LARGE BANK 

SUPERVISION

Improved 

Implementation of 

Federal Reserve 

Policies Could Help 

Mitigate Threats to 

Independence

Report to Congressional Requesters

November 2017

GAO-18-118

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-118, a report to 

congressional requesters

November 2017

LARGE BANK SUPERVISION

Improved Implementation of Federal Reserve 

Policies Could Help Mitigate Threats to 

Independence

What GAO Found

The Board of Governors of the Federal Reserve System (Board) has not 

finalized and implemented its enterprise risk management (ERM) framework, 

and as a result, it may have limited ability to manage risks across the Large 

Institution Supervisory Coordinating Committee (LISCC) program. One such risk 

is regulatory capture, a condition that exists when a regulator acts in service of 

private interests, such as the interests of the regulated industry, at the expense 

of the public interest. GAO has previously found that regulators should be 

independent of inappropriate influence, including undue influence from the 

industry they are regulating. LISCC is a supervisory program developed by the 

Board to enhance the oversight of large, complex financial institutions. LISCC 

takes a cross-cutting approach to supervision, drawing staff from across the 

Federal Reserve System including the Board and four Federal Reserve Banks, 

and risks of regulatory capture span various aspects of the LISCC program. To 

help the Board manage its diverse risks, the Board has recognized the 

advantages of implementing an ERM, which the Office of Management and 

Budget (OMB) encourages all federal agencies to do. The Board began to 

develop an ERM framework in 2017, but it has not yet developed some of OMB’s 

recommended key elements, such as risk identification and assessment. 

Completing and implementing the ERM framework should position the Board to

better manage regulatory capture risks across the LISCC program.

The LISCC program has other policies to mitigate threats to independence for 

supervisory staff. For example, under the LISCC program, four Reserve Banks 

supervise the largest financial institutions with oversight from the Board, which 

increases the transparency and accountability of supervisory decisions and helps 

to ensure those decisions are free of inappropriate influence. In addition, the 

Federal Reserve has mechanisms for Reserve Bank staff to communicate their 

views directly to Board officials. However, GAO found weaknesses in some

internal controls related to guidance and monitoring mechanisms. These limit the 

Board’s assurance that policies are being implemented consistently across the 

LISCC program. Because of these weaknesses, the four Reserve Banks may not 

be mitigating regulatory capture risks and threats to supervisory independence 

as effectively or consistently as possible. 

The Board and the four Reserve Banks have also implemented various conflictof-interest and other ethics policies for LISCC examiners and other types of 

supervisory employees. While these policies are not explicitly designed to 

address regulatory capture, Federal Reserve officials said they use them in part 

for this purpose. However, GAO found weaknesses in the Federal Reserve’s 

implementation of these policies. For example, the Federal Reserve officials said 

that they have policies to help mitigate threats to independence posed by the 

revolving door—that is, the movement of employees between the financial 

industry and the Federal Reserve—but they do not systematically collect 

employment data needed to implement these policies effectively. Without 

addressing this and other weaknesses, the Federal Reserve may be limited in its

ability to use its ethics policies to mitigate regulatory capture.

View GAO-18-118. For more information, 

contact Lawrance Evans, Jr. at (202) 512-

8678 or EvansL@gao.gov.

Why GAO Did This Study

The Board of Governors created 

LISCC in 2010, in the wake of the 

financial crisis of 2007–2009, to 

strengthen supervision of the largest 

U.S. financial institutions that pose the 

greatest risk to the economy. However, 

questions have been raised about the 

independence of the supervisory 

process and the risk of regulatory 

capture. 

GAO was asked to review regulatory 

capture and threats to independence in 

large bank supervision. This report 

discusses the Federal Reserve’s 

policies for (1) managing risks of 

regulatory capture in the LISCC 

program using an ERM approach; (2) 

mitigating threats to supervisory 

independence for the LISCC program; 

and (3) mitigating conflicts of interest 

for LISCC supervisory personnel. 

GAO reviewed studies and Federal 

Reserve policies and procedures. GAO 

also interviewed officials and

supervisory staff at the Board and the 

LISCC Reserve Banks.

What GAO Recommends

GAO is making six recommendations 

to help improve the Federal Reserve’s 

implementation of ERM and to 

strengthen internal controls to more 

effectively mitigate risks of regulatory 

capture and threats to supervisory 

independence across the LISCC 

program. Although the Federal 

Reserve neither agreed nor disagreed 

with the recommendations, it identified 

ongoing and planned efforts to address 

them. 
Page i GAO-18-118 Large Bank Supervision

Letter 1

Background 4

Enterprise Risk Management Frameworks Can Be Used to 

Manage Regulatory Capture Risks, but the Board Is Still 

Developing Such a Framework 17

Board of Governors and Reserve Banks Have Policies to Mitigate 

Threats to Independence, but Some Related Internal Controls 

Have Weaknesses 21

Implementation of Policies to Identify and Mitigate Conflicts of 

Interest Is Hampered By Lack of Data and Program Evaluations 36

Conclusions 63

Recommendations for Executive Action 64

Agency Comments and Our Evaluation 65

Appendix I Objectives, Scope and Methodology 69

Appendix II Literature on Regulatory Capture in Financial Banking Supervision 73

Appendix III Summary of Federal Reserve Investment and Borrowing Prohibitions 

for Examiners and Other Types of Employees 79

Appendix IV Federal Reserve Bank Examination Staff with Active Conflicts of 

Interest, 2011–July 2016 82

Appendix V Comments from the Board of Governors of the Federal Reserve 

System 85

Appendix VI GAO Contact and Acknowledgments 91

Contents
Page ii GAO-18-118 Large Bank Supervision

Tables

Table 1: Summary of Available Pre- and Post-Employment 

Information of Federal Reserve Bank LISCC Program 

Examiners Employed 2011–July 2016 57

Table 2: Federal Reserve Guide to Investment and Borrowing 

Prohibitions and Situations Requiring Recusal 79

Table 3: Federal Reserve Examination Staff Working on Large 

Institution Supervision Coordinating Committee (LISCC) 

Examinations with Active Conflicts of Interest, 2011–July 

2016 82

Figures

Figure 1: Federal Reserve Components That Participate in the 

LISCC Program 6

Figure 2: Components of the Federal Reserve’s LISCC Program 

That Participate in Horizontal Examinations 9

Figure 3: Selected Factors That Can Increase Risk of Regulatory 

Capture and Mitigation Strategies 13

Figure 4: Summary of Internal Review Findings Relevant to LISCC 

Policies That May Mitigate Threats to Independence, 

2012–2016 26

Figure 5: Federal Reserve Ethics Programs and Procedures That 

Apply to LISCC Employees 38

Figure 6: Conflict-of-Interest Disclosure and Review Process for 

Reserve Bank Examiners 47

Figure 7: Summary of Available Data on Federal Reserve Bank 

LISCC Examiners Hired from the Financial Industry Who 

Left Reserve Banks for the Financial Industry, 2011–July 

2016 58
Page iii GAO-18-118 Large Bank Supervision

Abbreviations 

Board of Governors or Board Board of Governors of the Federal

Reserve System

CCAR Comprehensive Capital Analysis and

Review

CLAR Comprehensive Liquidity Analysis

and Review

COFI Conflict-of-Interest Application

COSO Committee of Sponsoring Organizations

of the Treadway Commission

CPC Central Point of Contact

Dodd-Frank Act Dodd-Frank Wall Street Reform and

Consumer Protection Act 

ERM Enterprise Risk Management

Federal Reserve Federal Reserve System

FRBNY Federal Reserve Bank of New York

FRB Boston Federal Reserve Bank of Boston

FRB Richmond Federal Reserve Bank of Richmond

FRB San Francisco Federal Reserve Bank of San Francisco

FSOC Financial Stability Oversight Council

LISCC Large Institution Supervision Coordinating

Committee

OC LISCC Operating Committee

OGE Office of Government Ethics

OIG Office of the Inspector General

OMB Office of Management and Budget

Reserve Bank Federal Reserve Bank

SSO Senior Supervisory Officers

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Page 1 GAO-18-118 Large Bank Supervision

441 G St. N.W.

Washington, DC 20548

November 6, 2017

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Al Green

Ranking Member

Subcommittee on Oversight and Investigations

Committee on Financial Services

House of Representatives

Among many factors that contributed to the financial crisis of 2007–2009 

was weakness in federal supervision of large banks, and some analyses 

have identified regulatory capture as one potential cause of this 

weakness. While definitions vary, regulatory capture can be defined as a 

condition that exists when a regulator acts in service of private interests, 

such as the interests of the regulated industry, at the expense of the 

public interest due to actions taken by the interested parties.1 The 

financial crisis that began in the summer of 2007 tested both the strength 

of financial institutions and the quality of the Federal Reserve System’s 

(Federal Reserve), and other financial regulators’, supervision. In our 

work since the crisis, we have found that regulators have struggled, and 

often failed, to mitigate the systemic risks posed by large and 

interconnected financial conglomerates and to ensure that they 

adequately manage their risks.2 Among the characteristics that should be 

reflected in any well-functioning regulatory system, we have found that 

 1

According to some scholars, regulatory capture requires both intent and action on behalf 

of the regulated industry which results in a higher evidentiary standard for the existence of 

capture. For a discussion of the implications of unclear definitions of regulatory capture 

including the potential for misdiagnosis and insufficient mitigation strategies, see D. 

