.[Footnote 
107] SEC receives appropriations, but SEC collects transaction fees 
and assessments that are designed to recover the costs to the federal 
government of its annual appropriation. CFPB receives a mandatory 
transfer of funding from the Federal Reserve, subject to certain 
limits, but may request discretionary appropriations. Treasury and 
CFTC are funded through congressional appropriations.[Footnote 108] 
Although entities' funding resources and staff have increased due to 
implementation of the act, these increases are not expected to have a 
significant impact on the federal deficit. In 2011, CBO estimated that 
the Dodd-Frank Act would reduce federal deficits by $3.2 billion over 
the period from 2010 to 2020.[Footnote 109] CBO projected that the act 
would increase revenues by $13.4 billion and increase direct spending 
by $10.2 billion over this period. While CBO's analysis did not 
consider the potential impacts of the act's reforms on economic 
growth, its estimates suggest that the size of the act's direct 
impacts on federal spending is small relative to total federal net 
outlays of $3.6 trillion in fiscal Year: 2011. While fees and 
assessments paid by financial institutions to the federal entities 
help to limit the act's direct impacts on the federal budget deficit, 
they represent a cost to these institutions and could have indirect 
impacts on the economy, as discussed later in this report. 

In collecting and analyzing this information, we found challenges and 
limitations that affected our efforts to aggregate the data. For 
example, agencies told us that their reported funding and FTE 
resources for 2013 reflect their best estimates of the level of 
resources required to implement existing and new responsibilities but 
stated that these estimates were uncertain. As shown in tables 3 and 
4, a few agencies did not provide projections for 2013 resources 
related to the act's implementation. In addition, not all of the 
federal entities are on a federal fiscal year, so the reported 
budgetary activities for some entities cover different time frames. 
Moreover, the entities may have used different approaches to estimate 
the funding and FTE resources, potentially making the figures harder 
to compare across entities. 

The Act Imposes Costs on the Financial Services Industry but Limited 
Data Exist on the Magnitude of the Costs: 

The Dodd-Frank Act's provisions and regulations generally impose or 
are expected to impose costs on banks and other financial 
institutions. According to some academics and others, certain types of 
costs imposed by the act on financial institutions serve to make such 
institutions internalize costs that they impose on others through 
their risk-taking and thereby reduce the risk that they pose to the 
financial system. The extent to which the act imposes costs on 
financial institutions may vary among not only different types of 
financial firms (e.g., banks versus nonbank financial companies) but 
also among the same types of firms (e.g., large banks versus small 
banks). In discussions with regulators, industry representatives, and 
other experts, we identified two main categories of financial impacts 
on financial institutions: (1) increased regulatory compliance and 
other costs and (2) reduced revenue associated with new restrictions 
on certain activities.[Footnote 110] However, as commonly noted by 
financial firms in their annual reports, the Dodd-Frank Act's full 
impact on their businesses, operations, and earnings remains 
uncertain, in part because of the rulemakings that still need to be 
completed. For example, in its 2012 annual report, one large bank 
holding company noted that it could not quantify the possible effects 
of the significant changes that were under way on its business and 
operations, given the status of the regulatory developments. 
Furthermore, even when the reforms have been fully implemented, it may 
not be possible to determine precisely the extent to which observed 
costs can be attributed to the act versus other factors, such as 
changes in the economy. 

Regulatory Compliance and Other Costs: 

No comprehensive data are readily available on the costs that the 
financial services industry is incurring to comply with the Dodd-Frank 
Act. Representatives from financial institutions and industry 
associations told us that firms generally do not track their 
incremental costs for complying with the act. Moreover, they said that 
the piecemeal way that the act is being implemented makes it difficult 
to measure their regulatory costs. Likewise, none of the industry 
associations we met with are tracking the incremental costs that their 
members are incurring to comply with the act. Regulators and others 
have collected some data on certain compliance costs. Specifically, 
federal agencies typically estimate the cost of complying with any 
recordkeeping and reporting requirements of their rules under the 
Paperwork Reduction Act, but these estimates do not capture other 
types of compliance costs, which can be more substantial.[Footnote 
111] For example, an SEC rule on asset-backed securities requires 
issuers of such securities to conduct, or hire a third party to 
conduct, a review of the assets underlying the securities; this cost 
is not a paperwork-related cost and thus not included in the 
compliance costs captured under the Paperwork Reduction Act.[Footnote 
112] In May 2012, the Treasury Secretary asked the Federal Reserve's 
Federal Advisory Council, a group of bank executives, to prepare a 
study to provide regulators with more specific examples of the 
regulatory burdens imposed by the act's reforms. 

A number of the Dodd-Frank Act provisions target large financial firms 
and are expected to increase their compliance or other costs more 
significantly than for other financial firms. In particular, several 
provisions specifically apply to SIFIs, which include bank holding 
companies with $50 billion or more in total consolidated assets (which 
we refer to as "bank SIFIs") and nonbank financial companies 
designated by FSOC for supervision by the Federal Reserve. Examples of 
provisions targeting large financial institutions include the 
following: 

* Enhanced prudential standards: Higher capital and liquidity 
requirements can increase funding costs for banks.[Footnote 113] 
Studies by the Basel Committee on Banking Supervision, IMF, and 
Organization for Economic Cooperation and Development estimated that 
increased capital and liquidity requirements would have modest impacts 
on funding costs for financial institutions. In contrast, a study by 
the International Institute of Finance, a global association of 
financial institutions, found much larger negative impacts. 
Differences in these studies' estimates result from differences in 
certain assumptions. For example, the size of the estimated impact on 
funding costs depends on assumptions about how much of the increase in 
banks' capital levels is due to regulatory reforms rather than other 
factors. Some researchers have noted that attributing all of the 
increase in banks' capital levels to regulatory reforms may overstate 
the cost impacts of these reforms, because banks likely increased 
their capital levels, to some extent, in response to market forces 
after the crisis. 

* Resolution plans: Regulators and industry officials stated that bank 
SIFIs have devoted significant staffing resources to developing the 
required resolution plans and that some plans submitted in July 2012 
were thousands of pages in length.[Footnote 114] Regulators estimated 
that each bank SIFI required to complete a full resolution plan (20 
banks) will spend, on average, 9,200 hours to complete the first plan 
and 2,561 hours to update the plan annually.[Footnote 115] 

* Stress tests: In accordance with the act, the Federal Reserve, OCC, 
and FDIC have issued rules for stress testing requirements for certain 
bank holding companies, banks, thrift institutions, state member 
banks, savings and loan companies, and nonbank financial companies 
FSOC designates for supervision by the Federal Reserve.[Footnote 116] 
Bank holding companies with $50 billion or more in assets and nonbank 
financial companies designated by FSOC will be required to conduct 
company-run stress tests semi-annually, and the Federal Reserve will 
be required to conduct stress tests on these companies annually. 
Financial companies with more than $10 billion but less than $50 
billion in assets will be required to conduct company-run stress tests 
annually as directed by their primary federal banking supervisor. 
According to industry representatives, stress testing requires newly 
covered firms to incur significant compliance costs associated with 
building information systems, contracting with outside vendors, 
recruiting experienced personnel, and developing stress testing models 
that are unique to their organization. 

* Regulatory assessments: The Dodd-Frank Act also increases operating 
costs for SIFIs and certain large banks through new or higher 
regulatory assessments. First, under the act, large bank holding 
companies and nonbank financial companies designated by FSOC for 
supervision by the Federal Reserve must fund the Financial Research 
Fund, which funds the operating costs of FSOC and OFR, and certain 
expenses for the implementation of the orderly liquidation activities 
of FDIC, through a periodic assessment.[Footnote 117] The President's 
fiscal Year: 2013 budget included estimates of about $158 million for 
the Financial Research Fund for fiscal Year: 2013.[Footnote 118] 
Second, pursuant to the act, FDIC issued a final rule changing the 
assessment base for the deposit insurance fund and the method for 
calculating the deposit insurance assessment rate.[Footnote 119] 
According to FDIC, the change in the assessment base shifted some of 
the overall assessment burden from community banks to the largest 
institutions, which rely less on domestic deposits for their funding 
than smaller institutions, but without affecting the overall amount of 
assessment revenue collected. According to FDIC data, following 
implementation of the new assessment base, from the first to the 
second quarter of 2011, total assessments for banks with $10 billion 
or more in assets increased by $413 million.[Footnote 120] 

In addition to increasing compliance costs for SIFIs and other large 
financial institutions, Title VII of the Dodd-Frank Act establishes a 
new regulatory framework for swaps, which is expected to impose 
substantial compliance and other costs on swap dealers, which 
generally include large banks, and other swap market participants. 

* Business conduct standards: Swap dealers and major swap participants 
will face increased costs to comply with new business conduct 
standards under the act. These requirements address, among other 
things, interaction with counterparties, disclosure, reporting, 
recordkeeping, documentation, conflicts of interest, and avoidance of 
fraud and other abusive practices. Under CFTC's final rules, swap 
dealers and major swap participants will need to adopt or amend 
written policies and procedures, obtain needed representations from 
counterparties, and determine whether existing counterparty 
relationship documents need to be otherwise changed or supplemented. 

* Clearing, exchange trading, and data reporting: Changes to the 
market infrastructure for swaps--such as clearing and exchange-trading 
requirements--and real-time reporting requirements for designated 
major swap dealers or major swap participants will require firms to 
purchase or upgrade information systems. Industry representatives and 
regulators said that while some compliance costs of the derivatives 
reforms could be recurring, a large part of these costs will come from 
one-time upfront investments to update processes and technology. For 
example, according to industry groups and agency officials, the real-
time reporting and swap execution facility technology upgrades for 
reporting are among the largest technology investment compliance cost 
areas for derivatives reforms, and costs to develop new reporting 
technology for firms may vary depending on the compatibility of the 
new reporting system with the prior system used. In its final rule on 
real-time reporting of swap data, CFTC estimated that the annual 
information collection burden on swap dealers and major swap 
participants would be approximately 260,000 hours.[Footnote 121] 

* Margin rules: Swap dealers and end users will incur costs to post 
the additional collateral required under the new margin rules, 
including costs to borrow assets to pledge as collateral.[Footnote 
122] For newly raised funds, the net cost would be the difference 
between the interest rate paid on the borrowed funds and the interest 
rate earned on the securities purchased to use as collateral. 
Estimating the incremental costs is difficult, in part because the 
incremental cost must take into account the extent to which swap 
dealers in the past, even if they did not require margin explicitly, 
may have charged end users more to price in a buffer to absorb losses. 

Although the Dodd-Frank Act reforms are directed primarily at large, 
complex U.S. financial institutions, many of the act's provisions are 
expected to impose costs on other financial institutions as well. For 
example, we recently reported that the act's reforms covering 
residential mortgages, securitizations, executive compensation, and 
other areas may impose additional requirements and, thus, costs on a 
broad range of financial institutions, but the magnitude of these 
costs will depend on, among other things, how the provisions are 
implemented.[Footnote 123] 

Limitations or Restrictions on Business Activities: 

In addition to imposing compliance and other costs on financial 
institutions, the Dodd-Frank Act's provisions may limit or restrict 
financial institutions' business activities and reduce their revenue 
or revenue opportunities.[Footnote 124] Examples of such provisions 
include the following. 

* Volcker rule: By generally prohibiting banks from engaging in 
proprietary trading and limiting their ability to sponsor or invest in 
hedge and private equity funds, the restrictions could eliminate past 
sources of trading and fee income for some banks.[Footnote 125] In 
addition, according to industry representatives, some banks currently 
holding private funds face the risk of incurring losses on the 
investments, if they are required to liquidate such investments at a 
substantial discount within an allotted period. 

* Swaps reform: The provisions of the Dodd-Frank Act requiring central 
clearing and exchange trading of certain swaps could reduce the volume 
of dealers' higher-profit margin swaps and thereby reduce their 
revenue. In addition, the margin requirements could reduce the ability 
of U.S. dealers to compete internationally, according to industry 
representatives. 

