Financial Stability: New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions
Highlights
What GAO Found
These new organizations--the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR)--face challenges in achieving their missions. Key FSOC missions--to identify risks and respond to emerging threats to financial stability--are inherently challenging, in part, because risks to financial stability do not develop in precisely the same way in successive crises. Collaboration among FSOC members can also be challenging at times, as almost all of them represent independent agencies that retained existing authorities. OFR faces the challenge of trying to establish and build a world-class research organization while meeting shorter-term goals and responsibilities.
FSOC's and OFR's management mechanisms to carry out their missions could be enhanced to provide greater accountability and transparency. FSOC and OFR have taken steps toward establishing such mechanisms. FSOC has established seven standing committees generally composed of staff of its members and member agencies to support the council in carrying out its business and provide information to the council for decision making and adopted a memorandum of understanding on information sharing to help govern its activities. FSOC and OFR have also issued annual reports on their activities and created web pages that provide some information to the public. However, certain mechanisms could be strengthened. For instance:
- FSOC's Systemic Risk Committee, which is responsible for identifying risks to financial stability, has procedures to facilitate analysis of risks raised by staff. However, without a more systematic approach and comprehensive information, FSOC member agencies, on their own, may not be well positioned to judge which potential threats will benefit from interagency discussions. GAO recommends that FSOC collect and share key financial risk indicators as part of a systematic approach to help identify potential threats to financial stability.
- Public information on FSOC's and OFR's decision making and activities is limited, which makes assessing their progress in carrying out their missions difficult. GAO recommends that (1) FSOC keep detailed records of closeddoor sessions and (2) both entities develop a communication strategy to improve communications with the public.
- FSOC's annual reports--which serve as its key accountability documents--do not consistently identify which entities should monitor or implement the identified recommendations or give time frames for specific actions. To hold FSOC accountable for its recommendations, GAO recommends that FSOC recommend a lead agency or agencies to monitor or implement each recommendation within specified time frames.
- OFR issued a strategic framework in March 2012 as an important first step in adopting a strategic planning and performance management system. However, that document lacked some leading practices such as linking activities to strategic goals and performance measurement systems. GAO recommends that OFR further develop a strategic planning and performance management system that includes these elements and will allow it to be held accountable.
Although FSOC and OFR have taken steps to promote collaboration among FSOC members and external stakeholders, FSOC could further adopt key practices. FSOC member agency staff noted that agencies have leveraged their joint expertise and resources to produce FSOC’s mandated reports and rules. OFR has also taken steps to collaborate with external stakeholders by initiating a working paper series, moving to form an advisory committee, and coordinating U.S. efforts at the international level to help create a legal entity identifier for financial entities that could enable regulators to identify parties to financial transactions. However, FSOC could do more to promote collaboration. For instance, FSOC, and OFR are required to monitor risks to financial stability, but they have not yet clarified agency responsibilities for implementation—creating the potential for regulatory gaps or duplication of effort. In addition, FSOC could take better advantage of statutory mechanisms to leverage external resources, including developing advisory committees. To improve collaboration and coordination among its member agencies and with external stakeholders, GAO recommends that FSOC (1) develop policies to clarify when formal collaboration or coordination should occur and FSOC’s role in such efforts, (2) more fully incorporate key practices for successful collaboration that GAO has previously identified, and (3) clarify roles and responsibilities for implementing requirements to monitor risks to the financial system.
FSOC has issued rules that improve the transparency of its processes, and statutorily mandated reports but has not established processes to help ensure that these will have their intended results. While FSOC has issued rules on processes for designating nonbank financial entities for additional oversight and intends to review certain aspects of those rules, it has not developed plans for comprehensively evaluating whether designations are having their intended impact—reducing threats to financial stability. The impact of the designations on the economy and the financial entities will depend, in part, on a number of rules being issued by independent FSOC member agencies that will be applied to those being designated. Without a comprehensive assessment of the impact of these rules that will require the cooperation of individual FSOC members, understanding whether the designations are having their intended impact will be difficult. GAO recommends that FSOC develop a comprehensive framework for assessing the impact of its designation decisions. In addition, FSOC has not developed a systematic forward-looking process for identifying potential emerging threats in its mandated annual reporting process. In particular, FSOC does not have processes for consistently identifying such threats, separating them from more current threats, or prioritizing them. Identifying a large number of threats—the 2011 report identified over 30—without prioritizing them makes focusing on those that are most important difficult for decisionmakers. The 2012 report also included many threats, and neither report separates current threats from those that are potentially emerging. To improve FSOC’s annual reporting on potential emerging threats, GAO recommends that FSOC develop more systematic approaches that are forward looking and help to prioritize the threats.