Carpenter and D. Moss (eds.), Preventing Regulatory Capture: Special Interest Influence 

and How to Limit It (New York, NY: Cambridge University Press, 2014). Given our 

oversight role we are also interested in cases where regulation deviates from the public 

interest toward private interest for reasons unrelated to actions taken by the regulated 

industry. As a result, we refer more broadly to threats to supervisory independence where 

appropriate to cover both regulatory capture threats and other threats that might 

compromise effective bank supervision.

2

GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to

Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216 (Washington,

D.C.: Jan. 8, 2009).

Letter
Page 2 GAO-18-118 Large Bank Supervision

regulators should be independent of inappropriate influence, including 

undue influence from the industry they are regulating.3

The Board of Governors of the Federal Reserve System (Board of 

Governors or Board) is responsible for, among other things, supervising 

bank holding companies, which are some of the largest financial 

institutions in the United States, and it has delegated certain aspects of 

day-to-day execution of this supervisory responsibility to the Federal 

Reserve Banks (Reserve Bank). In 2009, the Federal Reserve Bank of 

New York (FRBNY) commissioned an independent consultant to assess 

the lessons learned from the 2007–2009 financial crisis, with a particular 

focus on bank supervision. In a testimony to the U.S. Congress, the 

author of the report said that FRBNY suffered from weak regulatory 

capture, in that it did not strictly enforce regulatory requirements because 

of deference to supervised firms.4 According to the President of the 

FRBNY, the supervision group at FRBNY has been reorganized as a 

result of the 2009 report to better promote unbiased analysis and 

professional objectivity. Additionally, in 2010 the Federal Reserve created 

a new system-wide supervisory program—the Large Institution 

Supervision Coordinating Committee (LISCC)—to enhance the oversight 

of large, complex financial institutions. This new approach has shown 

promise, but several studies have suggested possible weaknesses in the 

Federal Reserve’s oversight of these banks, which in turn could impede 

the agency’s goals of supervising this nation’s largest, most systemically 

important financial institutions.

You asked us to examine issues related to regulatory capture and 

supervisory independence in the financial services industry. This report 

examines the Federal Reserve’s policies and procedures for (1) 

managing risks, including regulatory capture, across the Federal Reserve 

LISCC program using an enterprise risk management (ERM) approach; 

(2) identifying and mitigating threats to supervisory independence for the 

LISCC program; and (3) identifying and mitigating conflicts of interest 

 3

GAO-09-216. 

4

The 2009 report and its findings are summarized in a public testimony by the report’s 

author. See Improving Financial Institution Supervision: Examining and Addressing 

Regulatory Capture: Hearing Before the Subcomm. on Financial Institutions and 

Consumer Protection of the S. Comm. on Banking, Housing, and Urban Affairs, 113th 

Cong., 1st Sess. (Nov. 21, 2014) (statement of David O. Beim, Professor of Professional 

Practice, Columbia Business School).
Page 3 GAO-18-118 Large Bank Supervision

among supervisory personnel in the LISCC program.5 This report is the 

first in a series that we plan to conduct to review issues related to 

regulatory capture and supervisory independence among federal financial 

regulatory agencies.6

To assess the extent to which the Federal Reserve and Reserve Banks 

manage regulatory capture risks across the LISCC program, we reviewed 

ERM documentation from the Board of Governors and the four LISCC 

Reserve Banks and interviewed risk officers and other staff responsible 

for the supervision of risk management. In addition, to identify ways in 

which banking supervisors might experience regulatory capture and 

strategies for mitigation, we reviewed and summarized relevant academic 

studies and interviewed academic experts. To assess the Federal 

Reserve’s policies and procedures for identifying and mitigating threats to 

supervisory independence for the LISCC program, we reviewed the 

Board’s documentation of the program as well as internal evaluations, 

including reports by the Office of the Inspector General (OIG) of the 

Federal Reserve. We conducted individual interviews and focus groups 

with examiners and senior examination officials to assess the 

implementation of LISCC program policy changes that may mitigate 

regulatory capture. To assess the extent to which Federal Reserve 

policies and procedures mitigate conflicts of interest, we reviewed Board 

and Reserve Bank conflict-of-interest policies and procedures and 

relevant statutes and regulations and interviewed ethics officials at the 

Board and Reserve Banks. We collected data on conflict-of-interest 

disclosures of Reserve Bank LISCC examination staff and Federal 

Reserve members of the LISCC Operating Committee between 2011 and 

2016. We also collected available data on prior and subsequent 

employment of LISCC program participants. To assess the reliability of 

data we received from the Federal Reserve, we interviewed Federal 

Reserve officials, reviewed related documentation, and tested the data for 

missing or erroneous values. We determined the data were sufficiently 

reliable for purposes of our review. Appendix I provides more detail on 

our scope and methodology.

 5

The concept of regulatory capture was introduced by economist George Stigler in 1971 

and was broadly applied to any regulated industry. This report focuses on regulatory 

capture by the financial industry of bank examiners and other supervisory staff.

6

In forthcoming reports, we plan to assess similar issues for other federal financial and 

market regulators, including the Office of the Comptroller of the Currency, the Federal 

Deposit Insurance Corporation, the National Credit Union Administration, the Securities 

and Exchange Commission, and the Commodity Futures Trading Commission.
Page 4 GAO-18-118 Large Bank Supervision

We conducted this performance audit from April 2016 to November 2017 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

The Federal Reserve Act established the Federal Reserve as the 

country’s central bank. The act established the Federal Reserve as an 

independent, decentralized bank to better ensure that monetary policy 

would be based on a broad economic perspective from all regions of the 

country. The Federal Reserve consists of the Board of Governors, located 

in Washington, D.C.; 12 Reserve Banks, which have 24 branches located 

throughout the United States; and the Federal Open Market Committee, 

which is composed of the Board of Governors and five Reserve Bank 

presidents who serve on a rotating basis. The Board of Governors is an 

independent federal agency that is responsible for maintaining the 

stability of financial markets; supervising financial and bank and savings 

and loan holding companies, and the nondepository institution 

subsidiaries of those companies, state-chartered banks that are members 

of the Federal Reserve, and the U.S. operations of foreign banking 

organizations; and supervising the operations of the Reserve Banks.7

Unlike the Board of Governors, the Reserve Banks are not federal 

agencies. Each Reserve Bank is a federally chartered corporation, and 

under the Federal Reserve Act, Reserve Banks are subject to the general 

supervision of the Board of Governors. The Board has delegated some of 

its responsibilities, such as certain aspects of supervision, to the Reserve 

 7

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

includes provisions that expand the roles and responsibilities of the Federal Reserve. In 

particular, the act authorizes the Board of Governors to regulate nonbank financial 

companies designated as systemically significant by the Financial Stability Oversight 

Council (FSOC). See Pub. L. No. 111-203, § 113(a), 124 Stat. 1376, 1398 (2010) (codified 

at 12 U.S.C. § 5323(a)). The Financial Stability Oversight Council, established by the 

Dodd-Frank Act, is chaired by the Secretary of the Treasury, and its membership includes 

the Chairman of the Board of Governors and the heads of the other federal financial 

regulators, among others. § 111, 124 Stat. at 1392 (codified at 12 U.S.C. § 5321).

Background

The Federal Reserve
Page 5 GAO-18-118 Large Bank Supervision

Banks. Unlike federal agencies that are funded through congressional 

appropriations, the Board and the Reserve Banks are self-funded entities.

Staff at the Federal Reserve supervise 13 financial institutions that are in 

the LISCC program.

8 At the Reserve Bank level, the LISCC program is 

made up of dedicated supervisory teams for each of these 13 firms,

horizontal teams that cover issues across multiple firms and program, and 

System-level committees that provide direction and oversight. Based on 

the geographic location of currently designated LISCC firms, the Reserve 

Banks that participate in the LISCC program are those in Boston (FRB 

Boston), New York (FRBNY), Richmond (FRB Richmond), and San 

Francisco (FRB San Francisco).

9 In designating firms for supervision 

under the LISCC program, the Federal Reserve takes into account a 

number of factors, such as the size of the financial institutions, their 

interconnectedness, a lack of readily available substitutes for the services 

they provide, their complexity, and their global activities. In examining 

these institutions, the Federal Reserve aims to provide consistency 

across its firm-specific and horizontal supervisory decisions. Staff from 

across the Federal Reserve participate in supervising these large, 

systemically important firms. 

The LISCC Operating Committee (OC) oversees the execution of the 

LISCC program. The OC is a multidisciplinary group composed of senior 

officials from various divisions at the Board and Reserve Banks and is 

chaired by a senior officer from the Division of Supervision and 

Regulation who reports to the Director of the Division of Supervision and 

Regulation at the Board. The OC, in consultation with the LISCC, sets 

priorities for and oversees the execution of the LISCC program, identifies

common risks facing firms in the portfolio, and makes decisions about 

certain supervisory actions. The OC has several subcommittees that 

focus on different components of large financial institution supervision. 