* Single counterparty credit limit: Section 165(e) of the act directs 
the Federal Reserve to establish single-counterparty credit limits for 
SIFIs to limit the risks that the failure of any individual company 
could pose to a SIFI. According to industry representatives, the 
Federal Reserve's proposed rule to implement credit limits would, 
among other things, require some SIFIs to reduce their derivatives and 
securities lending activities. 

* Debit card interchange fees: Under section 1075 of the act (known as 
the Durbin amendment) the Federal Reserve issued a final rule that 
places a cap on debit card interchange fees charged by debit card 
issuers with at least $10 billion of assets.[Footnote 126] In their 
SEC filings, several large debit card issuers have estimated lost 
revenues from the Durbin amendment to be in the hundreds of millions 
of dollars annually. Similarly, we recently reported that large banks 
that issue debit cards initially have experienced a decline in their 
debit interchange fees as a result of the rule but that small banks 
generally have not.[Footnote 127] The reduction in debit interchange 
fees following the adoption of the rule likely has resulted or will 
result in savings for merchants. However, debit card issuers, payment 
card networks, and merchants are continuing to react to the rule; 
thus, the rule's impact has not yet been fully realized. 

While the Dodd-Frank Act Could Impose Costs on the Economy, 
Quantifying Such Costs Is Difficult: 

Financial markets can channel funds from savers and investors looking 
for productive investment opportunities to borrowers who have 
productive investment opportunities but not the funds to pursue them. 
By serving this financial intermediation function, financial markets 
can contribute to higher production and efficiency in the economy. 
Banks and other financial institutions can facilitate transactions 
between savers and borrowers and reduce the associated costs, as well 
as provide other financial services and products that contribute to 
economic growth.[Footnote 128] However, according to academics and 
industry representatives, by imposing higher costs on financial 
institutions, the Dodd-Frank Act may indirectly impose higher costs on 
businesses and households and reduce their investment and consumption 
with a consequent effect on economic output. 

Industry representatives, academics, and others generally expect the 
costs imposed by the act on the economy to be more significant than 
the act's compliance costs for regulated institutions. At the same 
time, experts have noted that such costs can be viewed as part of the 
price to pay to realize the act's potential financial stability and 
other benefits. For example, reforms that increase safety margins in 
the financial system--such as by requiring increased capital and 
collateral to absorb potential losses--represent a tradeoff between 
lower economic growth in the short term and a lower probability of a 
financial crisis in the long term. Furthermore, reforms may cause 
financial market participants to internalize costs that their failure 
could impose on others through, for example, triggering declines in 
asset prices and strains in funding markets; thus, such reforms could 
improve overall economic outcomes. Nevertheless, experts continue to 
debate whether the economic costs of the act's reforms, individually 
and cumulatively, could be excessive relative to their potential 
benefits. 

One way through which the Dodd-Frank Act could impose costs on the 
broader economy is through its reforms that ultimately increase the 
cost or reduce the availability of credit for households and 
businesses. All else equal, when credit becomes more expensive or 
harder to obtain, households may reduce purchases and businesses may 
reduce investments that are funded by debt. These declines in 
consumption and investment can reduce GDP. According to academics, 
industry associations and firms, and others, reforms that could 
increase the cost or reduce the availability of credit include higher 
capital and liquidity requirements for financial institutions, the 
Volcker rule, counterparty credit limits, and mortgage-related 
provisions.[Footnote 129] 

* Capital and liquidity requirements: Higher capital and liquidity 
requirements for banks can increase their funding and other costs. 
While banks can respond to these additional costs in a variety of 
ways, they generally are expected to pass on some of these costs to 
borrowers by charging higher interest rates on their loans, which 
could lead to a reduction in output. Some studies have assessed the 
potential short-term and long-term cost impacts of higher capital and 
liquidity requirements. Differences in estimates produced by different 
studies follow from differences in key modeling assumptions.[Footnote 
130] With respect to short-term impacts, studies generally suggest 
that increasing capital and liquidity requirements for banks will 
likely be associated with short-term increases in interest rates for 
borrowers and short-term decreases in lending volumes, output, and 
economic growth rates during the period over which banks transition to 
these new requirements, but the magnitudes vary considerably across 
studies. For example, a Macroeconomic Assessment Group study 
summarized research by its members on the impact of the transition to 
the Basel III capital and liquidity requirements and found that 
interest rates for borrowers are likely to increase and lending 
volumes are likely to fall during the transition period, but that the 
ultimate reductions in output and growth are likely to be modest. 
[Footnote 131] Studies from the IMF and the Organization for Economic 
Cooperation and Development found broadly similar results.[Footnote 
132] In contrast, a study by the Institute of International Finance 
estimated the impact of banks' making the transition to meeting Basel 
III and additional country-specific requirements and found much larger 
short-term impacts on lending rates, lending volumes, output, and 
growth rates during the transition period.[Footnote 133] Studies also 
suggest that increasing capital and liquidity requirements for banks 
will likely be associated with long-term or permanent changes in 
lending rates and output. For example, a Basel Committee working group 
assessed the long-term impact of higher capital and liquidity 
requirements and found that they are likely to be associated with 
modest long-term increases in lending spreads and modest long-term 
reductions in output.[Footnote 134] An IMF study found similar 
results.[Footnote 135] 

* Volcker rule: Some experts and industry representatives have 
expressed concern that the Volcker rule's restriction on proprietary 
trading by banks could reduce market liquidity and increase the cost 
of raising funds in the securities markets and thus reduce output. As 
we previously reported, some market observers maintain that 
restrictions on proprietary trading by banks under the Volcker rule 
may reduce the amount of liquidity in the securities markets, 
depending on how the restrictions are implemented.[Footnote 136] For 
example, the rule could reduce the amount of market-making provided by 
banks for certain debt securities and ultimately result in higher 
borrowing rates for corporations, state and local governments, or 
others that use debt securities to help finance their activities. 
[Footnote 137] A study sponsored by an industry association estimated 
that the Volcker rule could increase annual borrowing costs for debt 
securities issuers by billions of dollars, and reduce liquidity in a 
wide range of markets, and consequently, to some extent, impede the 
ability of businesses to access capital through increases in cost of 
funds to borrowers.[Footnote 138] However, other experts have asserted 
that the study's estimate is too high, in part because they believe it 
understates the potential for other firms to fill the gap left by 
banks and provide liquidity to the market. 

* Single counterparty credit limit: According to industry 
representatives, the Federal Reserve's proposed single counterparty 
credit limit rule could restrict the ability of SIFIs to engage in 
derivatives transactions with each other to hedge risk. In turn, such 
interference could reduce market liquidity and result in higher 
funding, hedging, and transaction costs for businesses. 

* Mortgage-related reforms: The act's provisions regulating the 
underwriting of mortgages also could restrict the availability of 
mortgage loans and raise mortgage costs for some homebuyers.[Footnote 
139] For example, the act amends the Truth in Lending Act to prohibit 
lenders from making mortgage loans without regard to borrowers' 
ability to repay them. As described earlier in this report, lenders 
may comply with the ability-to-repay standard by originating qualified 
mortgages that meet criteria that will be finalized by CFPB in 
rulemaking. In addition, securitized mortgages that meet certain 
criteria and which are referred to as "qualified residential 
mortgages" (QRM), are exempt from the act's risk retention 
requirements. While there is general agreement that new Dodd-Frank 
rules should restrict certain types of risky loans and loan products 
that proliferated in the lead-up to the crisis, many market observers 
have expressed concern that these restrictions could go too far. For 
example, some mortgage industry representatives have raised concerns 
that including overly restrictive requirements for loan-to-value and 
debt service-to-income ratios in the qualified residential mortgage 
criteria could restrict the availability of mortgages to lower-income 
borrowers.[Footnote 140] 

Measuring the costs of financial regulation to the broader economy is 
challenging because of the multitude of intervening variables, the 
complexity of the global financial system, and data limitations. Many 
of the rules implementing the act's reforms have not been finalized, 
and it is difficult to predict how regulated institutions will respond 
to the act's reforms. For example, the extent to which regulated 
institutions pass on a portion of their increased costs to their 
customers may be impacted by competitive forces or other factors. 
Furthermore, even when the reforms have been fully implemented, it may 
not be possible to determine precisely the extent to which observed 
costs can be attributed to the act versus other factors, such as 
changes in the economy. Differences in assumptions about the 
appropriate baseline for comparison can lead to significant variation 
in estimates of the act's impacts. As discussed below, other sources 
of uncertainty, such as the potential for regulatory arbitrage, add to 
the challenges of estimating the act's potential costs. 

Some of the act's reforms have the effect of transferring wealth 
across groups and may create economic costs if they result in 
resources being deployed less efficiently. For example, new 
assessments to fund the Financial Research Fund, which funds the 
operating costs of FSOC, OFR, and certain expenses for the 
implementation of the orderly liquidation activities of FDIC, 
represent an economic transfer from bank holding companies to the 
Financial Research Fund. In addition, as noted previously, changes in 
the deposit insurance fund assessment base shift some of the overall 
assessment burden from smaller banks to the largest institutions 
without affecting the overall amount of assessment revenue collected. 
Similarly, while the Durbin amendment has reduced revenues from 
interchange fees for large debit card issuers, these lost revenues 
will be offset to some extent by financial benefits to merchants who 
will pay lower interchange fees. Predicting the extent to which such 
transfers across groups could reduce economic growth is difficult, in 
part because how financial institutions will respond to these changes 
is unclear. For example, financial institutions could respond to 
increased assessment burdens or reduced revenue streams by cutting 
other expenses or increasing fees and other costs for their customers. 
Some market observers have noted that some financial institutions have 
increased fees on certain services, such as bank checking accounts, to 
compensate for lost revenues and increased fee assessments from the 
act. However, financial institutions' business strategies are impacted 
by a wide range of factors, and determining the extent to which such 
increased fees can be attributed to the Dodd-Frank Act is difficult. 

The Potential for Unintended Consequences Adds to Challenges of 
Assessing Benefits and Costs: 

Academics, industry representatives, and others we spoke with also 
have expressed concern about the potential for the Dodd-Frank Act's 
reforms to have unintended consequences that could harm U.S. economic 
growth or the global competitiveness of U.S. financial 
markets.[Footnote 141] Experts have a wide range of views on the act's 
potential to enhance financial stability, with some maintaining that 
certain reforms could make the financial system more vulnerable to a 
crisis. For example, some experts suggest that higher capital, 
liquidity, and collateral requirements will cause regulated 
institutions to increase significantly their holdings of relatively 
safe and liquid securities, such as U.S. Treasuries. Such an outcome 
could inflate the value of such securities and result in large losses 
if there were a sharp correction in the securities' valuation. 

In addition, experts raised concerns about the potential for certain 
reforms to cause financial activities to shift to less regulated or 
unregulated markets and pose risks to U.S. financial stability. Of 
particular concern is the potential for increased regulation of U.S. 
financial markets to cause financial activities in the United States 
to move to foreign jurisdictions with less stringent regulations. For 
example, some academics and industry groups contend that if the United 
States imposes new margin requirements on swaps before other 
countries, the swap business could migrate to countries with lower 
margin requirements. Similarly, industry representatives have raised 
concerns about the potential for the Volcker rule and single 
counterparty credit limit to disadvantage U.S. financial institutions 
relative to foreign competitors that will be permitted to engage in 
proprietary trading activities outside the United States. While 
acknowledging these concerns and the need for harmonizing 
international regulatory standards, regulators noted that it can be 
advantageous for the United States to be the leader in implementing 
new regulatory safeguards. For example, when financial institutions 
are more resilient to unexpected shocks, they can continue to provide 
loans and other financial services that are important to economic 
growth, even during periods of market turmoil. 

