Bank holding companies and their subsidiaries also accrued benefits  specific to their own institutions, including liquidity benefits from programs  that allowed them to borrow at lower interest rates and at longer  maturities than might have been available in the markets. At the end of 2008, use of these  programs—measured for each institution as the percentage of total  assets supported by the programs—was larger on average for larger  banking organizations—those with $50 billion or more in total assets— than for smaller banking organizations. The six largest bank holding  companies were significant participants in several emergency programs  but exited most of the programs by the end of 2009. Crisis Programs with Broad-Based Eligibility Provided Funding Support to Bank Holding Companies and Their Subsidiaries

During the financial crisis, the Federal Reserve System, Treasury, and  FDIC introduced new programs with broad-based eligibility to provide  general funding support to the financial sector and to stabilize the  financial system. Stabilizing deposit funding. Federal Reserve System programs. Differences in the level of  program use by institutions of various sizes were driven in part by  differences in how institutions funded themselves. For example,  compared to smaller bank holding companies, larger bank holding  companies relied to a greater extent on short-term credit markets that  were the most severely disrupted during the crisis and participated more  in programs intended to address disruptions in these markets. Smaller  banking organizations relied more on deposits to fund their activities. The Federal Reserve Board Granted Exemptions to Allow Banks to Provide Liquidity Support to the Nonbanking Sector and for Other Purposes

During the financial crisis, the Federal Reserve Board granted a number  of exemptions to requirements under Section 23A of the Federal Reserve  Act for a range of purposes, such as allowing banks to provide greater  liquidity support to the nonbank sector. Dodd-Frank Aims to Restrict Future Government Support, but Implementation Is Incomplete and Effectiveness Remains Uncertain

Enacted in July 2010, the Dodd-Frank Act contains provisions intended to  modify the scope of federal safety nets for financial firms, place limits on  agency authorities to provide emergency assistance, and strengthen  regulatory oversight of the largest firms, among other things. FDIC and  the Federal Reserve Board have finalized certain changes to traditional  safety nets for insured banks, but impacts of the act’s provisions to limit  the scope of financial transactions that benefit from these safety nets will  depend on how they are implemented. FDIC has made progress  toward implementing its new resolution authority and continues to work to  address potential obstacles to the viability of its resolution process as an  alternative to bankruptcy, such as challenges that could arise when  resolving more than one large institution concurrently. While these actions  collectively helped to avert a more severe crisis, they raised concerns  about moral hazard and the appropriate scope of federal safety nets for  the financial sector. The act also requires the Federal  Reserve Board to establish policies and procedures governing future  actions under this authority. As of the date of this report, the Federal  Reserve Board has not yet completed its process for drafting these  policies and procedures and has not set time frames for doing so. While  the act did not set a specific deadline, setting time frames could help  ensure more timely completion of these policies and procedures. Recommendation for Executive Action

To better ensure that the design and implementation of any future  emergency lending programs comply with Dodd-Frank Act requirements  in a timely manner, we recommend that the Chairman of the Board of  Governors of the Federal Reserve System set timeframes for completing  the process for drafting policies and procedures governing the use of  emergency lending authority under Section 13(3) of the Federal Reserve  Act. Appendix I: Objectives, Scope and Methodology

The objectives of our report were to examine: (1) support banks and bank  holding companies received as a result of government efforts to stabilize  financial markets during the financial crisis of 2007-2009; and (2) recent  statutory and regulatory changes related to government support for banks  and bank holding companies and factors that could impact the  effectiveness of these changes. It does not address benefits that  some financial institutions may have received and may continue to  receive from perceived government support. To address our second objective, we identified and reviewed relevant  statutory provisions, regulations, and agency documents. To identify  recent statutory and regulatory changes related to government support for  banks and bank holding companies, we reviewed sections of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  that change rules or create new requirements for safety net programs for  insured depository institutions; further restrict the types of financial  activities that can be conducted by insured depository institutions or their  holding companies; make changes to agencies’ emergency authorities to  assist or resolve financial institutions; and subject the largest bank  holding companies to enhanced regulatory oversight and standards. Temporary Liquidity Guarantee Program. Treasury capital investments.
Why GAO Did This Study