The subcommittees consist of OC members and other Federal Reserve 

staff. For example, the OC’s Vetting Committee is a forum to review the 

 8

FSOC designates non-bank financial firms for supervision by the Federal Reserve Board 

of Governors. The Board determines whether a firm is in the LISCC portfolio. On 

September 29, 2017, FSOC voted to de-designate AIG as a Non-Bank SIFI; as a result, 

AIG is no longer subject to supervision by the Board.

9

FRB Boston supervises Prudential Financial Inc. and State Street Corporation; FRBNY 

supervises The Bank of New York Mellon Corporation, Barclays PLC, Citigroup Inc., 

Credit Suisse Group AG, Deutsche Bank AG, The Goldman Sachs Group, Inc., JPMorgan 

Chase & Co., Morgan Stanley, and UBS AG; FRB Richmond supervises Bank of America 

Corporation; and FRB San Francisco supervises Wells Fargo & Company.

The Federal Reserve’s 

LISCC Supervisory 

Program
Page 6 GAO-18-118 Large Bank Supervision

results of key components of the supervisory program and provide 

feedback and guidance to various LISCC-dedicated supervisory teams. 

According to policy documents, the Vetting Committee tries to promote 

quality and consistency in supervisory approaches, key examination work 

and related communications, risk and risk management assessments, 

and supervisory actions and messages sent to individual firms.

The OC also provides direction to the LISCC firms’ dedicated supervisory 

teams and horizontal teams. LISCC-dedicated supervisory teams and 

horizontal teams are required to develop detailed supervisory plans to 

establish an official record of supervisory activities planned for the annual 

supervisory cycle and vet that plan with the OC. At the end of the annual 

supervisory cycle, the dedicated supervisory teams compile the findings 

from firm-specific and horizontal exams and other supervisory work 

related to the firm into an annual assessment, which conveys supervisory 

ratings, messages, and key issues and risks for each LISCC firm. The 

designated supervisory teams recommend ratings to the OC, and the OC 

is responsible for approving the final rating. Figure 1 illustrates the 

Federal Reserve components that participate in the LISCC program.10

Figure 1: Federal Reserve Components That Participate in the LISCC Program

 10According to Federal Reserve officials, other staff from across the Federal Reserve may 

also at times participate in examinations of LISCC firms.
Page 7 GAO-18-118 Large Bank Supervision

Reserve Banks have organized their dedicated supervisory teams 

differently by establishing additional layers of management or assigning 

examiners to different subgroups. All of the designated supervisory teams 

include a key top management figure, but some use different titles for 

their staff. For example, designated supervisory teams at FRB Boston, 

Richmond, and San Francisco are led by a Central Point of Contact 

(CPC), while FRBNY calls the leaders of its designated supervisory 

teams Senior Supervisory Officers (SSO).11 Reserve Banks and the 

Board also contribute staff to system-wide horizontal teams. All 

participating Reserve Banks have risk specialists—staff responsible for 

understanding a supervised entity’s risk exposures and risk management 

that may be assigned to dedicated supervisory teams or horizontal teams, 

depending on the Reserve Bank’s chosen structure. According to 

FRBNY, risk specialists in their Reserve Bank are aligned with both 

dedicated teams as well as horizontal teams to (1) ensure that sufficient 

resources are dedicated to understanding the complexities of any given 

LISCC firm and (2) enable specialists with expertise on a specific firm to 

be informed by colleagues with similar expertise on similar firms. FRBNY 

has also formalized distinct roles within each designated supervisory 

team to focus supervision more on how specific areas of a firm’s business 

strategies may affect risk. 

According to the Federal Reserve, work generally consisted of several 

types of examination activities, including continuous monitoring; 

enhanced continuous monitoring; and full-scope or target examinations: 

• Continuous monitoring. Continuous monitoring activities provide 

information to assess inherent risks; stay abreast of risk management 

and internal control processes; and assist in the assessment of 

management, corporate governance practices, and the specific firm’s 

financial condition. Continuous monitoring also assists in the 

identification of emerging risks. Examples of continuous monitoring 

activities include ongoing meetings with management, review of firm 

management information system reports, and meetings with other 

supervisors.

• Enhanced continuous monitoring. Enhanced continuous monitoring 

is a planned event that requires a “deeper dive” than routine 

continuous monitoring in order to learn more about a particular issue 

at a specific firm. These events have fewer documentation 

 11For the purposes of this report, CPCs and SSOs are referred to as managers.
Page 8 GAO-18-118 Large Bank Supervision

requirements, are typically less formal than a target review, and are 

meant to fill a knowledge gap or determine if more formal supervisory 

work is needed.

• Firm-specific full scope and target examinations. Full scope 

examinations are planned events that assess safety and soundness 

and assign supervisory ratings to state member bank subsidiaries. 

Target reviews are limited in scope and assess the quality and 

effectiveness of a firm’s control function (e.g., audit), line of business, 

or business process (e.g., credit origination process). 

In addition, horizontal examinations look at specific issues, such as the 

adequacy of capital and the sufficiency and resiliency of liquidity, across 

multiple firms. The OC oversees the committees that are charged with the 

execution of horizontal examinations for LISCC firms: among others, the 

Comprehensive Capital Analysis and Review (CCAR), the 

Comprehensive Liquidity Analysis and Review (CLAR), and the 

Supervisory Assessment of Recovery and Resolution Preparedness 

(SRP). CCAR is the Federal Reserve’s annual process for evaluating 

capital adequacy of LISCC firms (and other firms subject to the Federal 

Reserve’s capital plan rule) under normal and stressed conditions, as well 

as assessing their capital planning processes. CLAR is the Federal 

Reserve’s annual, forward-looking program to evaluate the liquidity 

position and liquidity risk management practices of LISCC firms. SRP is 

the Federal Reserve’s annual review of the LISCC firms’ options to 

support recovery and progress in removing impediments to orderly 

resolution.12 The OC also oversees ad hoc horizontal examinations that 

are developed in support of LISCC priorities—for example, horizontal 

examinations have reviewed such issues as cyber-security and model 

risk management across multiple LISCC firms. Ad hoc horizontal 

examinations are performed by staff drawn from horizontal teams 

comprised of staff from multiple Reserve Banks and staff at the Board of 

Governors who have particular technical expertise. Figure 2 illustrates 

how horizontal examinations work within the LISCC program.

 12The nonbank systemically important financial institutions (SIFIs) are not subject to 

CCAR or CLAR. Nonbank SIFIs and foreign firms are not subject to SRP until 2018.
Page 9 GAO-18-118 Large Bank Supervision

Figure 2: Components of the Federal Reserve’s LISCC Program That Participate in 

Horizontal Examinations

Note: Other horizontal examinations include the Supervisory Assessment of Recovery and Resolution 

Preparedness (SRP).

Regulatory capture exists when a regulator acts in service of private 

interests, such as the interests of the regulated industry, at the expense 

of the public interest. However, there is no commonly accepted definition 

of regulatory capture, and some scholars have offered more precise 

definitions to facilitate detecting, measuring, and mitigating it.13

Nevertheless, articles and studies we reviewed generally agree that 

capture is a complex and significant threat to effective regulation and can 

 13For example Carpenter and Moss, Preventing Regulatory Capture: Special Interest 

Influence and How to Limit It (2014), offer a stricter and more nuanced definition: 

“Regulatory capture is the result of a process by which regulation, in law or application, is 

consistently or repeatedly directed away from the public interest and toward the interest of 

the regulated industry by the intent and action of the industry itself.” While many 

definitions of regulatory capture do not require action on behalf of the regulated industry, 

these scholars maintain that not doing so contributes to a fairly low evidentiary standard 

for assessing whether or not capture has occurred. The concern is that these definitional 

issues can lead to agencies misdiagnosing and insufficiently treating regulatory capture.

Regulatory Capture
Page 10 GAO-18-118 Large Bank Supervision

take many forms. For example, while regulatory capture was traditionally 

posited as phenomenon in which incumbent firms actively pursue 

regulations to the disadvantage of new potential entrants (“traditional” or 

“anticompetitive” capture), more recent academic literature largely 

addresses “corrosive” or “deregulatory” capture, in which regulated 

entities look to avoid, minimize, or eliminate regulations to the detriment 

of the public good.14 Regulatory capture is typically distinguished as a 

condition that compromises an entity’s ability to serve the public interest 

to some extent (weak capture) or that completely undermines the public 

interest (strong capture) to the extent that Congress would need to 

eliminate or replace an agency to reestablish the public-interest qualities 

of regulation.15 Moreover, capture could compromise an entire agency or 

could be limited to a smaller segment of an agency that executes a 

portion of the agency’s mission. In all cases, capture is generally 

considered to operate less explicitly than outright bribery. However, 

similar to more extreme versions of corruption, private interests (in this 

case the regulated entities) exploit available points of leverage—financial, 

social, or informational—to influence the target regulator’s decisions, 

particularly those decisions that require substantial judgment which can 

then be biased in ways that are difficult to identify definitively.

The potential negative effects of capture on bank regulation and 

supervision requires well-designed preventative measures by prudential 

banking regulators.16 Some experts argue that banking regulation is 

particularly susceptible to regulatory capture given a number of factors 

ranging from size and profitability of the regulated entities and the 

existence of influential trade associations to the banks’ ability to offer 

regulators (implicitly or explicitly) attractive employment opportunities, 

among other things.17 Capture may influence regulatory and supervisory 

 14As this report is concerned with the supervisory process for large financial institutions, it 

is concerned with an assessment of corrosive capture.