These potential unintended consequences add to the challenge of 
assessing the costs and full impacts of the Dodd-Frank Act. Currently, 
the act is imposing costs on the financial services industry that 
could contribute to slower economic growth. At the same time, the act 
may help reduce the probability or severity of a future financial 
crisis, which would benefit the economy by preventing or mitigating 
crisis-related costs. However, the Dodd-Frank Act remains untested in 
a number of areas, has yet to be fully implemented, and leaves 
unresolved certain potential sources of system risk, such as money 
market funds and the tri-party repo market. As noted earlier, because 
the costs associated with a financial crisis can total trillions of 
dollars, the Dodd-Frank Act might need to reduce the probability of a 
crisis by only a small fraction for its benefits to equal its costs. 
Whether the act can achieve that outcome is unknown. As the impact of 
the act's multitude of provisions, individually or cumulatively, 
materializes, their benefits and costs will become more fully known 
and understood--enabling policy makers and regulators to revise the 
requirements, as needed, to achieve the appropriate balance between 
the act's benefits and costs to the U.S. economy. 

Agency Comments: 

We provided a draft of this report to CFPB, CFTC, FDIC, the Federal 
Reserve, FSOC, OCC, OFR, Treasury, and SEC for their review and 
comment. We also provided excerpts of the draft report for technical 
comment to FHFA. All of the agencies provided technical comments, 
which we have incorporated, as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to CFPB, CFTC, 
FDIC, FHFA, the Federal Reserve, FSOC, OCC, OFR, Treasury, and SEC, 
interested congressional committees, members, and others. In addition, 
this report will be available at no charge on our web site at 
[hyperlink, http://www.gao.gov]. 

Should you or your staff have questions concerning this report, please 
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix IV. 

Signed by: 

A. Nicole Clowers: 
Director Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of our report were to examine what is known about (1) 
the losses and related economic impacts associated with the 2007-2009 
financial crisis; (2) the benefits of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the Dodd-Frank Act), particularly 
its key financial stability provisions, for the U.S. financial system 
and broader economy; and (3) the costs associated with the act, 
particularly its key financial stability provisions. 

To address our first objective, we reviewed and analyzed studies by 
regulators and academics. We conducted searches of social science, 
economic, and federal research databases, including EconLit, Google 
Scholar, and JSTOR, to identify relevant studies that examine the 
losses associated with the 2007-2009 financial crisis. To help us 
identify relevant studies, we also relied on federal agencies and 
academic and other experts. Although we found these studies to be 
sufficiently reliable for the purposes of our report, the results 
should not necessarily be considered as definitive, given the 
potential methodological or data limitations contained in the studies 
individually or collectively. In addition, we reviewed our prior work 
that addresses economic impacts associated with the crisis, including 
the impacts on the fiscal challenges faced by federal, state, and 
local governments. We interviewed federal financial regulators, 
academics, industry associations, market participants and others to 
obtain their perspectives on how the recent financial crisis impacted 
the economy and what methods have been used to quantify the economic 
impacts associated with the crisis. Based on our literature review and 
interviews with experts, we identified approaches commonly used by 
experts to quantify or describe the economic losses associated with 
the crisis, and the limitations of these approaches. For example, we 
summarized approaches used by some researchers to quantify losses 
associated with the financial crisis in terms of lost gross domestic 
product, which measures the total goods and services produced in the 
economy. To describe trends in economic measures associated with the 
financial crisis, we collected and analyzed data from the Bureau of 
Economic Analysis, the Bureau of Labor Statistics, CoreLogic, the 
Federal Reserve Flow of Funds database, and the National Bureau of 
Economic Research. Lastly, we obtained and analyzed perspectives on 
the role of the federal government's policy interventions in 
mitigating the costs of the financial crisis. We obtained and analyzed 
data from government financial statements and other reports on the 
income and losses for the most significant government programs to 
assist the financial sector, including the Troubled Asset Relief 
Program, the Board of Governors of the Federal Reserve System's 
(Federal Reserve) emergency liquidity programs, the Temporary 
Liquidity Guarantee Program, and assistance provided to rescue 
individual institutions, such as American International Group, Inc. 
and the government-sponsored enterprises. Our review did not consider 
the potential short-term and long-term impacts of other federal policy 
responses to the recession that coincided with the financial crisis, 
including the American Recovery and Reinvestment Act of 2009. 

To address our second objective, we obtained and analyzed a broad 
range of perspectives on the potential economic benefits of the Dodd-
Frank Act and factors that could impact the realization of these 
benefits. Using a literature search strategy similar to the one 
described under our first objective, we identified and analyzed 
academic and other studies that evaluate the potential benefits of one 
or more of the act's reforms. In addition, we reviewed relevant 
reports and public statements by federal financial regulators, 
industry associations, and others. We obtained additional perspectives 
from regulators, academics, and representatives of industry and public 
interest groups through interviews and an expert roundtable we held 
with the assistance of the National Academy of Sciences (NAS). Based 
on our literature review, interviews, and expert roundtable, we 
identified provisions of the act that could have the most significant 
impacts on financial stability, and factors that could impact the 
effectiveness of these provisions. In addition, we obtained and 
summarized expert perspectives on potential benefits of the act beyond 
enhanced financial stability, such as increased consumer and investor 
protections. Finally, we reviewed and summarized approaches used by 
researchers to quantify potential benefits of the act's reforms. 
Although we found these studies to be sufficiently reliable for the 
purposes of our report, the results should not necessarily be 
considered as definitive, given the potential methodological or data 
limitations contained in the studies individually or collectively. 

To address our third objective, we obtained and analyzed information 
on the costs of implementing the Dodd-Frank Act, including for the 
federal government, the financial sector, and the broader economy. We 
obtained and summarized data on the incremental budgetary costs 
associated with the act's implementation for 10 federal entities 
(Board of Governors of the Federal Reserve System, Commodity Futures 
Trading Commission, Federal Deposit Insurance Corporation, Federal 
Housing Finance Agency, Office of the Comptroller of the Currency, 
Securities and Exchange Commission, Department of the Treasury, 
Consumer Financial Protection Bureau, Financial Stability Oversight 
Council, and the Office of Financial Research). We requested data on 
the entities' estimates of their funding and full-time equivalents 
agency-wide and for activities related to the Dodd-Frank Act in 2010, 
2011, 2012, and 2013. We also requested that the entities identify 
their sources of funding (appropriations, assessments of supervised 
institutions, revenue from investments or providing services, and 
transfers of funds from other agencies), and describe the extent to 
which new resources related to the Dodd-Frank Act would be funded on a 
one-time or recurring basis. We corroborated the information with 
other data, where available. In addition, we reviewed the 
Congressional Budget Office's estimate of the act's effect on the 
federal government's direct spending and revenue and, in turn, 
deficit. To describe the potential costs for the financial sector and 
the broader economy, we reviewed published works, public statements, 
and other available analyses by financial regulators, industry 
representatives, academics, and other experts. We also obtained 
perspectives from representatives of these groups through interviews 
and the expert roundtable we held in coordination with NAS. We also 
had two financial markets experts review a draft of our report and 
incorporated their comments, as appropriate. 

To help inform our work on the second and third objectives, we 
contracted with NAS to convene a 1-day roundtable of 14 experts to 
discuss the potential benefits and potential costs of the Dodd-Frank 
Act. The group of experts was selected with the goal of obtaining a 
balance of perspectives and included former financial regulatory 
officials, representatives of financial institutions impacted by the 
act's reforms, academic experts on financial regulation, a 
representative of a public interest group, and an industry analyst. 
The discussion was divided into three moderated sub-sessions. The sub-
sessions addressed (1) the potential benefits of the act's key 
financial stability reforms; (2) the potential costs of these key 
financial stability reforms; and (3) methodological approaches and 
challenges in measuring the impacts of the act's reforms. For a list 
of the 14 experts, see appendix III. 

For parts of our methodology that involved the analysis of computer-
processed data, we assessed the reliability of these data and 
determined that they were sufficiently reliable for our purposes. Data 
sets for which we conducted data reliability assessments include gross 
domestic product data from the Bureau of Economic Analysis; employment 
data from the Bureau of Labor Statistics; home price data from 
CoreLogic; Federal Reserve Flow of Funds data on retirement fund 
assets; loan default and foreclosure data from the Mortgage Bankers 
Association; and recession data from the National Bureau of Economic 
Research. We reviewed information on the statistical collection 
procedures and methods for these data sets to assess their 
reliability. In addition, we assessed the reliability of estimates 
federal entities provided for the funding resources and full-time 
equivalents associated with Dodd-Frank implementation by comparing 
these estimates to agency budget documents and interviewing agency 
staff about how the data were collected. Finally, for studies that 
present quantitative estimates of the economic impacts associated with 
financial crises or financial regulatory reforms, we assessed the 
reasonableness of the methodological approaches used to generate these 
estimates. Although we found certain studies to be sufficiently 
reliable for the purposes of our report, the results should not 
necessarily be considered definitive, given the potential 
methodological or data limitations contained in the studies, 
individually or collectively. 

We conducted this performance audit from November 2011 to January 2013 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: International Financial Reform Efforts: 

Many U.S. financial firms conduct business around the world and thus 
generally are subject to rules on banking, securities, and other 
financial market activities in multiple jurisdictions. In response to 
the financial crisis that began in 2007, the United States and other 
countries have taken steps to introduce financial reforms into their 
domestic legal and regulatory systems. In parallel with these domestic 
reform efforts, international organizations have issued new standards 
and principles to guide their members' efforts. The goal of these 
international efforts is to harmonize and coordinate views and 
policies across different jurisdictions to minimize opportunities for 
regulatory arbitrage--the ability of market participants to profit 
from differences in regulatory regimes between one jurisdiction and 
another. 

Examples of some of these efforts include the following: 

* The G20, a group that represents 20 of the largest global economies, 
created the Financial Stability Board (FSB) to coordinate and monitor 
international financial regulatory reform efforts, among other 
activities. 

* The Basel Committee on Banking Supervision (BCBS)--hosted at the 
Bank for International Settlements (BIS)--has developed a new set of 
capital and, for the first time, liquidity requirements for banks. 

* The Committee on Payment and Settlement Systems (CPSS), which is 
comprised of central banks, focuses on the efficiency and stability of 
payment, clearing, and settlement arrangements, including financial 
market infrastructures. Recently, CPSS has worked jointly with the 
International Organization of Securities Commissions (IOSCO) to 
produce a new set of prudential standards for financial market 
infrastructures. 

* IOSCO, a multilateral organization of securities market regulators, 
has issued policy documents to guide national securities commissions' 
regulatory reform efforts. 

* Various other forums and groups, including the International 
Association of Insurance Supervisors (IAIS), are housed at BIS and 
cooperate on financial regulatory reform initiatives. For example, the 
Joint Forum--which includes representatives of IAIS, BCBS, and IOSCO--
works to coordinate financial services reforms. 

* Separately, multilateral organizations, such as the International 
Monetary Fund and Organization for Economic Cooperation and 
Development, have published research and analysis of international 
financial reforms. 

Table 5 summarizes selected international financial regulatory reform 
efforts. 

Table 5: Selected Organizations Engaged in Coordination of 
International Financial Regulatory Reform Efforts: 

Organization: FSB[A]; 
Sector: Multiple; 
Membership: Finance and central bank officials from members of the G20 
as well as representatives of other international economic and 
financial standard-setting organizations[B]; 
Purpose: International coordination of national financial authorities 
and international standard-setting bodies. Development and promotion 
of effective regulatory, supervisory, and other financial sector 
policies; 
Activities: Establish principles for financial regulatory reform; 
Monitor implementation of financial regulatory reforms, issue progress 
reports. 

Organization: BIS; 
Sector: Banking; 
Membership: Central banks or monetary authorities of 59 economies plus 
the European Central Bank[C]; 
Purpose: Forum for international cooperation among central banks and 
within financial and supervisory communities. Acts as a bank for 
central banks; 
Activities: Publishes economic and monetary research; Counterparty for 
central banks in their financial transactions; Agent or trustee in 
connection with international financial operations; Hosts other 
international financial organizations and groups. 

Organization: BCBS[A]; 
Sector: Banking; 
Membership: Central bank or bank supervisory officials representing 27 
economies[D]; 
Purpose: Forum for cooperation on issues related to banking 
supervision; 
Activities: Establishes capital and liquidity standards for member 
banking systems. 