Why GAO Did This Study
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to the stability of the U.S. financial system and OFR to support FSOC and Congress by providing financial research and data. GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR's efforts to establish management structures and mechanisms to carry out their missions, (3) FSOC and OFR's activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR's budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.
Recommendations
GAO makes 10 recommendations to strengthen the accountability and transparency of FSOC and OFR's decisions and activities as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said, as Chairperson, that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators. However, stronger and more systematic actions are still needed in these areas.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
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| Financial Stability Oversight Council | FSOC and OFR should clarify responsibility for implementing requirements to monitor threats to financial stability across FSOC and OFR, including FSOC members and member agencies, to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative. |
As stated in OFR's 2021 annual report, the OFR supports the FSOC and its members by providing research and analysis to help identify threats to financial stability, fulfilling FSOC requests for research and analysis, and working with FSOC members on research and data projects. FSOC and OFR personnel engage in bi-weekly coordination meetings that help to ensure roles and responsibilities for monitoring threats to financial stability are clearly understood. During these meetings, the relevant teams discuss several topics, including OFR's current research agenda; outstanding or anticipated data requests and collections; FSOC's major initiatives and updates from its committees; and insights from OFR's financial monitors. Like other FSOC member agencies, OFR participates on FSOC committees, including the Systemic Risk Committee and leads the Data Committee. These ongoing points of collaboration ensure that FSOC and OFR are aligned with respect to their joint and independent initiatives to identify threats to financial stability.
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| Office of Financial Research | FSOC and OFR should clarify responsibility for implementing requirements to monitor threats to financial stability across FSOC and OFR, including FSOC members and member agencies, to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative. |
As stated in OFR's 2021 annual report, the OFR supports the FSOC and its members by providing research and analysis to help identify threats to financial stability, fulfilling FSOC requests for research and analysis, and working with FSOC members on research and data projects. FSOC and OFR personnel engage in bi-weekly coordination meetings that help to ensure roles and responsibilities for monitoring threats to financial stability are clearly understood. During these meetings, the relevant teams discuss several topics, including OFR's current research agenda; outstanding or anticipated data requests and collections; FSOC's major initiatives and updates from its committees; and insights from OFR's financial monitors. Like other FSOC member agencies, OFR participates on FSOC committees, including the Systemic Risk Committee and leads the Data Committee. These ongoing points of collaboration ensure that FSOC and OFR are aligned with respect to their joint and independent initiatives to identify threats to financial stability.
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| Financial Stability Oversight Council | As FSOC continues to develop approaches for monitoring threats to financial stability, FSOC should develop an approach that includes systematic sharing of key financial risk indicators across FSOC members and member agencies to assist in identifying potential threats for further monitoring or analysis. |
The Financial Stability Oversight Council (FSOC) has developed an approach to share key financial risk indicators across FSOC members and member agencies and intends to continue to work on developing a range of approaches to facilitate how it monitors threats to financial stability. The Office of Financial Research (OFR) developed a monitoring tool to facilitate sharing of key financial risk indicators among the FSOC membership. This tool, the Financial Stability Monitor, is designed to provide a high level assessment of risks to financial stability. Once OFR had finalized the Financial Stability Monitor, it was presented and discussed at a Council meeting in December 2014. The next update of the Financial Stability Monitor was in June 2015 and was discussed at the Council's Deputies June 2015 meeting. Since February 2016, OFR reported that they had presented their newest monitor, the Money Market Fund Monitor to the Council's Systemic Risk Committee, as well as the 2016 Financial Stability Monitor. OFR continues to present and update the Systemic Risk Committee on operational monitors and new monitors that are being implemented. Going forward, FSOC plans to more regularly incorporate the Financial Stability Monitor, as well as other member agency tools and outputs, into the Systemic Risk Committee and other discussions, as appropriate.