15Strong capture (which is often associated with traditional capture) can imply regulation is 

counterproductive in that it is harmful to the public interest. See G. Stigler, “The Theory of 

Economic Regulation,” Bell Journal of Economics and Management Science, vol. 2 

(Spring 1971). Weak capture, on the other hand (typically associated with corrosive 

capture), implies only that regulation is less effective.

16For the importance of preventative actions in response to the risk of regulatory capture, 

see J. Yellen, “Improving the Oversight of Large Financial Institutions,”

https://www.federalreserve.gov/newsevents/speech/yellen20150303a.htm. 

17See for example, D. Hardy, “Regulatory Capture in Banking,” IMF Working Paper, 

WP/06/34, Washington, D.C. (2006).
Page 11 GAO-18-118 Large Bank Supervision

decisions affecting banks and other financial institutions. For example, 

according to some experts, supervisors may exercise less scrutiny than 

they should, overlooking potentially risky practices, or become reluctant to 

impose harsh penalties for transgressions as a consequence of pressure 

or inducements from regulated entities. Several factors may threaten the 

independence of banking supervisors, according to some experts, 

thereby increasing the risk of regulatory capture. Such factors include, 

among others, information asymmetry, a “revolving door” (that is, 

movement of personnel between a regulating agency and a regulated 

entity), cultural capture, an agency’s funding structure, and external 

pressure.

• Asymmetry in information and participation. Information 

asymmetry occurs when regulators depend on regulated firms for 

information, such as specialized knowledge and financial data, and 

may be unable to view that information skeptically. Some studies 

indicate that regulated firms may have more expertise than regulatory 

agencies because firms generally have more resources. An agency’s 

lack of expertise can limit a regulator’s ability to evaluate industry 

practices, thus providing leverage for the regulated entity to exploit. 

Some studies indicate that asymmetric participation may pose a risk 

of regulatory capture where large regulated firms have more 

resources and incentives to hire experts, and lobby effectively.

• Revolving door. A revolving door situation may threaten the 

independence of supervision in different ways. For example, 

according to some experts, banking supervisors may consider taking 

higher-paying job opportunities at supervised banks, potentially 

making them less willing to challenge supervised firms. In addition, 

when supervised banks hire examiners or other experienced staff 

from a banking regulator, these employees may help the bank 

navigate the regulatory requirements, according to these experts.

• Cultural capture. Shared cultural values between employees of the 

regulating agency and the regulated institution may cause supervision 

to be less objective—a situation sometimes referred to as “cultural 

capture.” For example, the employees of a regulatory agency can

come to share the beliefs, views, and perspectives of the regulated 

industry. Some studies indicate that regulators come to value 

relationships developed through repeated interactions and may avoid 

making decisions that could harm those relationships. Past 

employment or a shared professional background can also lead to 

cultural capture and affect the regulator’s confidence and trust in the 

regulated industry. In addition, when a regulatory agency lacks a clear 

mission to pursue and prioritize public interests, there is a risk of 
Page 12 GAO-18-118 Large Bank Supervision

regulatory capture in which agencies become passively persuaded by 

regulated parties.

• Agency funding structure. How an agency is funded can affect the 

agency’s risk of regulatory capture. For example, according to some 

experts, some regulators are funded through fees paid by the 

regulated firms, in which case regulators may feel pressure to make 

decisions that favor those firms.

• External pressure. External pressure, such as from the political 

sphere, can also subject the supervisory process to regulatory 

capture. For example, according to some experts, regulated firms may 

be influential campaign donors with the ability to pressure politicians 

when the regulated firms disagree with the regulators.18

Banking supervisors can mitigate these threats to supervisory 

independence, according to some experts, by adopting and implementing 

policies and strategies such as promoting transparency and 

accountability, countering cultural capture, slowing the revolving door, 

and reducing asymmetries and undue industry influence. For example, 

hiring staff from diverse backgrounds can provide different perspectives 

to supervisory decision making, while training may help to cultivate a 

supervisory mindset and counter cultural capture. Encouraging 

employees to voice and document divergent views can enhance 

transparency and hold supervisory staff and management accountable for 

their supervisory decisions. Further, increasing data collection and 

facilitating increased engagement by multiple groups can reduce 

information asymmetry. In the case of the revolving door, restricting 

former employees’ employment—or specific employment activities—with 

financial institutions they supervised for a set period can help to mitigate 

threats to supervisory independence, according to some experts. In 

addition, financial regulators may further mitigate threats to their 

independence by addressing individual employees’ ethical and conflict-ofinterest issues and by implementing risk management practices. Figure 3 

illustrates selected factors that can increase financial institutions’ risk of 

regulatory capture and strategies for mitigating these factors. See 

appendix II for more information on factors that can increase the risk of 

regulatory capture and strategies for mitigation.

 18See appendix II for summary of our literature review of factors that may contribute to 

regulatory capture and strategies for mitigating it in banking supervision and regulation.
Page 13 GAO-18-118 Large Bank Supervision

Figure 3: Selected Factors That Can Increase Risk of Regulatory Capture and Mitigation Strategies

ERM is a forward-looking management approach that allows an 

organization, such as a federal agency, to assess threats and 

opportunities that could affect the achievement of its goals. ERM is part of 

overall organizational governance and accountability functions and 

encompasses all areas where an organization is exposed to risk. The 

Office of Management and Budget (OMB) has defined “risk” as the effect 

of uncertainty on objectives. Risk management is a series of coordinated 

activities to direct and control challenges or threats to achieving an 

organization’s goals and objectives. ERM can address the full spectrum 

of the organization’s external and internal risks by understanding the 

combined impact of risks as an interrelated portfolio, rather than 

Enterprise Risk 

Management (ERM) and 

Internal Controls Related 

to Regulatory Capture
Page 14 GAO-18-118 Large Bank Supervision

addressing risks only within silos. Agency leaders are responsible for 

managing complex and risky missions. ERM is a way for these leaders to 

manage risk across their organizations—including risks related to 

regulatory capture. 

In 2016, OMB updated its Circular A-123, which requires all executive 

branch agencies to implement ERM frameworks and adjust their internal 

controls to align with GAO’s updated Standards for Internal Control in the 

Federal Government.19 In the 2016 guidance, OMB also encouraged all 

non-executive branch federal agencies to implement ERM. OMB Circular 

A-123 and the Federal Managers’ Financial Integrity Act of 1982 have 

been central to federal efforts to help ensure accountability within 

government agencies.20 The Federal Reserve is an independent entity 

and is not subject to OMB’s risk management guidelines, but the Board of 

Governors voluntarily complies with the Federal Managers’ Financial 

Integrity Act of 1982 as a best practice. We recently reported on good 

practices some federal agencies use to implement their ERM 

frameworks.21 These include aligning ERM with agency goals and 

objectives; identifying risks; assessing risks; selecting risk responses; 

monitoring risks; and communicating and reporting about risks.

An agency can use an ERM framework to manage its regulatory capture 

risks, which can span functional areas of organizations and can be 

categorized by type of risk. The Committee of Sponsoring Organizations 

of the Treadway Commission (COSO), which developed an ERM 

framework to help organizations manage risks, noted that ERM helps 

ensure effective reporting and compliance with laws and regulations and 

helps avoid damage to the entity’s reputation and associated 

 19OMB, Circular A-123: Management’s Responsibility for Enterprise Risk Management 

and Internal Control (Washington, D.C.: July 15, 2016); GAO, Standards of Internal 

Control for the Federal Government, GAO-14-704G (Washington, D.C.: Sept. 10, 2014).

20Pub. L. No. 97-255, 96 Stat. 814 (codified as amended at 31 U.S.C. § 3512). 

21GAO, Enterprise Risk Management: Selected Agencies’ Experiences Illustrate Good 

Practices in Managing Risk, GAO-17-63 (Washington, D.C.: Dec. 1, 2016). Internal control 

is also part of ERM and is used to manage or reduce risks in an organization. Beyond 

traditional internal controls, ERM promotes risk management by considering its effect 

across the entire organization and how it may interact with other identified risks. 

Additionally, ERM also addresses other topics such as setting strategy, governance, 

communicating with stakeholders, and measuring performance, and its principles apply at 

all levels of the organization and across all functions.
Page 15 GAO-18-118 Large Bank Supervision

consequences.22 In addition, OMB’s guidance on ERM highlights the 

process of identifying and categorizing risks.23 Among the risk categories 

OMB identifies are legal, compliance, and reputational risks. Risks of 

regulatory capture span these three risk categories. Legal and 

compliance risks refer to the risk that an agency will fail to comply with 

statutory or regulatory requirements, respectively. Reputational risk is a 

failure to fulfill the agency’s role (whether such failure is actual or 

perceived) in such a way that the agency faces diminished stature, 

credibility, or effectiveness. According to OMB, reputational risk—which 

could damage the reputation of an agency or component of an agency to 

the point of having a detrimental effect capable of affecting the agency’s 

ability to carry out mission objectives—is one of the most common risk 

types. Reputational risks are inherent in agency processes and 

encompass factors such as regulatory capture, employee conduct, 

supervision, and legal issues.