Organization: CPSS[A]; 
Sector: Banking; 
Membership: Central banks' payment and settlement officials; 
Purpose: Monitor and analyze developments in domestic, cross-border, 
and multicurrency payment, settlement, and clearing systems; 
Activities: Sets standards for payment, clearing, and settlement 
systems. 

Organization: IOSCO; 
Sector: Securities; 
Membership: Securities regulatory officials from more than 100 
jurisdictions; 
Purpose: Forum for international cooperation among securities 
regulators; 
Activities: Facilitates standard setting; Offers technical assistance. 

Organization: IAIS[A]; 
Sector: Insurance; 
Membership: Insurance regulators and supervisors from more than 190 
jurisdictions[E]; 
Purpose: Forum for global insurance supervision; 
Activities: Establishes principles, standards, and guidance; 
works with other counterparts to promote financial stability. 

Source: GAO summary information collected from each organization's web 
site. 

[A] Hosted at the Bank for International Settlements. 

[B] FSB member economies: Argentina, Australia, Brazil, Canada, China, 
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, 
Mexico, the Netherlands, Republic of Korea, Russia, Arabia, Singapore, 
South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, 
and the United States. FSB Member organizations: Bank for 
International Settlements, European Central Bank, European Commission, 
International Monetary Fund, Organization for Economic Cooperation and 
Development, and The World Bank. Other FSB member groupings: Basel 
Committee on Banking Supervision, Committee on the Global Financial 
System, Committee on Payment and Settlement Systems, International 
Association of Insurance Supervisors, International Accounting 
Standards Board, and the International Organization of Securities 
Commissions. 

[C] BIS member central banks: Algeria, Argentina, Australia, Austria, 
Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, 
China, Colombia, Croatia, the Czech Republic, Denmark, Estonia, 
Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, 
India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, 
Lithuania, Luxembourg, Macedonia (FYR), Malaysia, Mexico, the 
Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, 
Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, 
Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, 
the United Arab Emirates, the United Kingdom and the United States, 
plus the European Central Bank. 

[D] BCBS member economies: Argentina, Australia, Belgium, Brazil, 
Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, 
Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, 
Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, 
Turkey, the United Kingdom, and the United States. 

[E] Insurance professionals participate as observers in some 
activities. 

[End of table] 

[End of section] 

Appendix III: Experts Participating in the GAO Roundtable on the 
Benefits and Costs of the Dodd-Frank Act: 

* Eric Baggesen, California Public Employees' Retirement System: 

* Sheila Bair, The Pew Charitable Trusts: 

* Robert Bliss, Wake Forest University: 

* Charles Calomiris, Columbia University: 

* Athanassios Diplas, Deutsche Bank: 

* Douglas Elliott, The Brookings Institution: 

* Peter Fisher, BlackRock: 

* Sandra Lawson, Goldman Sachs: 

* Annette Nazareth, Davis, Polk, and Wardwell, LLP: 

* Karen Shaw Petrou, Federal Financial Analytics: 

* Matthew Richardson, New York University: 

* Marcus Stanley, Americans for Financial Reform: 

* Steve Strongin, Goldman Sachs: 

Paul Volcker, Former Chairman of the Board of Governors of the Federal 
* Reserve System: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Richard Tsuhara (Assistant 
Director), William R. Chatlos, John Fisher, Catherine Gelb, G. Michael 
Mikota, Marc Molino, Courtney LaFountain, Robert Pollard, Jennifer 
Schwartz, Andrew J. Stephens, and Walter Vance made significant 
contributions to this report. 

[End of section] 

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Acharya, Viral V., Thomas F. Cooley, Matthew Richardson, and Ingo 
Walter. Regulating Wall Street: The Dodd-Frank Act and the New 
Architecture of Global Finance. Hoboken, New Jersey, John Wiley & 
Sons, 2011. 

Admati, Anat R., Peter M. DeMarzo, Martin F. Hellwig, and Paul 
Pfleiderer. "Fallacies, Irrelevant Facts, and Myths in the Discussion 
of Capital Regulation: Why Bank Equity is Not Expensive." Stanford GSB 
Research Paper No. 2065. Stanford University: March 23, 2011. 

Basel Committee on Banking Supervision, The Transmission Channels 
Between the Financial and Real Sectors: A Critical Survey of the 
Literature, Bank for International Settlements (BIS) Working Paper No. 
18. Basel, Switzerland, February 2011. 

Basel Committee on Banking Supervision, An Assessment of the Long-Term 
Economic Impact of Stronger Capital and Liquidity Requirements, BIS. 
Basel, Switzerland, August 2010. 

Boyd, John H., Sungkyu Kwak, and Bruce Smith, "The Real Output Losses 
Associated with Modern Banking Crises." Journal of Money, Credit and 
Banking, vol. 37, no. 6. (December 2005): 977-999. 

Cecchetti, Stephen G., Marion Kohler, and Christian Upper, Financial 
Crises and Economic Activity. National Bureau of Economic Research 
(NBER), Working Paper 15379. Cambridge, MA, September 2009. 

Congressional Budget Office (CBO), Understanding and Responding to 
Persistently High Unemployment (February 2012). 

CBO, The Budget and Economic Outlook: Fiscal Years 2012 to 2022 
(January 2012). 

Duffie, Darrell and Haoxing Zhu. "Does a Central Clearing Counterparty 
Reduce Counterparty Risk?" Review of Asset Pricing Studies, 1 (1) 
(July 18, 2011): 74-95. 

Elmendorf, Douglas W. Review of CBO's Cost Estimate for the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Statement Before the 
Subcommittee on Oversight and Investigations, Committee on Financial 
Services, U.S. House of Representatives. March 30, 2011. 

Federal Financial Analytics, Inc., "Strategic Regulatory Landscape: 
Regulatory Intent versus Policy and Market Risk in Financial-Services 
Industry - Capital, Liquidity, Risk Management and Related Prudential 
Requirements," October 2012. 

Financial Stability Oversight Council (FSOC), 2011 Annual Report. 
Washington, D.C. July 26, 2011. 

FSOC, 2012 Annual Report. July 24, 2012. 

Gorton, Gary and Andrew Metrick. "Regulating the Shadow Banking 
System," Brookings Papers on Economic Activity. Fall 2010. 

Hanson, Samuel G., Anil K. Kashyap, and Jeremy C. Stein. "A 
Macroprudential Approach to Financial Regulation." Journal of Economic 
Perspectives, vol. 25, no. 1 (Winter 2011): 3-28. 

Institute of International Finance, The Cumulative Impact on the 
Global Economy of Changes in the Financial Regulatory Framework, 
September 2011. 

Laevan, Luc and Fabian Valencia, Systemic Banking Crises Database: An 
Update, International Monetary Fund Working Paper 12/163. Washington, 
D.C. June 2012. 

Levine, Ross. The Governance of Financial Regulation: Reform Lessons 
from the Recent Crisis, BIS Working Paper No. 329, BIS Monetary and 
Economic Department. Basel, Switzerland. November 2010. 

Macroeconomic Assessment Group, Final Report: Assessing the 
Macroeconomic Impact of the Transition to Stronger Capital and 
Liquidity Requirements, Bank for International Settlements, Basel, 
Switzerland: December 2010. 

Office of Financial Research, 2012 Annual Report. July 20, 2012. 

Reinhart, Carmen M. and Kenneth S. Rogoff, The Aftermath of Financial 
Crises, NBER Working Paper 14656. January 2009. 

Santos, André Oliveira and Douglas Elliott, Estimating the Costs of 
Financial Regulation, IMF Staff Discussion Note. September 11, 2012. 

Schwarcz, Steven. "Systemic Risk." Georgetown Law Journal (2008): 
97:193. 

Skeel, David. The New Financial Deal: Understanding the Dodd-Frank Act 
and Its (Unintended) Consequences. John Wiley & Sons, Hoboken, New 
Jersey. 2011. 

The Squam Lake Group. The Squam Lake Report: Fixing the Financial 
System. Princeton University Press, Princeton, New Jersey. 2010. 

[End of section] 

Related GAO Products: 

Community Banks and Credit Unions: Impact of the Dodd-Frank Act 
Depends Largely on Future Rule Makings. [hyperlink, 
http://www.gao.gov/products/GAO-12-881]. Washington, D.C.: September 
13, 2012. 

Financial Stability: New Council and Research Office Should Strengthen 
the Accountability and Transparency of Their Decisions. [hyperlink, 
http://www.gao.gov/products/GAO-12-886]. Washington, D.C.: September 
11, 2012. 

Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific 
Provisions of Orderly Liquidation Authority. [hyperlink, 
http://www.gao.gov/products/GAO-12-735]. Washington, D.C.: July 12, 
2012. 

Unemployed Older Workers: Many Experience Challenges Regaining 
Employment and Face Reduced Retirement Security. [hyperlink, 
http://www.gao.gov/products/GAO-12-445]. Washington, D.C.: April 25, 
2012. 

State and Local Government Pension Plans: Economic Downturn Spurs 
Efforts to Address Costs and Sustainability. [hyperlink, 
http://www.gao.gov/products/GAO-12-322]. Washington, D.C.: March 2, 
2012. 

Dodd-Frank Act Regulations: Implementation Could Benefit from 
Additional Analyses and Coordination. [hyperlink, 
http://www.gao.gov/products/GAO-12-151]. Washington, D.C.: November 
10, 2011. 

Bankruptcy: Complex Financial Institutions and International 
Coordination Pose Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-11-707]. Washington, D.C.: July 19, 
2011. 

Mortgage Reform: Potential Impacts in the Dodd-Frank Act on Homebuyers 
and the Mortgage Market. [hyperlink, 
http://www.gao.gov/products/GAO-11-656]. Washington, D.C.: July 19, 
2011. 

Dodd-Frank Act: Eleven Agencies' Estimates of Resources for 
Implementing Regulatory Reform. [hyperlink, 
http://www.gao.gov/products/GAO-11-808T]. Washington, D.C.: July 14, 
2011. 

Proprietary Trading: Regulators Will Need More Comprehensive 
Information to Fully Monitor Compliance with New Restrictions When 
Implemented. [hyperlink, http://www.gao.gov/products/GAO-11-529]. 
Washington, D.C.: July 13, 2011. 

State and Local Governments: Knowledge of Past Recessions Can Inform 
Future Federal Fiscal Assistance. [hyperlink, 
http://www.gao.gov/products/GAO-11-401]. Washington, D.C.: March 31, 
2011. 

The Federal Government's Long-Term Fiscal Outlook: January 2011 
Update. [hyperlink, http://www.gao.gov/products/GAO-11-451SP]. 
Washington, D.C.: March 18, 2011. 

Financial Assistance: Ongoing Challenges and Guiding Principles 
Related to Government Assistance for Private Sector Companies. 
[hyperlink, http://www.gao.gov/products/GAO-10-719]. Washington, D.C.: 
August 3, 2010. 

Credit Cards: Rising Interchange Fees Have Increased Costs for 
Merchants, but Options for Reducing Fees Pose Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-10-45] Washington, D.C.: November 19, 
2009. 

Financial Markets Regulation: Financial Crisis Highlights Need to 
Improve Oversight of Leverage at Financial Institutions and across 
System. [hyperlink, http://www.gao.gov/products/GAO-09-739]. 
Washington, D.C.: July 22, 2009. 

Systemic Risk: Regulatory Oversight and Recent Initiatives to Address 
Risk Posed by Credit Default Swaps. [hyperlink, 
http://www.gao.gov/products/GAO-09-397T]. Washington, D.C.: March 5, 
2009. 

Financial Regulation: A Framework for Crafting and Assessing Proposals 
to Modernize the Outdated U.S. Financial Regulatory System. 
[hyperlink, http://www.gao.gov/products/GAO-09-216]. Washington, D.C.: 
January 8, 2009. 

[End of section] 

Footnotes: 

[1] As discussed below, no universal or widely accepted definition of 
a financial crisis exists. Indeed, no clear consensus exists on when 
the recent financial crisis started or ended (if yet). In a number of 
speeches, officials from the Board of Governors of the Federal Reserve 
System and several academics have dated the crisis as starting in 2007 
and ending in 2009. We are adopting that time frame, although others 
sometimes date the crisis as starting in 2008 and ending in 2009. 