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| Financial Stability Oversight Council | To improve the transparency of FSOC and OFR operations, FSOC and OFR should each develop a communication strategy to improve communications with the public. The strategy could include using technology more effectively to communicate, such as having fully developed websites, sending regular notices to interested parties, and developing methods to communicate with the public. |
In May 2014, FSOC updated its transparency policy to reflect improvements in communicating with the public. For example, the policy now states that the council will publicly announce its meetings at least seven days in advance of the meeting and will have a live web stream of its open meetings. In addition, the provision for releasing summaries of the meetings as soon as practicable afterwards is an effort to provide information in a timelier manner. Prior to the change (providing these summaries), the public would have to wait until the next FSOC meeting when the minutes were approved for the prior meeting. In addition, the FSOC website now offers the public the ability to sign up for email updates.
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| Office of Financial Research | To improve the transparency of FSOC and OFR operations, FSOC and OFR should each develop a communication strategy to improve communications with the public. The strategy could include using technology more effectively to communicate, such as having fully developed websites, sending regular notices to interested parties, and developing methods to communicate with the public. |
As part of its communication strategy, in February 2015, OFR launched a new website to provide policy makers and the public better access to OFR information and analysis that can help to promote financial stability. The new website contains a "Directors Blog," biographies of senior managers, and information about OFR initiatives to collect financial data and improve data quality. The site also provides OFR's annual reports, working papers, staff discussion papers, and other research and analysis. The new website also offers the public the ability to sign up for email updates.
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| Office of Financial Research | To support the growth of OFR into a viable and sustainable entity, OFR should build on its strategic framework by further developing its strategic planning and performance management system so that it links its activities to its goals and uses publicly available performance measures to measure its progress. |
OFR has taken steps to strengthen strategic planning and performance measurement that address our recommendation. In February 2015, OFR publicly released a new strategic plan for FY 2015 through 2019 that describes its strategic goals and how it will measure progress. In addition, in its fiscal year 2015 budget request, OFR reported several performance measures and targets for measuring progress.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should keep detailed records (for example, detailed minutes or transcripts) of closed door sessions of principals meetings and to the extent possible make them publicly available after an amount of time has passed sufficient to avoid the release of market-sensitive information or information that would limit deliberations. |
The Financial Stability Oversight Council (FSOC) undertook a review of its governance and transparency policies in 2013 and early 2014. The review included consideration of the practices of other organizations with similar structures, memberships, or responsibilities as the Council. In May 2014, FSOC issued a transparency policy that stated the intent to issue council minutes on a more timely basis and include more detail as appropriate. The Council's minutes from June 2014 to June 2016 reflected increased detail of the presentations during the executive (closed) session and also included more detail about the topics Council principals discussed. In addition, documents supporting the presentations during the closed sessions are retained. The more detailed minutes along with the retention of other records will help to ensure the Council is accountable for its decisions.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should establish formal collaboration and coordination policies that clarify issues such as when collaboration or coordination should occur and what role FSOC should play in facilitating that coordination. |
The Financial Stability Oversight Council (FSOC) has taken several actions to formalize how it will collaborate and coordinate its work. In May 2014, FSOC issued bylaws that govern the Deputies Committee. Specifically, these bylaws state that the Deputies Committee is responsible for coordinating the activities of the Council's other committees, such as the Systemic Risk Committee, and coordinating with the Office of Financial Research. In addition, in May 2015, FSOC completed charters for its other five committees (Data, Financial Markets Utilities, Nonbank Financial Companies Designations, Regulation and Resolution, and Systemic Risk). These charters describe how member agencies and members of FSOC will coordinate and share information, among other things.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should more fully incorporate key practices for successful collaboration that we have previously identified. Internally, this could include working with agencies to rationalize schedules for rulemakings and conducting collaborative system-wide stress testing. Externally, this could include using professional and technical advisors including state regulators, industry experts, and academics. |