We have previously reported that effective ERM implementation starts 

with an agency establishing a customized ERM program that fits its 

specific organizational mission, culture, operating environment, and 

business processes.24 OMB Circular A-123 specifies elements that 

federal agencies’ ERM frameworks should include and steps agencies 

should take to develop these frameworks. These include a planned risk 

management governance structure, a process for considering risk 

appetite and risk tolerance levels, a methodology for developing a risk 

profile, a general implementation timeline, and a plan for maturing the 

comprehensiveness and quality of the risk profiles over time.25 OMB and 

 22Committee of Sponsoring Organizations of the Treadway Commission, Enterprise Risk 

Management-Integrated Framework, 2004. COSO has since updated the ERM 

framework, Enterprise Risk Management-Aligning Strategy with Performance, exposure 

draft issued in June 2016, but we did not include this in our analysis.

23Further, the Chief Financial Officers Council and Performance Improvement Council 

published a guide to implementing OMB’s revised circular that noted that one of the most 

salient lessons from past crises and negative reputational incidents is that both public and 

private sector organizations would benefit from establishing or reviewing and 

strengthening their risk management practices. U.S. CFO Council and Performance 

Improvement Council, Playbook: Enterprise Risk Management for the U.S. Federal 

Government (Washington, D.C.: July 29, 2016).

24GAO-17-63.

25OMB Circular A-123 also stated that agencies have discretion in terms of the 

appropriate content and format for their risk profiles; however, in general risk profiles 

should include the following seven components: 1. Identification of Objectives; 2. 

Identification of Risk; 3. Inherent Risk Assessment; 4. Current Risk Response; 5. Residual 

Risk Assessment; 6. Proposed Risk Response; and 7. Proposed Action Category.
Page 16 GAO-18-118 Large Bank Supervision

COSO define risk appetite as the amount of risk an organization is willing 

to accept in pursuit of its mission. It is established by the organization’s 

most senior leadership and serves as the guidepost to set strategy and 

select objectives. OMB and COSO define risk tolerance as the acceptable 

level of variance in performance relative to the achievement of objectives. 

Reserve Banks, which are separately incorporated entities, have 

voluntarily followed guidance from COSO on ERM.

While regulatory capture threatens the independence of supervision at 

the agency-wide level, employees’ individual conflicts of interest can also 

undermine their independence in performing supervisory duties. To help 

ensure that federal employees act in the interest of the public rather than 

their own personal interests, Congress has enacted legislation intended 

to prevent conflicts of interest or the appearance of conflicts of interest.26

Congress also established the Office of Government Ethics (OGE) in 

1978 to provide direction to executive branch agencies in developing 

policies related to preventing conflicts of interest on the part of officers 

and employees.27 OGE, with a staff of approximately 75, oversees federal 

ethics programs administered by more than 4,500 agency ethics officials 

across the executive branch; these agency ethics officials, in turn, have 

the primary responsibility for directing the agency’s ethics program and 

coordinating with OGE. OGE also has issued standards of conduct for 

 26For example, a criminal conflict of interest statute prohibits former employees from 

representing another person or entity by making a communication to or appearance 

before a federal department, agency, or court concerning the same “particular matter 

involving specific parties” with which the former employee was involved while in public 

service. 18 U.S.C. § 207. In addition, certain senior officials are subject to a “cooling off”

period, so that for a period of one year after leaving a senior position, the former employee 

may not represent another person or entity by making a communication to or appearing 

before the former employee’s former agency to seek official action on any matter. 18 

U.S.C. § 207 (c).

27Ethics in Government Act of 1978, Pub. L. No. 95-521, tit. IV, 92 Stat. 1862 (codified as 

amended at 5 U.S.C. app. §§ 401-408). By Federal Reserve regulation, employees of the 

Board are subject to OGE’s executive branch-wide standards of ethical conduct, codified 

at 5 C.F.R. part 2635, and the executive branch-wide financial disclosure regulation, 

codified at 5 C.F.R. part 2634. 

Preventing Conflicts of 

Interest
Page 17 GAO-18-118 Large Bank Supervision

federal employees, as well as regulations that help implement federal 

statutes intended to prevent conflicts of interest.28

In addition, federal agencies—including independent entities such as the 

Federal Reserve—have issued supplemental ethics regulations that 

impose additional ethics restrictions on their employees.29 Board 

regulations include prohibitions on employees receiving preferential terms 

from regulated institutions and on supervisory employees from seeking 

credit from institutions that are involved in the employee’s work 

assignments.30 The Board of Governors and Reserve Banks maintain 

internal policies that reflect applicable statutes and regulations and 

impose additional restrictions. The statutory, regulatory, and Federal 

Reserve policy restrictions generally apply to the employees themselves, 

although some regulations and policies also apply to an employee’s 

spouse, domestic partner, or dependent children.31

ERM frameworks could be used to manage regulatory capture risks 

across the LISCC program, and the Federal Reserve Board just recently 

started the development of an ERM framework in 2017. The four Reserve 

Banks that participate in the LISCC program already maintain their own 

ERM frameworks. However, they have limited ability to manage 

regulatory capture risks because the individual Reserve Banks do not 

have visibility across the LISCC program, and their risk management 

officers’ access to and reporting of supervisory information is restricted. 

An ERM framework would enhance the ability of the Board of Governors 

to look comprehensively across the Federal Reserve to identify, assess, 

and monitor sources of reputational risk, including the risk of regulatory 

capture across the system.

 28Executive Order 12674 (as modified by Executive Order 12731) set out fourteen basic 

principles of ethical conduct for executive branch personnel and directed OGE to establish 

a single, comprehensive, and clear set of executive branch standards of ethical conduct. 

OGE’s Standards of Ethical Conduct for Employees of the Executive Branch regulation, 5 

C.F.R. part 2635, became effective on February 3, 1993. 57 Fed. Reg. 35006 (Aug. 7, 

1992).

29See 5 C.F.R. pt. 6801. 

305 C.F.R. §§ 6801.105 - 6801.106.

31The restrictions may also apply to other associates of the employee, such as general 

partners. See, e.g., 5 C.F.R. § 6801.106(b)(3).

Enterprise Risk 

Management 

Frameworks Can Be 

Used to Manage 

Regulatory Capture 

Risks, but the Board 

Is Still Developing 

Such a Framework
Page 18 GAO-18-118 Large Bank Supervision

The Board of Governors did not have an ERM framework for the period of 

our review, 2011 through 2016, but began to develop a framework in 

January 2017. As noted previously, OMB has encouraged all 

nonexecutive branch federal agencies to implement ERM, and ERM can 

be used to manage reputational risks, including the risk of regulatory 

capture. The Federal Reserve OIG also recommended that the Board 

adopt a comprehensive risk management structure in its 2016 

management challenges report, restating a recommendation the OIG first 

made in 2013 (the Board agreed to implement the 2013 recommendation 

but had not done so by 2016). A senior Board official we spoke with said 

the reason the Board is moving ahead with developing an ERM 

framework now, even though the Reserve Banks have had such 

frameworks for some time (and the OIG made such a recommendation in 

2013), is that the Board has come to recognize the diverse set of risks the 

Federal Reserve faces and the Board believes that a more structured 

framework would be useful in understanding and managing these risks. 

However, this Board official was not clear about the relevance of 

regulatory capture risk to ERM. To manage regulatory capture risks within 

supervisory programs such as the LISCC program, an ERM framework 

would integrate existing supervision and ethics internal controls and 

procedures into a system-wide risk management approach.

Board officials indicated that development of an ERM framework is a 

multiyear effort and that the Board plans to set up a preliminary program 

within the next 10 months and enhance the program going forward. Board 

officials told us that the new ERM framework will focus on strategic risk 

management for the Board as a whole. Officials explained that the 

rationale for the Board’s decision to develop an ERM framework was 

twofold: first, the ERM framework would enable the Board to look across 

business lines and obtain a comprehensive understanding of and better 

define risks, and identify any gaps. Second, the Board wants to use 

information from this comprehensive understanding to assist with 

operational or budgetary decision making. According to officials with 

whom we spoke, the Board of Governors senior leadership supports the 

effort. As part of the ERM development process, according to the 

presentation materials we reviewed, Board of Governors officials 

interviewed senior officers and stakeholders, including senior officers at 

12 of the Board’s 15 divisions, to assess support and concerns about 

developing an ERM framework at the Board level. Officials also reviewed 

the ERM frameworks of other agencies, such as the Office of the 

Comptroller of the Currency and the Federal Deposit Insurance 

The Board of Governors 

Only Recently Began 

Developing an ERM 

Framework that Could 

Help Manage Regulatory 

Capture Risks
Page 19 GAO-18-118 Large Bank Supervision

Corporation, and those of the Reserve Banks to learn about ERM 

practices.

Although the Board has taken some steps to develop an ERM framework, 

as of August 2017 it had not yet developed key ERM elements OMB has 

identified. For example, OMB guidance highlights the need for a planned 

risk management governance structure, a process for considering risk 

appetite and risk tolerance levels, a methodology for developing a risk 

profile, a general implementation timeline, and a plan for maturing the 

comprehensiveness and quality of the risk profiles over time. Risk 

appetite and risk tolerance statements would include identification of risks 

including reputational risks such as regulatory capture. For example, the 

Office of the Comptroller of the Currency’s risk appetite statement 

includes regulatory capture as one of the types of reputational risks it 

attempts to mitigate through its ERM framework. The Board had not taken 

these steps as of August 2017, although officials told us that plans to 

further assess how ERM would fit with the Federal Reserve culture are 

proceeding. Until the Board includes these key elements to identify and 

assess risks of regulatory capture in its ERM framework, the Board will be 

unable to comprehensively mitigate regulatory capture risks across the 

system.

