The Federal Reserve, SEC, and OTS vary in their missions in that the  Federal Reserve and SEC have responsibilities outside of the supervision  and regulation of financial institutions. Agencies Employ Differing Policies and Approaches to Provide Consolidated Supervision

The Federal Reserve, OTS, and SEC have all responded to the dramatic  changes in the financial services industry, and now, for many of the  largest, most complex financial services firms in the United States, these  agencies examine risks, controls, and capital levels on a consolidated  basis. Now, for many of the  largest, most complex financial services firms in the United States, the  agencies focus on the firms’ risks, controls, and capital levels on a  consolidated basis. Consolidated supervision provides a basis for the supervisory agencies to  oversee the way in which financial services firms manage risks and to do  so on the same basis that many firms’ manage their risk. When applied to the consolidated  supervision programs at the Federal Reserve, OTS, and SEC, clearly  defined objectives of consolidated supervision programs, agency activities  of these programs linked to those objectives, and performance measures  to determine how well the programs are operating are the management  approaches that would contribute to the desired accountability and  efficiency for the programs. As a result, the regulatory burden  would be as low as possible, consistent with maintaining safety and  soundness of financial institutions and markets. Agencies Have Opportunities to Better Ensure Effective and Consistent Supervision, with Minimal Regulatory Burden

Because the U.S. regulatory structure assigns responsibility for financial  supervision to multiple agencies, and a single firm may be subject to  consolidated and primary or functional supervision by different agencies,  not having objectives and performance measures for consolidated  supervision programs increases the difficulty of ensuring effective,  efficient, and consistent supervision with minimal regulatory burden and  ensuring that each agency is appropriately accountable for its activities. In part, because OTS oversees a diverse set of firms and has been changing  some of its consolidated supervisory activities, consistency is a difficult  challenge. However, we  found instances of duplication and regulatory gaps that could be  minimized through more systematic collaboration. Federal Reserve officials noted,  however, that risks would be lessened to the extent that the objectives of  the consolidated supervisor and the primary bank supervisor are the same  (e.g., to preserve the safety and soundness of insured depository  institutions) and the consolidated supervisor takes action to prevent the  holding company from taking actions that are deleterious to its insured  depository institutions. Greater Collaboration among the Three Consolidated Supervisors Could Improve Supervisory Efforts

While the three consolidated supervisors have some mechanisms in place  to share information and supervisory approaches, opportunities remain for  them to collaborate more systematically to promote greater consistency,  particularly in oversight of large, complex firms. Conclusions

As financial institutions have grown, become more complex and  internationally active, and adopted enterprisewide risk management  practices, consolidated supervision has become more important. These practices are  particularly important in helping to ensure consistent treatment of  financial services holding companies and in clearly defining accountability  for providing consolidated supervision. While the agencies do exchange information, they have  opportunities to improve collaboration. We have noted in the past that it is  difficult to collaborate within the fragmented U.S. regulatory system and  have recommended that Congress modernize or consolidate the regulatory  system. Recommendations for Executive Action

We are recommending that the Federal Reserve, Office of Thrift  Supervision, and Securities and Exchange Commission take the following  seven actions, as appropriate:  To better assess their agencies’ achievements as consolidated supervisors,  the Chairman of the Federal Reserve System’s Board of Governors, the  Director of the Office of Thrift Supervision, and the Chairman of the  Securities and Exchange Commission should direct their staffs to develop  program objectives and performance measures that are specific to their  consolidated supervision programs. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) describe the policies and approaches U.S.  consolidated supervisors use to oversee large and small holding  companies in the financial services industry; (2) review the supervisory  agencies’ management of its consolidated supervision program, including  program objectives and performance measures; and (3) evaluate how well  consolidated supervisors are collaborating with other supervisors and  each other.
Why GAO Did This Study

As financial institutions increasingly operate globally and diversify their businesses, entities with an interest in financial stability cite the need for supervisors to oversee the safety and soundness of these institutions on a consolidated basis. Under the Comptroller General's Authority, GAO reviewed the consolidated supervision programs at the Federal Reserve System (Federal Reserve), Office of Thrift Supervision (OTS), and Securities and Exchange Commission (SEC) to (1) describe policies and approaches that U.S. consolidated supervisors use to oversee large and small holding companies; (2) review the management of the consolidated supervision programs, including use of program objectives and performance measures; and (3) evaluate how well consolidated supervisors are collaborating with other supervisors and each other in their activities. In conducting this study, GAO reviewed agency policy documents and supervisory reports and interviewed agency and financial institution officials.

What GAO Found

The Federal Reserve, OTS, and SEC have responded to the dramatic changes in the financial services industry and for many of the largest financial services firms the agencies focus on the firms' consolidated risks, controls, and capital. Reflecting in part differences in structure, traditional roles and responsibilities, and the length of time they have had to develop and refine their programs, the agencies employ somewhat differing policies and approaches for their consolidated supervision programs. Consolidated supervision becomes more important in the face of changes in the financial services industry, particularly with respect to the increased importance of enterprise risk management by large, complex financial services firms. Consolidated supervision provides a basis for the supervisors to oversee the risks of financial services firms on the same level that the firms manage those risks. GAO found that while all of these agencies were meeting international standards for effective oversight of large, internationally active conglomerates and have broad goals for supervision, they could more clearly articulate the specific objectives and performance measures for their evolving consolidated supervision programs. Both Federal Reserve and OTS, for example, focus on the safety and soundness of the depository institution but could take steps to better measure how consolidated supervision contributes to this in ways that differ from primary supervision of the depository institution. Such objectives and measures would help the agencies ensure consistent treatment of the firms that are subject to consolidated supervision. More effective collaboration can occur if agencies take a more systematic approach to agreeing on roles and responsibilities and establishing compatible goals, policies, and procedures on how to use available resources as efficiently as possible. While the three agencies coordinate and exchange information, they could take a more systematic approach to collaboration with respect to their consolidated supervision programs. For instance, SEC and OTS have authority for some of the same firms with no effective mechanism to prevent duplication, assign accountability, or resolve potential conflicts. Similarly, while the Federal Reserve and other federal bank supervisory agencies have taken steps to share information and examination activities when the Federal Reserve is not the primary supervisor of the lead bank in a bank holding company, some duplication and lack of accountability remain. As a result, consolidated supervision of U.S. financial institutions is not as efficient and effective as it could be if agencies collaborated more systematically. GAO has noted in the past that it is difficult to collaborate within the fragmented U.S. regulatory system and has recommended that Congress modernize or consolidate the regulatory system. However, if the current system is maintained, it is increasingly important for agencies to collaborate to ensure effective and efficient consolidated supervision, consistent treatment of financial services firms, and clear accountability of the agencies for their supervisory activities.