[2] As discussed in the background section of this report, other 
factors that are thought to have contributed to the crisis include 
financial innovations and economic conditions, characterized by 
accommodative monetary policies, ample liquidity and availability of 
credit, and low interest rates that spurred housing investment. 

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

[4] U.S. Senate, Committee on Banking, Housing, and Urban Affairs, 
Dodd-Frank Wall Street Reform: Conference Report Summary, accessed 
December 17, 2012, [hyperlink, 
http://banking.senate.gov/public/index.cfm?FuseAction=Issues.View&Issue_
id=84d77b9f-c7ab-6fe2-4640-9dd18189fb23]. 

[5] For a more detailed discussion of the evolution of the U.S. 
financial regulatory framework before the enactment of the Dodd-Frank 
Act, see GAO, Financial Regulation: A Framework for Crafting and 
Assessing Proposals to Modernize the Outdated U.S. Financial 
Regulatory System, [hyperlink, http://www.gao.gov/products/GAO-09-216] 
(Washington, D.C.: Jan. 8, 2009). 

[6] OTS chartered and supervised federally chartered savings 
institutions and savings and loan holding companies. Rule-making 
authority previously vested in OTS was transferred to OCC for savings 
associations and to the Federal Reserve for savings and loan holding 
companies. Other authorities were transferred to OCC, FDIC, and the 
Federal Reserve. 12 U.S.C. § 5412. 

[7] Pub. L. No. 84-511, 70 Stat. 133 (1956) and Pub. L. No. 73-43, 48 
Stat. 128 (1933). Bank holding companies are companies that own or 
control a bank, as defined in the Bank Holding Company Act. S&L 
holding companies are companies that own or control an S&L. 

[8] For a more detailed discussion of the regulatory framework for 
bank holding companies and S&L holding companies, see GAO, Bank 
Holding Company Act: Characteristics and Regulation of Exempt 
Institutions and the Implications of Removing the Exemptions, 
[hyperlink, http://www.gao.gov/products/GAO-12-160] (Washington, D.C.: 
Jan. 19, 2012). 

[9] Certain securities activities also are overseen by state 
government entities. 

[10] Futures commission merchants are individuals, associations, 
partnerships, corporations, and trusts that solicit or accept orders 
for the purchase or sale of any commodity for future delivery on or 
subject to the rules of any exchange and that accept payment from or 
extend credit to those whose orders are accepted. Firms and 
individuals who trade futures with the public or give advice about 
futures trading must be registered with the National Futures 
Association, the industrywide self-regulatory organization for the 
U.S. futures industry. 

[11] A swap is a type of derivative that involves an ongoing exchange 
of one or more assets, liabilities, or payments for a specified 
period. Financial and nonfinancial firms use swaps and other over-the-
counter derivatives to hedge risk, or speculate, or for other 
purposes. Swaps include interest rate swaps, commodity-based swaps, 
and broad-based credit default swaps. Security-based swaps include 
single-name and narrow-based credit default swaps and equity-based 
swaps. For the purposes of this report, we use "swaps" to refer to 
both "swaps" and "security-based swaps." 

[12] 12 U.S.C. §§ 5481-5603. 

[13] These agencies included the Federal Reserve, FDIC, the Federal 
Trade Commission, the Department of Housing and Urban Development, the 
National Credit Union Administration, OCC, and OTS. 

[14] Pub. L. No. 110-289, 122 Stat. 2654 (2008). 

[15] OFHEO regulated Fannie Mae and Freddie Mac on matters of safety 
and soundness, while HUD regulated their mission-related activities. 
FHFB served as the safety and soundness and mission regulator of the 
Federal Home Loan Banks. 

[16] With respect to Fannie Mae and Freddie Mac, the law gave FHFA 
such new regulatory authorities as the power to regulate the retained 
mortgage portfolios, to set more stringent capital standards, and to 
place a failing entity in receivership. In addition, the law provides 
FHFA with funding outside the annual appropriations process. The law 
also combined the regulatory authorities for all the housing GSEs that 
were previously distributed among OFHEO, FHFB, and HUD. 

[17] 31 U.S.C. § 313. 

[18] 12 U.S.C. §§ 5321-5333. For additional information on FSOC and 
OFR, see GAO, Financial Stability: New Council and Research Office 
Should Strengthen the Accountability and Transparency of Their 
Decisions, [hyperlink, http://www.gao.gov/products/GAO-12-886] 
(Washington, D.C.: Sept. 11, 2012). 

[19] Public debt crises can occur when rising levels of government 
debt lead investors to lose confidence in the ability of a country to 
repay its debts, causing the country's borrowing costs to surge and 
forcing large cuts to public spending. Currency crises can occur when 
there is a speculative attack on the foreign exchange value of a 
currency, causing a sharp depreciation in the currency or forcing 
authorities to defend the value of the currency by selling foreign 
exchange reserves and raising domestic interest rates. 

[20] See, for example, Basel Committee on Banking Supervision, The 
Transmission Channels between the Financial and Real Sectors: A 
Critical Survey of the Literature. Working paper No. 18 (Basel, 
Switzerland: February 2011). 

[21] During the crisis, market liquidity and funding liquidity 
declined in certain markets. To function efficiently, the securities 
markets need market liquidity, generally defined as the ability to buy 
and sell a particular asset without significantly affecting its price. 
In contrast to market liquidity, which is an asset-specific 
characteristic, funding liquidity generally refers to the availability 
of funds in the market that firms can borrow to meet their obligations. 

[22] Leverage traditionally has referred to the use of debt, instead 
of equity, to fund an asset and been measured by the ratio of total 
assets to equity on the balance sheet. Leverage also can be used to 
increase an exposure to a financial asset without using debt, such as 
by using derivatives. In that regard, leverage can be defined broadly 
as the ratio between some measure of risk exposure and capital that 
can be used to absorb unexpected losses from the exposure. 

[23] Carmen M. Reinhart and Kenneth S. Rogoff, The Aftermath of 
Financial Crises, National Bureau of Economic Research, Working Paper 
14656 (Cambridge, MA: January 2009). 

[24] Recessions mark a distinct phase of the overall business cycle, 
beginning with a business cycle "peak" and ending with a business 
cycle "trough." Between trough and peak the economy is in an 
expansion. The National Bureau of Economic Research identifies dates 
for national recessions, which can vary in overall duration and 
magnitude. The National Bureau of Economic Research is a private, 
nonprofit, nonpartisan research organization dedicated to promoting a 
greater understanding of how the economy works. 

[25] Many researchers identify August 2007 as the start of the recent 
financial crisis, when strains appeared in interbank lending markets, 
but others date the start of the crisis to late 2008, when strains in 
credit markets intensified and led to the failure or near failure of a 
number of large financial institutions. 

[26] Cecchetti et al. measure output losses by comparing postcrisis 
levels of GDP with the level of GDP at the onset of the crisis. 
However, this measure does not account for any growth in GDP that 
would have been expected to occur in the absence of a crisis. See 
Stephen G. Cecchetti, Marion Kohler, and Christian Upper, Financial 
Crises and Economic activity, National Bureau of Economic Research, 
Working Paper 15379 (Cambridge, MA: September 2009). 

[27] CBO calculated this cumulative difference as the sum of the 
shortfall in output (compared to potential output) for each Year: that 
such a shortfall has occurred since the crisis began and the sum of 
projected shortfalls in the future--specifically, between its 2012 
estimate date and 2018, when it projected that output would regain its 
potential level. See CBO, The Budget and Economic Outlook: Fiscal 
Years 2012 to 2022, (Washington, D.C.: January 2012). 

[28] Basel Committee on Banking Supervision, An Assessment of the Long-
Term Economic Impact of Stronger Capital and Liquidity Requirements, 
(Basel, Switzerland: August 2010). The Basel Committee on Banking 
Supervision (Basel Committee) seeks to improve the quality of banking 
supervision worldwide, in part by developing broad supervisory 
standards. The Basel Committee consists of central bank and regulatory 
officials from Argentina, Australia, Belgium, Brazil, Canada, China, 
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, 
Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, 
South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, 
and the United States. The Basel Committee's supervisory standards are 
also often adopted by nonmember countries. 

[29] Luc Laevan and Fabian Valencia, Systemic Banking Crises Database: 
An Update, IMF Working Paper, 12/163 (Washington, D.C.: June 2012). 

[30] See, for example, John H. Boyd, Sungkyu Kwak, and Bruce Smith, 
"The Real Output Losses Associated with Modern Banking Crises," 
Journal of Money, Credit and Banking, vol. 37, no. 6 (Dec. 2005), pp. 
977-999. 

[31] Persons considered to be marginally attached to the labor force 
and persons who were employed part time for economic reasons are not 
counted as unemployed persons in the Bureau of Labor Statistics' (BLS) 
calculation of the unemployment rate. BLS considers workers who want 
work and are available for work but who did not actively seek work in 
the past month as marginally attached to the labor force. BLS defines 
persons employed part time for economic reasons as those who want and 
are available for full-time work but have had to settle for a part-
time schedule. As of November 2012, total unemployed persons plus 
these two groups--marginally attached persons and persons working part-
time for economic reasons--represented 14.4 percent of the labor force 
plus those marginally attached to the labor force. 

[32] Changes in workers' earnings provide a rough proxy for changes in 
their knowledge and skills obtained through education and experience--
or what is referred to as their "human capital." The decline in 
earnings for some workers following the crisis could in part reflect 
other factors, such as their inability to continue working in an 
industry or occupation where employment has fallen as a result of 
changes in markets or technologies. 

[33] Till von Wachter, Jae Song, and Joyce Manchester, "Long-term 
Earnings Losses Due to Mass Layoffs During the 1982 Recession: An 
Analysis Using U.S. Administrative Data from 1974 to 2004" (paper 
presented at the Institute for the Study of Labor/Centre for Economic 
Policy Research, 11TH Symposium in Labour Economics in Buch, Ammersee, 
Sept. 17-19, 2009). 

[34] McKee-Ryan et al., "Psychological and Physical Well-Being During 
Unemployment: A Meta-Analytic Study," Journal of Applied Psychology, 
vol. 90, no. 1 (January 2005), 53-76. 

[35] Lisa B. Kahn, "The Long-Term Labor Market Consequences of 
Graduating from College in a Bad Economy," Labour Economics, vol. 17, 
no. 2 (Apr. 2010), 303-316. 

[36] GAO, Unemployed Older Workers: Many Experience Challenges 
Regaining Employment and Face Reduced Retirement Security, [hyperlink, 
http://www.gao.gov/products/GAO-12-445] (Washington, D.C.: Apr. 25, 
2012). 

[37] GAO, Foreclosure Mitigation: Agencies Could Improve Effectiveness 
of Federal Efforts with Additional Data Collection and Analysis, 
[hyperlink, http://www.gao.gov/products/GAO-12-296] (Washington, D.C.: 
June 28, 2012). 

[38] The CoreLogic Index, like other house price indexes, measures 
house price changes in a geographic area based on sales of the same 
properties at different points in time. The use of repeat transactions 
on the same homes helps to control for differences in the quality of 
the houses in the data. The CoreLogic index is based on all usable 
transactions from CoreLogic's public record, servicing, and securities 
databases of single family attached and detached homes with all types 
of financing, including prime and nonprime loans. 

[39] See [hyperlink, http://www.gao.gov/products/GAO-12-296]. 

[40] National home equity is the difference between aggregate home 
value and aggregate home mortgage debt, which is a measure of the 
value of household-owned real estate debt. 

[41] Foreclosure is a legal process that a mortgage lender initiates 
against a homeowner who has missed a certain number of payments. The 
foreclosure process has several possible outcomes but generally means 
that the homeowner loses the property, typically because it is sold to 
repay the outstanding debt or repossessed by the lender. The legal 
fees, foregone interest, property taxes, repayment of former 
homeowners' delinquent obligations, and selling expenses can make 
foreclosure extremely costly to lenders. 

[42] See [hyperlink, http://www.gao.gov/products/GAO-12-296]. 