The federal government extended unprecedented support to financial institutions to stabilize financial markets during the financial crisis. While these actions helped to avert a more severe crisis, they raised questions about the appropriate scope of government safety nets for financial institutions. GAO was asked to review the benefits that large bank holding companies (those with more than $500 billion in assets) have received from actual and implied government support.
This is the first of two reports GAO will issue on this topic. This report examines (1) actual government support for banks and bank holding companies during the financial crisis, and (2) recent statutory and regulatory changes related to government support for banks and bank holding companies. GAO reviewed relevant statutes, regulations, and agency documents; analyzed program transaction data; and interviewed regulators, representatives of financial institutions, and academics. In a second report to be issued in 2014, GAO will examine any funding or other economic advantages the largest bank holding companies have received as a result of implied government support.

What GAO Found

During the 2007-09 financial crisis, the federal government's actions to stabilize the financial system provided funding support and other benefits to bank holding companies and their subsidiaries. Agencies introduced new programs with broad-based eligibility that provided funding support to eligible institutions, which included entities that were part of a bank holding company and others. Programs that provided the most significant support directly to bank holding companies or their subsidiaries included Department of the Treasury capital investment programs, Federal Reserve System lending programs, and Federal Deposit Insurance Corporation (FDIC) guarantee programs. Together these actions helped to stabilize financial conditions, while participating firms also accrued benefits specific to their own institutions, such as liquidity benefits from programs that allowed them to borrow at longer maturities and at interest rates that were below possible market alternatives. At the end of 2008, program use--measured for each institution as the percentage of total assets supported by the programs--was higher on average for banks and bank holding companies with $50 billion or more in total assets than for smaller firms. The six largest bank holding companies were significant participants in several emergency programs but exited most by the end of 2009. Differences in program use were driven in part by how institutions funded themselves. For example, while smaller banks relied more on deposit funding, larger bank holding companies relied more on short-term funding markets and participated more in programs that assisted these markets. In addition to these programs, the Board of Governors of the Federal Reserve System (Federal Reserve Board) granted several regulatory exemptions to allow banks to provide liquidity support to their nonbank affiliates and for other purposes. Finally, government assistance to individual troubled firms benefited these firms, their counterparties, and the financial system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) contains provisions that aim to modify the scope of federal safety nets, restrict future government support and strengthen regulatory oversight for the banking sector, but implementation is incomplete and the effectiveness of some provisions remains uncertain. Agencies have finalized certain changes to traditional safety nets for insured banks, but impacts of provisions to limit the scope of transactions that benefit from these safety nets will depend on how they are implemented. The act also places restrictions on emergency authorities used by regulators during the crisis to assist financial firms. For example, it prohibits the use of these authorities to rescue a specific failing firm. The Federal Reserve Board is required by the act to establish policies and procedures implementing changes to its emergency authority under Section 13(3) of the Federal Reserve Act, but it has not completed its process for drafting the required procedures or set time frames for doing so. Setting time frames could help ensure more timely completion of these procedures. FDIC has made progress toward implementing its new authority under the Dodd-Frank Act to resolve a large failing firm. FDIC continues to work to address potential obstacles to the viability of its resolution process as an alternative to bankruptcy, such as challenges that could arise when resolving more than one failing firm. Finally, the Federal Reserve Board has finalized certain enhanced prudential standards for the largest financial firms intended to reduce the risks these firms could pose to the financial system.

What GAO Recommends

GAO recommends that the Federal Reserve Board establish timeframes for completing its process for drafting procedures related to its emergency lending authority to ensure timely compliance with Dodd-Frank Act requirements. The Federal Reserve Board accepted this recommendation.