The four Reserve Banks that participate in the LISCC program maintain 

their own ERM frameworks but the frameworks were not intended and 

have limited ability to fully manage all relevant regulatory capture risks 

across the system. These Reserve Banks’ ERM structures feature three 

lines of defense. The first line of defense is the individual business line, or 

functional area. For example, the supervision function at each Reserve 

Bank is considered part of the first line of defense. Additionally, each 

Reserve Bank has an independent quality management framework within 

the supervisory program to review and assess supervisory work.32 The 

second line typically includes the risk management and legal and 

compliance functions—including ethics functions—because these 

functions look across the business lines at risk issues. The third line is the 

internal audit function, which serves an independent review, oversight, 

and evaluation function. The four Reserve Banks also each designate a 

senior official who acts as the Chief Risk Officer. Within this structure, the 

 32This was required by Advisory Letter 07-23, Revised Guidelines for Reserve Bank 

Quality Management Frameworks.

The Four LISCC Reserve 

Banks’ ERM Frameworks 

Cannot Provide Visibility 

into Risks across the 

System
Page 20 GAO-18-118 Large Bank Supervision

four Reserve Banks have processes to identify, prioritize, and assess risk, 

and they have risk-response functions in place, such as processes for 

reporting on risk events to senior management.

These four Reserve Banks’ risk officials told us that they mitigate 

regulatory capture risks through policies in the supervision and ethics 

functional areas of their organizations, which we discuss in greater detail 

later in this report. These risk officials noted that ethics oversight is 

integrated into the Reserve Banks’ risk management frameworks. For 

example, the chief risk officer regularly communicates with the bank’s 

chief ethics officer, who is a member of the banks’ risk management 

group.

However, these Reserve Banks’ risk officials also said they face 

limitations, particularly in reporting on risks related to supervision. The 

Reserve Banks’ risk management functions do not have access to 

confidential supervisory information, nor do they have the expertise and 

background to make judgments on supervisory activities, according to 

Reserve Banks’ risk management officials. Moreover, the Reserve Banks’

boards of directors do not oversee the Reserve Banks’ supervisory 

activities because of Federal Reserve Act restrictions.33 For this reason, 

these four Reserve Banks’ ERMs are limited in their reporting on 

supervision-related risks to Reserve Bank boards.34 FRBNY risk officials 

noted that they monitor operational risks related to supervision but do not 

report on supervision-related risks to their board of directors or externally. 

As a result, when these four Reserve Banks produce their annual 

consolidated risk reports, they do not address risks related to supervisory 

activities.35

 33See 12 U.S.C. §§ 248, 301.

34The directors do not oversee the Reserve Banks’ supervisory activities of their member 

banks, bank holding companies, or nonbank SIFIs. Reporting lines vary by Reserve Bank, 

but the Chief Risk Officer usually reports to a committee of the Bank’s Board of Directors 

or to the Bank President. The risk officers produce reports for senior management on 

priority risks. In addition, the internal audit function also reports on risks. 

35As part of the Federal Reserve’s Operational Risk Management program, the Reserve 

Banks, product offices, and centralized service providers develop the Federal Reserve’s 

annual operational risk profile, referred to as the Consolidated Assessment of Risk 

report. This report does not include an assessment of the soundness or effectiveness of 

supervision activities.
Page 21 GAO-18-118 Large Bank Supervision

Because of these restrictions, the four Reserve Banks in the LISCC 

program are limited in their ability to use their ERM frameworks to 

manage regulatory capture risks. The LISCC program encompasses 

supervisory activities conducted by staff from four of the Reserve Banks 

and the Board, that supervise the largest financial institutions, as well as 

the OC at the Board level. The program exceeds the scope of any 

individual Reserve Bank’s ERM framework. The Board has just recently 

started developing an ERM framework in 2017. As a result, the Board 

currently has a limited ability to manage regulatory capture risks across 

all areas of the LISCC program.

The Federal Reserve has established policies that promote supervisory 

independence to help mitigate the risk of regulatory capture in the LISCC 

program. These policies include oversight of the program by the Board of 

Governors, horizontal examinations, and vetting of examination findings. 

In addition, the Federal Reserve’s internal reviews of the LISCC program 

have included recommendations to the Reserve Banks to improve their 

implementation of LISCC policies, including those that promote 

supervisory independence. The Reserve Banks have taken steps to 

respond to these recommendations, but our interviews with Federal 

Reserve staff and review of Reserve Bank policies indicate that 

inconsistencies in the Reserve Banks’ execution of some aspects of the 

LISCC program persist. Further, the Board’s internal controls—in 

particular with respect to guidance and monitoring mechanisms—limit 

assurance that policies are implemented consistently and effectively 

across the LISCC program.

The Federal Reserve has established policies that promote supervisory 

independence to help mitigate the risk of regulatory capture in the LISCC 

program. Academic literature that we reviewed found that, among other 

things, effective bank supervision that is independent of inappropriate 

influence requires transparency and accountability and a supervisory 

climate that encourages discussion and dissent. In contrast, weak and 

insufficiently independent supervisory teams may be susceptible to 

regulatory capture and other threats to effective supervision. Board 

officials told us that they mitigate threats to supervisory independence by 

obtaining a range of inputs in supervisory decision making from multiple 

perspectives, creating strong and independent dedicated supervisory 

teams, conducting supervisory work on a horizontal as well as firmspecific basis, adhering to strict rules and practices concerning ethics and 

potential conflicts of interest, and promoting cultures of public service. 

Board of Governors 

and Reserve Banks 

Have Policies to 

Mitigate Threats to 

Independence, but 

Some Related 

Internal Controls 

Have Weaknesses

Key Features of the 

LISCC Program and 

Internal Reviews Help 

Mitigate Threats to 

Supervisory Independence
Page 22 GAO-18-118 Large Bank Supervision

Officials said that while specific practices at a given Reserve Bank may 

vary, each adheres to the same principles and governing supervisory 

policies.

36

Officials from the Board and the four LISCC Reserve Banks also said that 

specific features of the program are intended to mitigate threats to 

supervisory independence, including oversight by the Board, horizontal 

reviews, and extensive procedures for vetting Reserve Banks’ ratings of 

supervised entities under the LISCC program.

• Oversight by System-wide staff. Oversight of Federal Reserve 

staffs’ supervision of LISCC firms can mitigate threats to 

independence by increasing transparency and accountability. Officials 

we spoke with said that the dedicated supervisory and horizontal 

teams convey the results of their supervisory determinations to 

System-wide committees, such as the OC or Vetting Committee. For 

further vetting and discussion, Reserve Banks also present significant 

disagreements or close calls leading up to their supervisory findings 

and ratings to the OC and Vetting Committee.

• Horizontal examinations. Because horizontal examinations draw on 

staff with different expertise and experience from across the Federal 

Reserve, they bring a variety of perspectives to the supervision of 

LISCC firms. Officials said that by engaging and collaborating with 

peers outside of their dedicated supervisory teams, staff assigned to 

horizontal examinations can make optimal use of subject-matter 

experts and insight from multiple perspectives. They noted that these 

insights, coupled with increased scope of horizontal analyses of 

LISCC institutions, can promote independence by helping to ensure 

that supervisory work has consistent and accurate outcomes across 

the LISCC program. Furthermore, the Chair of the Federal Reserve 

remarked in 2015 that LISCC can help mitigate the risk of regulatory 

capture by ensuring that staff consider diverse views and 

perspectives.37

 36Additionally, officials we spoke with from each Reserve Bank said that when examiners 

engage with bank officials frequently, a relationship may emerge that could result in 

examiners losing their supervisory objectivity or, inadvertently, their supervisory 

independence. These statements reflect concerns cited in academic studies where 

supervisors might lose their objectivity and independent perspective to the extent they 

adopt a world view shared with their regulated entities.

37Yellen, Janet, “Improving the Oversight of Large Financial Institutions” (speech, New 

York, New York, March 3, 2015), Federal Reserve Board of Governors. 

https://www.federalreserve.gov/newsevents/speech/yellen20150303a.htm.
Page 23 GAO-18-118 Large Bank Supervision

• Vetting of examination findings. Officials from the Federal Reserve 

also discussed the use of vetting as a way to mitigate threats to 

independence. Under the vetting process, examination findings are 

documented in workpapers and Reserve Bank staff are required to 

discuss differences and consider divergent views. These processes 

increase the transparency and accountability of examiners’ findings 

and decisions by helping to facilitate better detection and deterrence 

of conclusions that may be affected by inappropriate influence.38

Officials at the Board of Governors also told us that the LISCC 

program has focused on extensive vetting procedures to help ensure

that a wide variety of stakeholders participate in analytical and 

decision-making discussions. Each Reserve Bank has guidelines for 

documentation and attendance requirements for vetting sessions.

