Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration

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

SEC's Consolidated Supervision Program was terminated in September 2008. The institutions previously supervised by SEC opted to be chartered as financial holding companies and are supervised by the Federal Reserve. In October 2008, the Federal Reserve Board issued new guidance on its consolidated supervision. This guidance laid out the objectives of consolidated supervision more clearly than the objectives had been laid out in the past. The guidance made clear, for example, that the objective of the Federal Reserve's supervision was to understand and assess bank holding companies on a consolidated basis. In its 2011 GPRA Annual Performance Report, although not directly focused on consolidated supervision, the Federal Reserve included the following metric: "Identify and resolve supervisory and financial problems in a timely manner, working alone or in cooperation with other authorities."

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

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

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

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

Consistent with the intent of this recommendation, the Federal Reserve entered into a Memorandum of Understanding with the Securities and Exchange Commission regarding collaboration and information sharing. The Federal Reserve and SEC as well as other functional regulators and international counterparties also engaged in joint regulatory activities including management of counterparty credit risk exposure to hedge funds and industry-wide operational issues related to credit derivatives. SEC also proposed periodic meetings with OTS. SEC's Consolidated Supervised Entities (CSE) program was subsequently terminated. Under Dodd-Frank, the Federal Reserve will also assume responsibility for thrift holding companies in July 2011.

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

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

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

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

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

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

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

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