FSOC has incorporated key collaboration practices in several ways including convening conferences to collaborate with external stakeholders and experts and seeking input and feedback to improve its processes and the Council's deliberations. For example, in May 2014, the FSOC hosted a public conference on asset management that brought together a group of industry and non-industry participants to help inform FSOC's initial approach to its work reviewing the asset management industry. The FSOC engaged with financial companies, nonbank financial companies, trade associations, public interest groups, and Congressional stakeholders to review its practices related to nonbank designations, resulting in changes to its procedures in February 2015. The FSOC/OFR annual conference is another example of collaboration with internal and external stakeholders. The most recent conference in January 2016 included participants spanning government, financial services, public interest groups, and academia. To enhance internal collaboration among member agencies of FSOC, in May 2015, the FSOC approved a new Regulation and Resolution Committee to promote coordination in rulemakings and to serve as a forum for information sharing and coordination among the staff of FSOC members, member agencies and other federal and state agencies, as appropriate, regarding domestic financial services policy development.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should establish a collaborative and comprehensive framework for assessing the impact of its decisions for designating FMUs and nonbank financial companies on the wider economy and those entities. This framework should include assessing the effects of subjecting designated FMUs and nonbank financial companies to new regulatory standards, requirements, and restrictions; establishing a baseline from which to measure the effects; and documenting the approach. |
In December 2019, FSOC released revised guidance for designations that includes a framework for assessing the costs and benefits of designating nonbank financial companies on both the wider economy and the companies. The final guidance says that before making a determination (designation) FSOC will consider the benefits to the U.S. financial system, long-term economic growth, and the nonbank financial company due to additional regulatory and supervisory requirements resulting from the determination. When evaluating potential benefits to the U.S. financial system and long-term economic growth, FSOC may consider whether the determination enhances U.S. financial stability and mitigates the severity of economic downturns by reducing the likelihood or severity of a potential financial crisis, among other factors. With respect to company-specific benefits, FSOC could consider the effects of anticipated new or increased requirements, including, for example, a lower cost of capital or higher credit ratings upon meeting its post-designation regulatory and supervisory requirements. When evaluating the costs, FSOC will consider the cost to the nonbank financial company from anticipated new or increased regulatory and supervisory requirements in connection with a determination, such as costs related to risk-management requirements, supervision and examination, and liquidity requirements. When evaluating the costs of to the U.S. economy, FSOC will assess the impact of the determination on the availability and cost of credit or financial products in relevant U.S. markets, among other factors. Collecting and assessing this information will also provide a baseline for assessing the impacts of FSOC's decisions for designating these companies.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should develop more systematic forward-looking approaches for reporting on potential emerging threats to financial stability in annual reports. Such an approach should provide methodological insight into why certain threats to financial stability are included or excluded over time, separate current or past threats from those that are potentially emerging, and prioritize the latter. |
Since GAO made this recommendation when the federal government did not have a financial stability report, the Board of Governors of the Federal Reserve System (Federal Reserve) and Office of Financial Research (OFR) have developed public tools or reports that provide analytically transparent measures of potential emerging threats to financial stability and how they evolve over time. In November 2018, the Federal Reserve began publishing a biannual financial stability report that classifies financial vulnerabilities in four areas, and describes the level of risk in these areas and the financial indicators upon which these judgments are based. The report separately identifies and describes near term risks to financial stability that might result in acute shocks to the US financial system and its participants based in part on a survey of market and official-sector contacts, and ranks these risks based on the frequency of survey responses.In addition, OFR's Financial System Vulnerabilities Monitor is a heat map based on 58 indicators divided into 6 categories and 16 sub-categories. As a color-coded heat map it is clear to the user the relative levels of risk implied by various indicators and how they have evolved over time. The indicators themselves are defined in a table and their selection and development is explained in a public working paper. This tool is complemented by OFR's annual report which characterizes risk levels in these same 6 categories. While FSOC did not implement GAO's recommendation, collectively these reports and tools reflect key elements of the recommendation to FSOC regarding the reporting of potential emerging threats to financial stability its Annual Report. That is, these approaches are systematic and intended to be forward-looking, they are analytically transparent which makes it clear why risks change in relative and absolute importance over time, and which risks are new, developing and/or current. We did not assess the quality of the indicators (for example their ability to anticipate and rank emerging risks to financial stability). Because the recommendation's intent has been addressed by the Federal Reserve and OFR and not FSOC, we are closing this recommendation as not implemented.
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| Financial Stability Oversight Council | To strengthen accountability and collaboration in FSOC's decision making, FSOC should make recommendations in the annual report more specific by identifying which FSOC member agency or agencies, as appropriate, are recommended to monitor or implement such actions within specified time frames. |
The 2014 and 2015 annual reports identified member agencies associated with monitoring or implementing certain recommendations, as appropriate. In addition, FSOC's Systemic Risk Committee has assigned responsibility for tracking individual recommendations over the year to specific member agencies of the Council. While the annual report recommendations have not yet included timeframes for specific recommendations, we continue to believe that FSOC should include timeframes going forward, as appropriate.
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