[43] See, for example, GAO, Vacant Properties: Growing Number 
Increases Communities' Costs and Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-12-34] (Washington, D.C.: Nov. 4, 
2011). 

[44] See, for example, Brian A. Mikelbank, "Spatial Analysis of the 
Impact of Vacant, Abandoned and Foreclosed Properties," study 
conducted for the Office of Community Affairs, Federal Reserve Bank of 
Cleveland, 2008; and Kai-yan Lee, "Foreclosure's Price-Depressing 
Spillover Effects on Local Properties: A Literature Review" (Community 
Affairs Discussion Paper, Federal Reserve Bank of Boston, 2008). 

[45] GAO, The Federal Government's Long-Term Fiscal Outlook: January 
2011 Update, [hyperlink, http://www.gao.gov/products/GAO-11-451SP] 
(Washington, D.C.: Mar. 18, 2011). For the most recent update, see 
GAO, The Federal Government's Long-Term Fiscal Outlook: Fall 2012 
Update, [hyperlink, http://www.gao.gov/products/GAO-13-148SP] 
(Washington, D.C.: Dec. 3, 2012). 

[46] Pub. L. No. 111-5, 123 Stat. 115 (2009). The federal government's 
largest response to the recession to date came in early 2009 with the 
passage of the Recovery Act. Fiscal stimulus programs are intended to 
increase aggregate demand--the spending of consumers, business firms, 
and governments--and may be either automatic or discretionary. 
Unemployment insurance, the progressive aspects of the tax code, and 
other fiscal stabilizers provide stimulus automatically by easing 
pressure on household incomes as economic conditions deteriorate. 
Discretionary fiscal stimulus, such as that provided by the Recovery 
Act, can take the form of tax cuts for households and businesses, 
transfers to individuals, grants-in-aid to state and local 
governments, or direct federal spending. In response, households, 
businesses, and governments may purchase more goods and services than 
they would have otherwise, and governments and businesses may refrain 
from planned workforce cuts or even hire additional workers. Thus, 
fiscal stimulus may lead to an overall, net increase in national 
employment and output. 

[47] For more information about these emergency programs, see GAO, 
Federal Reserve System: Opportunities Exist to Strengthen Policies and 
Processes for Managing Emergency Assistance, [hyperlink, 
http://www.gao.gov/products/GAO-11-696] (Washington, D.C.: July 21, 
2011). 

[48] In February 2009, to help restore confidence in the financial 
system, Treasury announced the Financial Stability Plan, which 
established the Supervisory Capital Assessment Program (SCAP). SCAP, 
as implemented by the Federal Reserve and other federal banking 
regulators, was to determine through a stress test whether the largest 
19 U.S. bank holding companies had enough capital for the next 2 years 
(2009-2010) to support their lending activities and survive a second 
similar economic shock. For more information about the stress tests, 
see GAO, Troubled Asset Relief Program: Bank Stress Test Offers 
Lessons as Regulators Take Further Actions to Strengthen Supervisory 
Oversight, [hyperlink, http://www.gao.gov/products/GAO-10-861] 
(Washington, D.C.: Sept. 29, 2010). 

[49] Between September 30, 2007, and September 30, 2011, the gross 
federal debt increased by about $7.1 trillion. In comparison, Fannie 
Mae and Freddie Mac's cumulative cash draws (net of dividends paid on 
these draws) under Treasury's Senior Preferred Stock Purchase 
Agreements program stood at approximately $137 billion as of September 
30, 2012. Some academic studies that review the costs of financial 
crises have found that costs associated with rescuing financial 
institutions are generally small relative to overall crisis costs. 
See, for example, Reinhart and Rogoff (2009). 

[50] As of December 31, 2011, FDIC estimated losses of $2.2 billion on 
TLGP guarantees of deposits and reported that it had paid or accrued 
$152 million in estimated losses resulting from TLGP debt guarantees. 

[51] Under the Senior Preferred Stock Purchase Agreements program, 
Treasury has made funding advances to Fannie Mae and Freddie Mac to 
ensure that they have sufficient assets to support their liabilities. 

[52] This accrued contingent liability is based on the projected draws 
from Treasury under the Senior Preferred Stock Purchase Agreements 
program. It is undiscounted and does not take into account any of the 
offsetting dividends which may be received as a result of those draws. 

[53] Under the current terms of the Senior Preferred Stock Purchase 
Agreements program, Fannie Mae and Freddie Mac must pay out all of 
their quarterly profits (if any) to Treasury. 

[54] GAO, State and Local Governments: Knowledge of Past Recessions 
Can Inform Future Federal Fiscal Assistance, [hyperlink, 
http://www.gao.gov/products/GAO-11-401] (Washington, D.C.: Mar. 31, 
2011). 

[55] GAO, State and Local Government Pension Plans: Economic Downturn 
Spurs Efforts to Address Costs and Sustainability, [hyperlink, 
http://www.gao.gov/products/GAO-12-322] (Washington, D.C.: Mar. 2, 
2012). 

[56] While the Dodd-Frank Act does not use the term "systemically 
important financial institution," this term is commonly used by 
academics and other experts to refer to bank holding companies with 
$50 billion or more in total consolidated assets and nonbank financial 
companies designated by FSOC for Federal Reserve supervision and 
enhanced prudential standards. 

[57] In our March 2009 testimony on credit default swaps, we noted 
that no single definition for systemic risk exists. Traditionally, 
systemic risk has been viewed as the risk that the failure of one 
large institution would cause other institutions to fail. This micro-
level definition is one way to think about systemic risk. Recent 
events have illustrated a more macro-level definition: the risk that 
an event could broadly affect the financial system rather than just 
one or a few institutions. See GAO, Systemic Risk: Regulatory 
Oversight and Recent Initiatives to Address Risk Posed by Credit 
Default Swaps, [hyperlink, http://www.gao.gov/products/GAO-09-397T] 
(Washington, D.C.: Mar. 5, 2009). 

[58] See, for example, Department of the Treasury, Financial 
Regulatory Reform, A New Foundation: Rebuilding Financial Supervision 
and Regulation (June 2009). 

[59] See GAO, Financial Markets Regulation: Financial Crisis 
Highlights Need to Improve Oversight of Leverage at Financial 
Institutions and across System, [hyperlink, 
http://www.gao.gov/products/GAO-09-739] (Washington, D.C.: July 22, 
2009). 

[60] Money market mutual funds (MMMF) are mutual funds that are 
registered under the Investment Company Act of 1940, and regulated 
under rule 2a-7 under that act. In September 2008, following the 
failure of Lehman Brothers Inc., many MMMFs faced severe liquidity 
pressures as redemption requests from their investors increased 
significantly. Many MMMF investors became concerned about potential 
losses on their investments when they learned that the Reserve Primary 
Money Fund, a large MMMF that suffered losses on holdings of Lehman 
Brothers commercial paper, "broke the buck"--that is, the net asset 
value of the fund dropped below its target value of $1 per share. 
Regulators became concerned that these pressures on MMMFs could 
further exacerbate turmoil in the markets. The potential widespread 
failure of MMMFs threatened systemic financial stability, as these 
funds were significant investors in many money market instruments, 
such as financial and nonfinancial commercial paper, floating rate 
notes, and CDs. Accordingly, regulators feared that a failure of the 
MMMF industry could have serious repercussions on other institutions 
and overall credit market conditions, as many businesses and 
investment vehicles would have had difficulty rolling over their 
liabilities and potentially been unable to finance their operations. 
Treasury and the Federal Reserve created temporary programs to assist 
MMMFs and reduce the likelihood that these funds would reduce their 
purchases of money market instruments issued by financial institutions. 

[61] See, for example, Viral V. Acharya, Thomas Cooley, Matthew 
Richardson, and Ingo Walter, Regulating Wall Street: The Dodd-Frank 
Act and the New Architecture of Global Finance (Hoboken, NJ: John 
Wiley & Sons, Inc., 2011). 

[62] The provisions of the Dodd-Frank Act dealing with FSOC are 
contained primarily in subtitle A of title I, §§ 111-123, codified at 
12 U.S.C. §§ 5321-5333 and title VIII, codified at 12 U.S.C. §§ 5461-
5472. 

[63] The provisions of the Dodd-Frank Act dealing with OFR are 
contained primarily in subtitle B of title I, §§ 151-156, codified at 
12 U.S.C. §§ 5341-5346. 

[64] As we previously reported, the act provided that FSOC may 
determine whether a nonbank financial company shall be supervised by 
the Federal Reserve and subject to prudential standards if it 
determines that material financial distress at the nonbank financial 
company, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the company, could 
pose a threat to the financial stability of the United States. The act 
lists specific factors for FSOC to consider in making these 
determinations along with any other risk-related factors it deems 
appropriate. Bank holding companies with $50 billion or more in total 
consolidated assets are automatically subject to the Federal Reserve's 
enhanced supervision and prudential standards. See [hyperlink, 
http://www.gao.gov/products/GAO-12-886] and 77 Fed. Reg. 21,637 (Apr. 
11, 2012). 

[65] Financial Stability Oversight Council, Annual Report, 2011 and 
2012 (Washington, D.C.: July 2011 and July 2012). 

[66] See [hyperlink, http://www.gao.gov/products/GAO-12-886]. 

[67] Dodd-Frank Act, § 165, 124 Stat. at 1423-1432, codified at 12 
U.S.C. § 5365. 

[68] The Federal Reserve intends to satisfy some aspects of the Dodd-
Frank Act heightened prudential standards rules for bank SIFIs through 
implementation of the Basel Committee on Banking Supervision 
standards. The Basel Committee has developed international standards 
for bank capital for its member economies since the 1980s. The United 
States, along with nearly all other major economies, agree to comply 
with international capital standards. Over the past few years, U.S. 
federal banking regulators have worked with other members of the Basel 
Committee to strengthen the regulatory capital regime for 
internationally active banks and develop a framework for a risk-based 
capital surcharge for the world's largest, most interconnected banking 
companies. The new regime, known as Basel III, seeks to improve the 
quality of regulatory capital and introduces a new minimum common 
equity requirement. Basel III also raises the numerical minimum 
capital requirements and introduces capital conservation and 
countercyclical buffers to induce banking organizations to hold 
capital in excess of regulatory minimums. In addition, Basel III 
establishes for the first time an international leverage standard for 
internationally active banks. Federal banking regulators are working 
to implement the Basel III capital reforms in the United States. The 
Federal Reserve will separately implement consistent capital and 
liquidity standards for nonbank financial companies designated for 
enhanced supervision by FSOC. 

[69] Companies subject to enhanced prudential standards also must 
conduct annual or semi-annual stress tests of their own, depending on 
their size. 

[70] See 77 Fed. Reg. 594 (Jan. 5, 2012).The Basel Committee has 
reached agreement on a framework for capital surcharges on global 
systemically important banking organizations that would increase their 
capital requirements by 1 to 2.5 percentage points, depending on their 
global systemic footprint. In its enhanced prudential standards 
proposal, the Federal Reserve announced its intention to issue a 
proposal implementing capital surcharges in the United States along 
the international timeline and in line with the framework developed by 
the Basel Committee. 

[71] Regulators generally require that banks maintain certain ratios 
of capital as a share of assets to ensure that they have sufficient 
capital to absorb losses. Under the Basel approaches, banks may weight 
certain assets based on their risks, and use these risk-weighted 
assets to calculate their capital adequacy ratios. 

[72] On January 5, 2012, the Federal Reserve published proposed rules 
to strengthen regulation and supervision of large bank holding 
companies and systemically important nonbank financial companies. The 
proposal includes a wide range of measures addressing issues such as 
capital, liquidity, credit exposure, stress testing, risk management, 
and early remediation requirements. See 77 Fed. Reg. 594. The rules 
concerning stress testing have been finalized. 77 Fed. Reg. 62,378 
(Oct. 12, 2012); 77 Fed. Reg. 62,396 (Oct. 12, 2012). The Federal 
Reserve has also published a proposed rule for large foreign banking 
organizations and foreign nonbank financial companies supervised by 
the Federal Reserve. 77 Fed. Reg. 76,628 (Dec. 28, 2012). 