Additionally, all Reserve Banks have a policy of rotating the managers of 

supervisory teams every 5 years to help ensure that the firms are 

reviewed by staff with “fresh eyes.” Officials also said they are 

increasingly moving staff away from working on-site at their supervised 

institutions to, among other things, lessen the likelihood of cultural 

capture.

According to documents we reviewed, the Federal Reserve also conducts 

internal reviews of the Reserve Banks to monitor and evaluate the 

implementation and effectiveness of supervisory policies and procedures, 

including those that may aid in the mitigation of threats to supervisory 

independence within the LISCC program. Reviews may lessen the 

likelihood of regulatory capture by increasing accountability among 

Federal Reserve staff and management. These reviews are conducted 

both at regular intervals and on an ad hoc basis, and they originate either 

at the individual Reserve Banks, the Board of Governors, or the OIG. 

While internal reviews occur regularly, their subject-matter focus and 

timing for each Reserve Bank vary. This variation can lead to similar 

findings being addressed at Reserve Banks across different time frames. 

Examples of different types of internal review include the following:

 38For example, officials we spoke with from each Reserve Bank said that when examiners 

engage with bank officials frequently, a relationship may emerge that could result in 

examiners losing their supervisory objectivity or, inadvertently, their supervisory 

independence. These statements reflect concerns cited in academic studies where 

supervisors might lose their objectivity and independent perspective to the extent they 

adopt a world view shared with their regulated entities. For more information on factors 

that can threaten supervisory independence, see appendix II.
Page 24 GAO-18-118 Large Bank Supervision

• Supervision and Regulation operations reviews. According to the 

officials we spoke with, the Division of Supervision and Regulation’s 

Performance Management and Assessment Section is responsible for 

the operations review program. Operations reviews are point-in-time 

assessments of whether each Reserve Bank is adequately supporting 

the performance of its Board-delegated responsibilities and is meeting 

requisite system guidance, standards, and objectives for its 

supervisory program on a triennial basis. The Board’s operations 

review program has been performing reviews of the LISCC program’s 

firm-specific supervisory work since 2013. The scope of the work has 

generally included the dedicated supervisory teams’ proposed annual 

ratings and the body of work performed to support these ratings, such 

as firm-specific full scope and target examinations and continuous 

monitoring.39

• Office of the Inspector General. The OIG is an independent 

oversight authority. According to documentation we reviewed, its 

mission is to provide independent oversight by conducting audits, 

evaluations, and investigations.40 In a report issued in November 

2016, the OIG found that approaches by Reserve Bank management 

influence employees’ willingness to share their views and that 

employees would likely benefit from a formal mechanism (as opposed 

to informal) to share views with system decision makers.41

Furthermore, the report found that no forum existed to share best 

practices in encouraging employees to share their views. The review 

also found that FRBNY, due in part to its team design and proximity to 

such a large number of complex financial institutions, had unique 

challenges. Deficiencies and inconsistencies identified in the report 

may diminish the effectiveness of policies designed to mitigate threats 

to supervisory independence.

• Board review of LISCC program. The Board announced in 2014 that 

it would conduct its own review of the LISCC Reserve Banks’ annual 

 39As will be discussed later in this report, the Division of Supervision and Regulation also 

performs reviews of the conflict-of-interest and examiner credentials program, as well as 

ad hoc horizontal review of post-employment rules.

40Among other things, the OIG uses a risk-based planning process and a hotline to 

determine which programs and operations to evaluate and makes recommendations 

intended to improve their efficiency and effectiveness. 

41Office of the Inspector General of the Board of Governors of the Federal Reserve 

System and the Consumer Financial Protection Bureau, “Opportunities Exist to Increase 

Employees’ Willingness to Share Their Views About Large Financial Institution 

Supervision Activities.” 2016-SR-B-014 (Washington, D.C.: Nov. 14, 2016).
Page 25 GAO-18-118 Large Bank Supervision

assessment process to help ensure that LISCC decision makers were 

receiving appropriate information needed to make their assessments 

and to determine whether adequate channels were available for 

decision makers to become aware of examiners’ divergent views on 

supervisory findings. This report was publicly released in 2015 though 

the Board also provided individual interim reports to each LISCC 

Reserve Bank.42 The Board’s LISCC review found that LISCC 

decision makers generally were receiving the information needed, but 

that some dedicated supervisory teams had insufficient support for 

findings and inconsistent practices. For these instances, reviewers 

could not determine if LISCC decision makers were receiving the 

information they needed. Furthermore, the report concluded that the 

inconsistencies were a result of inconsistent expectations from 

Reserve Bank management and ineffective Reserve Bank training. 

The report also found that while staff were satisfied with their ability to 

express divergent views, dedicated supervisory teams differed in how 

staff raised views and to whom they could raise them.

• Office of Quality Management quality assurance reviews.

According to officials we spoke with and documentation we reviewed, 

each Reserve Bank is responsible for establishing a quality assurance 

program as part of the Board’s quality management framework, to 

help ensure that Reserve Bank staff follow quality standards and 

processes and consistently apply them to supervisory activities. Each 

program conducts a series of reviews annually based on the areas 

presenting the highest risk to their supervision programs.

The implementation of policies and procedures that may lessen the 

likelihood of regulatory capture by mitigating threats to independence for 

supervisory staff working on the LISCC programs varied across the four 

Reserve Banks and among the examination teams. Federal Reserve 

internal reviews found deficiencies in adherence to Board guidance, and 

staff we spoke with and policies we reviewed also reflected variations in 

the policies that Banks have in place to satisfy LISCC requirements. 

Internal reviews note that, as a result of inconsistent policies, the OC may 

be receiving inadequate information in order to make decisions regarding 

the rating of or recommendations to LISCC firms. In response to internal 

review recommendations, the four Reserve Banks have taken some steps 

 42Federal Reserve Board of Governors, “Board of Governors Review of Federal Reserve 

Banks’ Large Institution Supervision Coordinating Committee Information Flows and 

Communication Channels.” (Washington, D.C.: November 2015).

The Reserve Banks Have 

Taken Various Steps to 

Strengthen 

Implementation of LISCC 

Policies
Page 26 GAO-18-118 Large Bank Supervision

to strengthen their implementation of LISCC policies. We reviewed the 

four Reserve Banks’ policies and procedures in the areas of (1) 

documentation of substantive discussion and divergent views during 

vetting discussions; (2) establishment of an effective supervisory culture; 

(3) onboarding43 and training of staff; and (4) staff communication with the 

Board of Governors. Figure 4 summarizes findings related to LISCC 

policies and procedures that may mitigate threats to supervisory 

independence from internal reviews the Federal Reserve conducted from 

2012 through 2016.44

Figure 4: Summary of Internal Review Findings Relevant to LISCC Policies That May Mitigate Threats to Independence, 2012–

2016

 43Onboarding is defined as the procedures used to acclimate new employees.

44Board officials told us that as a result of inconsistencies, the OC endorsed the 

development of a LISCC Program Manual. The Program Manual is expected to be final by 

January 2018. 
Page 27 GAO-18-118 Large Bank Supervision

Effective documentation of findings and discussions may aid in 

addressing regulatory capture and mitigating threats to independence by 

increasing transparency and accountability.45 Federal Reserve internal 

reviews have found variations in the implementation of policies and 

procedures related to the documentation, review, and vetting of 

examination findings by the four LISCC Reserve Banks and dedicated 

supervisory teams and have made relevant recommendations.46

Recently, internal reviews by the Board found evidence that examination 

teams generally considered dissenting or divergent views as part of the 

decision-making process, but the review also found insufficient 

documented support for supervisory issues at FRBNY and FRB 

Richmond. For FRBNY and FRB Richmond, reviewers could not identify 

the extent to which the Banks had documentation demonstrating that they 

considered and vetted divergent views, and they could not identify 

whether all appropriate information was being brought forward for 

consideration by LISCC decision makers to help ensure consistent and 

sound supervisory practices. In contrast, the Board LISCC review found 

sufficient evidence that staff at FRB Boston and FRB San Francisco both 

conducted vetting sessions and documented discussions and decisions 

resulting from these meetings, although previous internal reviews had 

identified areas for improvement.

The four Reserve Banks have modified their policies and procedures in 

response to internal review findings and recommendations. For example, 

our review of FRBNY policies and interviews with officials indicated that 

FRBNY now requires teams to use a vetting template to document 

changes and has created the position of Chief of Staff to help examiners 

adhere to documentation requirements. Similarly, we found that FRB 

Richmond now has an integrated supervision procedures manual that 

requires a scribe to attend vetting sessions to record any changes or 

divergent views that occur during the meeting. FRB Boston and FRB San 

Francisco also include vetting guidelines in their supervisory manuals. 

Our interviews with staff indicated that the findings and policy changes 

 45See appendix II for more information.

46Current Federal Reserve guidance states that management should participate in the 

vetting of issues from examinations and inspections and that there should be a 

mechanism for ensuring that management is aware of significant issues arising from 

examinations. Furthermore, guidance states that there should be a process for escalating 

issues to resolve disagreements. It also states that Reserve Banks must develop 

documentation, review, and approval requirements for the entire supervisory process, 

including scoping, workpapers, or other supervisory reports. 

