November 20, 2014

GAO Report Says FSOC Lacks Transparency, Accountability

Non-bank SIFI designation process should be systematic and measurable

Washington, D.C. - Today, the Government Accountability Office (GAO) released the results of a comprehensive study requested by Senate Banking Committee Ranking Member Mike Crapo (R-Idaho) analyzing the Financial Stability Oversight Council's (FSOC) process to designate systemically important non-bank financial companies (non-bank SIFIs) for additional regulation by the Federal Reserve.  The FSOC is a council created by the Dodd-Frank Act to, among other things, designate a financial firm as systemically important if the institution's financial distress could cause instability of the U.S. financial system. 

The GAO report highlights several problems with how FSOC oversees and manages the non-bank SIFI designation process.  Broadly, GAO concluded that FSOC's process lacks transparency and accountability, insufficiently tracks data and does not have a consistent methodology for determinations.

"Before FSOC makes further non-bank SIFI designations, its activities must be transparent and objective, with clearly outlined criteria when such designations are appropriate," Crapo said.  "The non-bank SIFI designation process has proved immeasurable and unclear, with serious regulatory consequences for firms that receive the designation that will inevitably translate into higher costs for consumers and the overall economy.  Threatening to subject firms to a new regulatory regime without clear and objective standards is not only contrary to the long established principles of our regulatory framework, but doing so will lead to legal uncertainty that will undermine the very objective of FSOC."

To date, FSOC has designated three non-bank entities as systemically important, and the publicly released documents surrounding the designations have provided little useful insight into the specific criteria FSOC used.  GAO ultimately determined that making FSOC's designation process more systematic and transparent could bolster public and market confidence in the process and help FSOC achieve its intended goals. 

Key findings from the GAO report:

Lack of publicly available information.

"FSOC's public documentation supporting its three final determinations made through September 2014 included only a small portion of the information and analysis in its nonpublic documentation, including information from publicly available sources." (p.39)  

"…without more fully disclosing the nonsensitive information and analysis supporting its determinations as included in its nonpublic basis documents, the public and the markets receive limited information on the bases for FSOC's determinations-which in turn may undermine the public's and the market's confidence in the determination process." (p.41)

Lack of documentation and tracking of key evaluation information.

"The determination process to evaluate companies has been in place for more than 2 years, but FSOC has not systematically recorded or monitored data related to the occurrence of significant events or comprehensive information on staff working on evaluations." (p.27)

"Without data on when staff conduct, or which staff participate in, determination evaluations, FSOC's ability to effectively monitor the progress and evaluate the efficiency of determination evaluations may be limited." (p.30)

"…FSOC has not centrally recorded the dates when significant events in the process occurred-such as the initiation of Stage 2 analysis-or tracked the duration of key stages in each evaluation…FSOC ultimately was unable to provide us with this information for 2012 because it has not systematically recorded or monitored the dates of key processing steps." (p.29)

Determinations largely judgment-based, rather than data-driven.

"…two of the international methodologies-those for banks and insurers-include specific calculations for weighting the analytical indicators and categories used to produce an aggregate risk score.  In contrast, FSOC's determination methodology does not have a formal mechanism for weighting evaluation criteria, but instead relies on the judgment of FSOC staff and principals in evaluating companies and making determination decisions." (p.49)

Evaluation teams assigned ad hoc and lacking continuity; varying levels of staff expertise.

"…two of the four companies [GAO] interviewed that FSOC evaluated in Stage 3 indicated that some of the analysts conducting the evaluation had limited expertise in their company's industry." (p.27)

"…One agency official said that team lead selections were contentious in some instances.  For example, staff from this agency and another member agency state that although they each attempted to have an experienced staff member co-lead an evaluation, FSOC denied the request without explanation." (p.27)

Communication with institutions under consideration is unclear.

"Companies that the FSOC evaluated generally were satisfied with FSOC's communication throughout the process, but were unclear about how and when they could access [FSOC member agencies'] deputies and principals." (p.30)

"Company officials stated that they also were allowed to provide additional information beyond the specific data that FSOC requested.  However, they said that they were unsure to what extent FSOC had considered the information or how FSOC incorporated it into the determination decision." (p.31)

Scope of evaluation standards limited.

"…documentation did not include details about precisely how FSOC determined that the stated characteristics were significant or sufficiently large in the context of meeting one or both of the determination standards, and FSOC's documentation could have benefitted from inclusion of such additional details." (p.41)

To view a full copy of the GAO report on recommended actions to improve FSOC's non-bank designation process, click HERE .  To view Senator Crapo's original request to the GAO, click HERE .