[73] The Federal Reserve, FDIC, and OCC published in the Federal 
Register in August 2012 joint notices of proposed rulemaking to 
implement Basel III, the Standardized Approach for risk-based capital, 
and revisions to the Advanced Approaches for risk-based capital. See 
77 Fed. Reg. 52,792 (Aug. 30, 2012); 77 Fed. Reg. 52,888 (Aug. 30, 
2012); 77 Fed. Reg. 52,978 (Aug. 30, 2012). 

[74] In a recent report, we developed indicators to monitor changes in 
SIFI characteristics that might be suggestive of the Dodd-Frank Act's 
impact on these firms. See GAO, The Dodd-Frank Act: Agencies' Efforts 
to Analyze and Coordinate Their Rules, [hyperlink, 
http://www.gao.gov/products/GAO-13-101] (Washington, D.C.: Dec. 18, 
2012). 

[75] GAO, Bankruptcy: Complex Financial Institutions and International 
Coordination Pose Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-11-707] (Washington, D.C.: July 19, 
2011). Certain financial institutions, including insured depository 
institutions and insurance companies, may not file for protection 
under the Bankruptcy Code. Broker-dealers may qualify for liquidation, 
but not reorganization, under either the Bankruptcy Code or the 
Securities Investor Protection Act of 1970. 

[76] Fire sales are the disorderly sale of assets to meet margin 
requirements or other urgent cash needs. Such a sudden sell-off drives 
down prices, potentially below their intrinsic value, when the 
quantities to be sold are large relative to the typical volume of 
transactions. 

[77] Approximately 80 percent of the derivative counterparties to 
Lehman's primary U.S. derivatives entity terminated their contracts 
within 5 weeks of Lehman's bankruptcy filing. 

[78] Market discipline enables investors and other market participants 
to constrain the risk taking of financial firms by investing in firms 
that they view as taking appropriate risks--and withdrawing support 
for firms engaging in behavior market participants view as excessively 
risky. 

[79] We previously reported that for market discipline to be 
effective, market participants need access to adequate information 
about the institutions, and institutions need to have sound risk 
management systems in place, among other things. See [hyperlink, 
http://www.gao.gov/products/GAO-09-739]. 

[80] GAO, Bankruptcy: Agencies Continue Rulemaking for Clarifying 
Specific Provisions of Orderly Liquidation Authority, [hyperlink, 
http://www.gao.gov/products/GAO-12-735] (Washington, D.C.: July 12, 
2012). When FDIC is appointed receiver of the financial company it 
must liquidate and wind up the affairs of the company, which may 
involve managing the assets of the company, determining the validity 
of creditor claims against the company, and paying creditor claims. 
The act generally requires that all creditors of a financial company 
with similar priority be treated similarly; however, FDIC has the 
authority to treat similarly situated creditors differently. In some 
cases, FDIC may repudiate contracts to which a financial company is a 
party or may enforce certain contracts that otherwise could have been 
terminated because of the financial company's insolvency. 

[81] FDIC retrospectively examined how it could have used OLA to 
resolve Lehman Brothers Holdings Inc. and concluded it could have 
promoted systemic stability and made the shareholders and creditors, 
not taxpayers, bear the losses. See FDIC, "The Orderly Liquidation of 
Lehman Brothers Holdings Inc. under the Dodd-Frank Act," FDIC 
Quarterly, vol. 5, no. 1 (2011). Critics of this report have noted, 
among other things, that the analysis does not acknowledge the 
widespread weakness in financial markets that affected many financial 
institutions during the financial crisis. 

[82] A related concern focused on whether FDIC may have the discretion 
to impose losses on creditors that might be larger than the market 
would expect or to pull in types of creditors not otherwise subject to 
losses under the Bankruptcy Code. If FDIC acts counter to the market's 
expectations, the result could be to undermine market confidence in 
the OLA process. 

[83] Dodd-Frank Act, § 165(d), 124 Stat. 1426-1427, codified at 12 
U.S.C. § 5365(d). As we previously reported, see [hyperlink, 
http://www.gao.gov/products/GAO-11-707], this provision requires each 
nonbank financial company supervised by the Federal Reserve and each 
bank holding company with total consolidated assets of $50 billion or 
more to submit periodically to the Federal Reserve, FDIC, and FSOC a 
plan for the firm's rapid and orderly resolution in the event of 
material financial distress or failure. Such a firm also must submit a 
report on the nature and extent of credit exposures the company has to 
significant bank holding companies and significant nonbank financial 
firms and the same types of exposures such firms have to the reporting 
firm. The Federal Reserve and FDIC have not yet finalized their joint 
proposed rule to implement the credit exposure reporting requirements. 

[84] FDIC issued a final rule on July 15, 2011 (which took effect on 
August 15, 2011) to implement certain provisions to resolve covered 
financial companies, including (i) recoupment of compensation from 
senior executives and directors; (ii) the clarification of power to 
avoid fraudulent or preferential transfers; (iii) the priorities of 
expenses and unsecured claims; and (iv) the administrative process for 
initial determination of claims. 76 Fed. Reg. 41,626. In addition, 
FDIC and the Federal Reserve published a final rule on resolution 
plans on November 1, 2011. 76 Fed. Reg. 67,323. For more information, 
see [hyperlink, http://www.gao.gov/products/GAO-12-735]. 

[85] FSOC, Annual Report, 2011. 

[86] A derivatives clearinghouse or similar organization enables each 
party to a derivatives transaction to substitute the credit of the 
clearinghouse for the credit of the parties, provides for the 
settlement or netting of obligations from the transaction, or 
otherwise provides services mutualizing or transferring the credit 
risk from the transaction. Dealers participate in the derivatives 
market by quoting prices to, buying derivatives from, and selling 
derivatives to end users and other dealers. 

[87] OCC, Quarterly Report on Bank Trading and Derivatives Activities, 
Second Quarter 2012. According to the report, the four banks with the 
most derivatives activity held 93.2 percent of all derivatives, while 
the largest 25 banks accounted for nearly 100 percent of all 
contracts. OCC noted that changes in notional volumes are generally 
reasonable reflections of business activity and therefore can provide 
insight into potential revenue and operational issues. However, the 
notional amount of derivatives contracts does not provide a useful 
measure of either market or credit risks. 

[88] In general, minimum capital requirements are designed to provide 
firms with sufficient liquidity to meet unsubordinated obligations to 
customers and counterparties and sufficient resources to wind down in 
an orderly manner without the need for a formal proceeding. Minimum 
margin requirements are generally intended to regulate the amount of 
credit directed into swaps and related transactions and to help 
protect swaps entities and their customers from price fluctuations and 
against losses arising from undue leverage. Minimum margin 
requirements also can help manage counterparty credit risk. 

[89] Any entity acting as a clearinghouse, or central counterparty, 
must register with CFTC, SEC, or both, as appropriate (unless granted 
an exemption) and is subject to regulatory requirements established by 
CFTC, SEC, or both, as appropriate. 

[90] Organized exchanges and swap execution facilities are subject to 
comprehensive registration, operational, and self-regulatory 
requirements. 

[91] Clearinghouses use initial and variation margin as a key part of 
their risk management programs. Initial margin serves as a performance 
bond against potential future losses. If a clearing member fails to 
meet its obligations to the clearinghouse (such as failing to pay 
variation margin when due), resulting in a default, the clearinghouse 
may use the defaulter's initial margin to cover any loss resulting 
from the default. Variation margin entails marking open positions to 
their current market value each day and transferring funds between the 
clearing members to reflect any change in value since the previous 
time the positions were marked. This process minimizes the risk that 
exposures will accumulate over time and thereby reduces the potential 
impact of a clearing member default and the size of the loss resulting 
from the default should one occur. 

[92] In addition to identifying financial stability benefits of Title 
VII, experts noted that the provisions can provide other benefits to 
market participants, such as increased market liquidity and lower 
costs through increased competition and greater transparency. 

[93] Counterparty credit risk is the risk to each party in an OTC 
derivatives contract that the other party will not perform the 
contractual obligations. Technically, the clearing house members 
interact with the counterparties. 

[94] FSOC has identified certain clearinghouses as systemically 
important financial market utilities, which are subject to risk 
management and other enhanced supervisory and prudential requirements 
under the Dodd-Frank Act and may be afforded access to collateralized 
emergency liquidity from Federal Reserve Banks in unusual or exigent 
circumstances. 

[95] Subprime mortgages generally are made to borrowers with blemished 
credit and feature higher interest rates and fees than prime loans. We 
have previously reported that the subprime market experienced 
substantially steeper increases in default and foreclosure start rates 
than the prime and government insured markets, accounting for two 
thirds or more of the overall increase in the number of loans between 
the second quarter of 2005 and the second quarter of 2007. See GAO, 
Information on Recent Default and Foreclosure Trends for Home Mortgage 
and Associated Economic and Market Developments, [hyperlink, 
http://www.gao.gov/products/GAO-08-78R] (Washington, D.C.: Oct. 16, 
2007). 

[96] According to the Dodd-Frank Act, a lender is presumed to have 
satisfied this requirement and receives some protection from liability 
when it originates a "qualified mortgage" (QM) that meets nine 
specific criteria, initially set forth in the act, but authorizes CFPB 
to change these criteria. 

[97] A securitization is a financial transaction in which assets, such 
as mortgage loans, are pooled and securities representing interests in 
the pool are issued. 

[98] To securitize mortgage loans, mortgage lenders or originators can 
either securitize the loans themselves or sell their loans to third 
parties (some of which are affiliated third parties)--either directly 
to securitizing institutions or loan aggregators that serve as 
intermediaries between originators and securitizers--generating funds 
that could be used to originate more loans. Securitizing institutions 
include investment banks, retail banks, mortgage companies, and real 
estate investment trusts. 

[99] Dodd-Frank Act, § 941, 124 Stat. at 1890-1896, codified at 15 
U.S.C. § 78o-11. Specifically, the Dodd-Frank Act requires mortgage 
securitizers (and certain originating lenders) to retain a financial 
exposure of no less than 5 percent of the credit risk of any 
securitized residential mortgage that does not meet a separate set of 
criteria (to be defined by six federal regulators, excluding CFPB). 
Securitized mortgages that meet these criteria are exempt from this 
risk retention requirement, referred to as "qualified residential 
mortgage" (QRM). The QRM risk retention requirement can be more 
restrictive than the QM criteria but not less restrictive. 15 U.S.C. § 
1639c(b)(2)(A), (3)(B)(i), (c)(1)(B). 

[100] See GAO, Proprietary Trading: Regulators Will Need More 
Comprehensive Information to Fully Monitor Compliance with New 
Restrictions When Implemented, [hyperlink, 
http://www.gao.gov/products/GAO-11-529], (Washington, D.C.: July 13, 
2011). 

[101] Dodd-Frank Act § 619, 124 Stat. at 1620-1631 codified at 12 
U.S.C. § 1851. Section 619 of the act requires the federal banking 
agencies, SEC, and CFTC to promulgate rules implementing the 
prohibition. 12 U.S.C. § 1851(b). The Volcker Rule also generally 
prohibits a banking entity from engaging in any permitted activity 
that, among other things, would involve or result in a material 
conflict of interest between the banking entity and its customers or 
that would result in a material exposure to a high-risk asset or 
trading strategy. 12 U.S.C. § 1851(d)(2)(A)(i). 

[102] Board of Governors of the Federal Reserve System and Department 
of the Treasury Offices of Inspector General, Review of CFPB 
Implementation Planning Activities (Washington, D.C.: July 15, 2011). 

[103] Dodd-Frank Act, §§ 951, 953, 954, 124 Stat. at 1899-1900, 1903-
04, codified at 15 U.S.C. §§ 78n-1, 78j-4, 78l note. Clawbacks of 
erroneously awarded incentive-based compensation are recoveries by the 
company of amounts paid to an employee based on materially inaccurate 
financial statements. This is money that the executive would not have 
received if the accounting were done properly and to which the 
executive was not entitled. 

[104] Basel Committee on Banking Supervision, "An Assessment of the 
Long-Term Economic Impact of Stronger Capital and Liquidity 
Requirements," Bank for International Settlements (Basel, Switzerland: 
Aug. 2010). 

[105] See, for example, Steven Schwarcz, "Systemic Risk," Georgetown 
Law Journal, vol. 97: 193-249 (2008). 

[106] See, for example, GAO, Community Banks and Credit Unions: Impact 
of the Dodd-Frank Act Depends Largely on Future Rule Makings, 
[hyperlink, http://www.gao.gov/products/GAO-12-881] (Washington, D.C.: 
Sept. 13, 2012). 

[107] FSOC and OFR have not received appropriated funds. During the 2-
Year: period following the enactment of the Dodd-Frank Act, the 
Federal Reserve provided OFR funds to cover the expenses of the 
office. Now, OFR is funded through assessments levied on bank holding 
companies with total consolidated assets of $50 billion or more and 
nonbank financial companies designated by FSOC for supervision by the 
Federal Reserve. Until FSOC designates nonbank financial companies, 
assessments will be levied only against large bank holding companies. 
The collected assessments are deposited into the Financial Research 
Fund, which was established within Treasury to fund the expenses of 
OFR. FSOC's expenses are considered expenses of OFR. 12 U.S.C. §§ 
5328, 5345. 

[108] Some of Treasury's expenses are funded through statutory 
provisions that authorize Treasury to spend certain of its receipts. 

[109] See D. Elmendorf, CBO, "Review of CBO's Cost Estimate for the 
Dodd-Frank Wall Street Reform and Consumer Protection Act" (testimony 
before the Subcommittee on Oversight and Investigations, Committee on 
Financial Services, U.S. House of Representatives, Washington, D.C., 
Mar. 30, 2011). 

[110] Compliance costs generally are the costs that firms incur to 
undertake an activity that they otherwise would not have undertaken in 
the absence of regulation. Such costs include the costs for regulated 
firms to hire and train staff, devote staff and management time to 
compliance activities, hire outside legal or other expertise, and make 
new investments in information technology or other systems. Compliance 
costs can include start-up, or one-time, costs (e.g., upgrading 
computer systems) and recurring costs (e.g., periodic reporting 
requirements). 

[111] See GAO, Dodd-Frank Act Regulations: Implementation Could 
Benefit from Additional Analyses and Coordination, [hyperlink, 
http://www.gao.gov/products/GAO-12-151] (Washington, D.C.: Nov. 10, 
2011). OCC reviews potential costs and benefits of each proposed rule 
in accordance with requirements of the Unfunded Mandates Reform Act, 
the Regulatory Flexibility Act, and the Congressional Review Act. 

[112] 76 Fed. Reg. 4231 (Oct. 13, 2010). 

[113] Higher capital requirements can require banks to increase the 
portion of their funding that comes from equity capital rather than 
debt. Heightened liquidity standards can require banks to rely more on 
longer-term rather than shorter-term debt financing. The results of 
academic, industry, and other research on the impact of such 
heightened prudential standards on financial institutions and their 
customers have varied widely. It generally is more expensive for banks 
to fund themselves through equity capital (such as by selling stock to 
investors) than through debt. This is because equity holders are 
residual claimants and assume more risk than debt holders. In theory, 
increasing the required proportion of equity funding relative to debt 
funding should not affect a firm's overall cost of funding as it 
reduces the risk that the firm will fail, thereby reducing the returns 
demanded by both equity and debt holders. However, certain government 
policies make equity financing (such as through issuing stock to 
investors) more expensive for financial institutions than debt 
financing. For example, interest on debt is tax deductible, while 
dividends on equity securities are not. In addition, bank deposits 
benefit from federal guarantees and the cost of these liabilities does 
not fall as capital levels and the perceived safety of the firm 
increase. 

[114] Dodd-Frank Act, § 165(d), 124 Stat. at 1426-1427, codified at 12 
U.S.C. § 5365(d); 76 Fed. Reg. 67,323 (Nov. 1, 2011). 

[115] As discussed earlier, SIFIs must develop annual resolution plans 
that describe how their institution's failure would proceed through 
bankruptcy. The rule allows less complex SIFIs to file a tailored 
resolution plan with reduced information requirements. 

[116] 77 Fed. Reg. 62,378 (Oct. 12, 2012); 77 Fed. Reg. 62,396 (Oct. 
12, 2012); 77 Fed. Reg. 62,417 (Oct. 15, 2012); and 77 Fed. Reg. 
61,238 (Oct. 9, 2012). 

[117] Dodd-Frank Act, § 155(d), 124 Stat. at 1419, codified at 12 
U.S.C. § 5345(d); 77 Fed. Reg. 29,884 (May 21, 2012). 

[118] As noted earlier, the Federal Reserve funded the Financial 
Research Fund through July 20, 2012. 

[119] Dodd-Frank Act, §§ 332, 334, 124 Stat. at 1539, codified at 12 
U.S.C. § 1817; 76 Fed. Reg. 10,672 (Feb. 25, 2011). The deposit 
insurance fund insures deposits at banks. Deposit insurance fund 
assessments are insurance assessments collected from its member 
depository institutions. 

[120] After the rule became effective on April 1, 2011, deposit 
insurance fund assessments for community banks (those with less than 
$10 billion in assets) decreased in aggregate by $342 million. 

[121] 77 Fed. Reg. 1182 (Jan. 9, 2012). 

[122] One study estimates that over half a trillion dollars of net new 
collateral could be required as a result of moving swaps to 
clearinghouses. See, for example, M. Singh, Collateral, Netting and 
Systemic Risk in the OTC Derivatives Market, IMF Working Paper, 10/99 
(Washington, D.C.: 2010). Swap market participants will face costs 
associated with funding this additional collateral. Among other 
options, swap dealers could sell longer-term securities to replace 
them with lower-yielding government securities that are eligible as 
collateral. For non-dealers, one option is to borrow funds in order to 
buy securities to use as collateral. 

[123] See [hyperlink, http://www.gao.gov/products/GAO-12-881]. 

[124] Some reforms may reduce revenue or profits for certain financial 
institutions but benefit other market participants and, thus, may not 
necessarily result in a net cost to the broader economy. As discussed 
later in this report, reforms that effect transfers between groups can 
give rise to economic costs if there are efficiency losses associated 
with these transfers. 

[125] As we previously reported, while bank holding companies earned 
profits from their proprietary trading operations in most years, in 
some years they suffered significant losses. See [hyperlink, 
http://www.gao.gov/products/GAO-11-529]. 

[126] Dodd-Frank Act, § 1075, 124 Stat. at 2068, codified at 15 U.S.C. 
§ 1693o-2; 77 Fed. Reg. 46,258 (Aug. 3, 2012). When a consumer uses a 
debit card to make an electronic purchase, the merchant does not 
receive the full purchase amount. Part of the amount (called the 
merchant discount fee) is deducted and distributed among the 
merchant's bank, debit card issuer, and payment card network 
processing the transaction. Historically, the majority of the merchant 
discount fee was paid from the merchant's bank to the debit card 
issuer in the form of an interchange fee. 

[127] See [hyperlink, http://www.gao.gov/products/GAO-13-101] and 
[hyperlink, http://www.gao.gov/products/GAO-12-881]. 

[128] Financial institutions can help contribute to economic growth by 
providing financial products and services to businesses and 
households. For example, they lend funds; transform credits with short 
term maturities into credits with long-term maturities; provide 
payment services, investment vehicles, and risk management; and 
support the functioning of financial markets. 

[129] As discussed earlier in this report, some experts noted that 
mortgage and related credit instruments were not accurately priced 
before the crisis to reflect their risks. As a result, the economy 
experienced a credit bubble that facilitated a misallocation of 
resources to the housing sector. To the extent that the act's reforms 
contribute to a more accurate pricing of credit, the economy could 
benefit from a more efficient allocation of resources. 

[130] One key assumption is the choice of baseline levels of capital 
and liquidity against which changes attributed to financial regulatory 
reforms are measured. Selecting precrisis levels of capital and 
liquidity as a baseline could lead to overestimated costs due to 
financial reforms if financial institutions would have increased 
capital and liquidity in the absence of such reforms based on lessons 
learned from the crisis. Other key assumptions relate to the length of 
the transition period, the responsiveness of bank equity and debt 
prices to changes in banks' capital and liquidity levels, the 
responsiveness of lending rates to changes in banks' funding costs, 
and the extent to which monetary policy can be used to offset any 
upward pressure on lending rates. For additional discussion of key 
assumptions that impact estimates of the costs of the act's reforms, 
see Santos and Elliott, Estimating the Costs of Financial Regulation, 
IMF Staff Discussion Note, September 11, 2012. 

[131] This study estimated that a 1 percentage point increase in the 
target ratio of tangible common equity to risk-weighted assets would 
lead to a maximum decline in the level of GDP of about 0.19 percent 
from the baseline path, which would occur 4 ½ years after the start of 
implementation (equivalent to a reduction in the annual growth rate of 
0.04 percentage points over this period), followed by a gradual 
recovery of growth towards the baseline. See Macroeconomic Assessment 
Group, Interim Report: Assessing the Macroeconomic Impact of the 
Transition to Stronger Capital and Liquidity Requirements, Bank for 
International Settlements, (Basel, Switzerland: August 2010), and 
Macroeconomic Assessment Group, Final Report: Assessing the 
Macroeconomic Impact of the Transition to Stronger Capital and 
Liquidity Requirements, Bank for International Settlements, (Basel, 
Switzerland: December 2010). The Macroeconomic Assessment Group was 
established by the Financial Stability Board and the Basel Committee 
on Banking Supervision and includes central banks and banking 
regulators from 15 countries, as well as several multilateral 
organizations. 

[132] See Scott Roger and Francis Vitek, The Global Macroeconomic 
Costs of Raising Bank Capital Adequacy Requirements, IMF Working Paper 
WP/12/44, February 2012, and Patrick Slovik and Boris Cournède, 
Macroeconomic Impact of Basel III, OECD Economics Department Working 
Paper No. 844, OECD Publishing, 2011. 

[133] See Institute of International Finance, The Cumulative Impact on 
the Global Economy of Changes in the Financial Regulatory Framework, 
September 2011. 

[134] Basel Committee on Banking Supervision, An Assessment of the 
Long-term Economic Impact of Stronger Capital and Liquidity 
Requirements, Bank for International Settlements (Basel Switzerland: 
August 2010). 

[135] Santos and Elliott, Estimating the Costs of Financial Regulation. 

[136] [hyperlink, http://www.gao.gov/products/GAO-11-529]. 

[137] For example, industry groups have expressed concern that strict 
enforcement of the Volcker rule could cause banks to reduce or 
withdraw from client-driven trading activities, such as making markets 
in certain securities (which entails standing ready to buy and sell a 
security from a client even when there is no other client to take the 
opposite side of the trade) and providing hedging services to clients. 
While some have attempted to estimate the impacts of the Volcker rule, 
these estimates are based on assumptions about how it will be 
implemented, which may differ significantly from how it is actually 
implemented. 

[138] Oliver Wyman, "The Volcker Rule Restrictions on Proprietary 
Trading: Implications for Market Liquidity" (Feb. 2012). 

[139] GAO, Mortgage Reform: Potential Impacts of Provisions in the 
Dodd-Frank Act on Homebuyers and the Mortgage Market, [hyperlink, 
http://www.gao.gov/products/GAO-11-656] (Washington, D.C.: July 19, 
2011). 

[140] The loan-to-value ratio is the loan amount divided by the value 
of the home at mortgage origination. As the required loan-to-value 
ratio falls, the required borrower down payment increases. The debt-
service-to-income ratio represents the percentage of a borrower's 
income that goes toward all recurring debt payments, including 
mortgage payments. 

[141] See, for example, Federal Financial Analytics, Inc., "Strategic 
Regulatory Landscape: Regulatory Intent versus Policy and Market Risk 
in Financial-Services Industry - Capital, Liquidity, Risk Management 
and Related Prudential Requirements" (October 2012). 

[End of section] 

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