Documenting Examination 

Findings and Vetting 

Discussions
Page 28 GAO-18-118 Large Bank Supervision

recommended by internal reviewers were being implemented by Reserve 

Banks that had received them. For example, some members of team 

management at FRBNY that we interviewed said that the new vetting 

template was helpful and more transparent in providing supporting 

evidence to the OC, and several said that practices of documenting 

examination findings and vetting discussions have improved. A few 

examiners at FRBNY we interviewed said that disagreements were 

documented during vetting sessions, and a few other examiners at FRB 

Richmond said they were familiar with the processes for raising dissent or 

divergent views.

To help facilitate an effective supervisory culture that may aid in mitigating 

threats to independence and reduce the likelihood of regulatory capture, 

management should seek to foster an inclusive culture in which staff are 

able to raise divergent views and not feel threatened if they want to 

challenge management’s views of an examination’s findings and 

conclusions.47 The Board LISCC Review found variation in the willingness 

of supervisory staff to raise divergent views and challenge management’s 

views of examination findings and conclusions, as well as issues related 

to team culture and openness, although the severity of some of these 

issues and the processes in place varied across the four Reserve Banks 

and their dedicated supervisory teams. These variations can influence 

how effective vetting sessions are across teams, affecting whether or not 

system decision makers are receiving the information needed to help 

ensure consistent and sound supervisory decisions. The Board’s LISCC 

review highlighted a lack of documented processes at FRB Richmond for 

staff to raise divergent views and recommended the use of a 

standardized template. The OIG report in particular focused on the 

cultural aspects of the supervision process, including supervision team 

dynamics and employees’ comfort in sharing their views, citing issues at 

FRB Boston, FRBNY, and FRB Richmond.48 Additionally, the OIG review 

found evidence that individual managers set the tone with their teams at 

FRBNY, creating variations in team culture across dedicated supervisory 

teams. The reports found that some managers were highly prescriptive, 

prohibited interaction with firms without their presence, and required little 

 47See appendix II for more information. 

48Office of the Inspector General of the Board of Governors of the Federal Reserve 

System and the Consumer Financial Protection Bureau, “Opportunities Exist to Increase 

Employees’ Willingness to Share Their Views About Large Financial Institution 

Supervision Activities.” 2016-SR-B-014 (Washington, D.C. November 14, 2016).

Establishing an Effective 

Supervisory Culture
Page 29 GAO-18-118 Large Bank Supervision

documentation, while other managers empowered their staff and 

encouraged open dialogue.

In response to internal review findings, the four Reserve Banks have 

changed some of their policies and procedures to better encourage 

examiners to express their views. For example, FRBNY has established 

weekly meetings for staff discussions across supervisory teams in 

addition to breakfast meetings and other forums for staff to share 

concerns and provide feedback to management. Similarly, the FRB 

Richmond Supervision Procedures Manual states that skip-level 

meetings—meetings between leaders and their indirect reports—reinforce 

the expectation and provide accountability for management to engage 

with team members and solicit views, as well as provide a forum for staff 

to escalate concerns and share viewpoints. In response to a 2014 Board 

operations review recommendation to increase participation in vetting 

sessions, FRB Boston updated its procedures and incorporated those 

changes into additional training. Furthermore, FRBNY, FRB Richmond, 

and FRB San Francisco have updated performance evaluation criteria for 

supervisory team managers to include the extent to which the managers 

encourage and integrate diverse perspectives from junior staff. 

Additionally, LISCC staff have been involved with the System-wide 

strategic initiative to develop a System-wide Divergent View Program, 

which launched in August of 2017.49

Our focus groups with the four Reserve Banks’ staff found that while the 

Banks have taken steps in response to internal review findings, some 

issues persist, particularly at FRBNY and FRB Richmond. Several 

examiners as well as some managers at FRBNY noted in their respective 

focus groups that the SSO sets the tone for their team’s culture to 

encourage examiners to express their views. Additionally, two staff noted 

during a focus group that the findings in the 2016 OIG Report, which also 

found variations in team culture, were accurate and continued to be 

issues within their teams.50 We discuss weaknesses in internal controls to 

provide reasonable assurance that policies are implemented effectively 

across the LISCC program later in this report.

 49The Board released AD/CA Admin Letter 17-7, “Implementation of Divergent Views 

Framework” on August 10, 2017.

50Office of the Inspector General of the Board of Governors of the Federal Reserve 

System and the Consumer Financial Protection Bureau, “Opportunities Exist to Increase 

Employees’ Willingness to Share Their Views About Large Financial Institution 

Supervision Activities.”
Page 30 GAO-18-118 Large Bank Supervision

Effective onboarding—that is, the procedures used to acclimate new 

employees—and training can help alleviate factors that may inhibit the 

development of an independent supervisory mindset or may prevent staff 

from sharing their views with management, in addition to potentially 

reducing information asymmetries with supervised institutions, which 

would reduce the likelihood of regulatory capture.51 Federal Reserve 

internal reviews indicated that the effectiveness of hiring strategies, 

training, and onboarding programs varied across the four Reserve Banks 

and their dedicated supervisory teams. The effectiveness of training 

programs for management, including developmental programs to 

encourage managers to solicit staff views, also varied in effectiveness, 

according to internal reviews. In particular, the Board’s LISCC review 

recommended that FRBNY and FRB Richmond strengthen their 

onboarding procedures, and staff we spoke with were aware of or had 

participated in new initiatives outlined by the Banks in response. The 

Board’s LISCC review also found that FRB Boston had an informal 

onboarding process but was already in the process of formalizing it and 

was increasing emphasis on training and mentoring for new hires to 

assist in the development of an appropriate supervisory perspective. 

Similarly, FRB San Francisco was found to have an informal but sufficient 

onboarding process that includes managers meeting with new staff and 

providing guidance. In addition, staff we interviewed at all four LISCC 

Reserve Banks emphasized the importance of on-the-job training, and 

some said such training is the most important element of becoming an 

effective examiner.

In response to internal review findings, the four LISCC Reserve Banks 

and the Board have made changes to their training policies. For example, 

the FRB Richmond Supervision Procedures Manual identifies 

requirements for individuals to develop customized training plans, 

incorporating both local and Federal Reserve-wide training opportunities. 

The manual also outlines requirements for managers to identify 

development objectives as part of the new-hire onboarding process. 

Furthermore, according to FRBNY documentation, new initiatives include 

mandatory courses for all hires, specific training for each business line 

portfolio, and a formal new-hire orientation that includes presentations by 

management focusing on the importance of speaking up and sharing 

views. Additionally, in response to OIG report findings, Board officials said 

that they would work with the Reserve Banks to make onboarding more 

 51See appendix II for more information.

Onboarding and Training
Page 31 GAO-18-118 Large Bank Supervision

consistent and to develop training programs to help ensure that managers 

develop core skills to manage and lead employees. Board officials also 

said that they are in the process of strengthening their examiner 

commissioning and training program by developing a curriculum 

specifically tailored to the supervision of large financial institutions, 

including those in the LISCC portfolio. This change can potentially help to 

mitigate threats to independence by reducing potential information 

asymmetries by ensuring that examiners are familiar with the practices of 

large firms as well as Federal Reserve supervisory policies.52 Two 

examiners we spoke with in a focus group with FRB Boston and FRB San 

Francisco noted that there was a new large bank commissioning track 

available in the training program.

Communication between Reserve Bank examination teams and the 

Board and additional layers of review for examinations can aid in reducing 

the likelihood of regulatory capture and mitigating threats to supervisory 

independence by increasing transparency and accountability.53 The 

Federal Reserve designed LISCC to help ensure that diverse views and 

perspectives are considered in making important decisions about the 

supervision of systemically important firms. According to Board staff we 

spoke with, the Vetting Committee vets the presentations made by the 

dedicated supervisory and horizontal teams and typically invites the entire 

OC to participate. The OC makes the decisions or in certain cases 

recommendations to the Board about issues discussed during these 

meetings, including language used in the communication of findings to 

the firm as well as ultimate institution ratings.54 Internal reviews found 

variations in the four Reserve Banks’ mechanisms for staff to 

communicate their views to Board officials. In addition, there was 

variation in the extent to which staff were aware of these communication 

 52Federal Reserve guidance states that management should use resources to conduct 

quality supervisory activities and implement a staff development program that promotes 

and maintains the professional proficiency of staff. The Federal Reserve is in the process 

of developing an examiner commissioning program for supervisors of large financial 

institutions. Three courses have been completed and are available to students and the 

remaining courses are under development and, based on current projections, will come 

on-line over the remainder of 2017 and through June of 2018.

53See appendix II for more information.

54According to Board Officials, the Vetting Committee receives presentation materials 

from the on-site teams about 2 weeks prior to the formal vetting sessions. The on-site 

team leader or other key staff present their recommendation for ratings. The OC provides 

a memorandum following a question-and-answer session that notes requested changes, 

recommendations, and any editorial comments for the ratings letter to be given to the firm.

Communication between 

Reserve Banks and the Board 

of Governors
Page 32 GAO-18-118 Large Bank Supervision

mechanisms. The Board’s LISCC review found that staff at FRB Boston 

and FRB Richmond were not aware of mechanisms to communicate with 

the OC. The 2016 OIG review concluded broadly that although Federal 

Reserve decision makers generally obtained the information they needed, 

none of the four LISCC Reserve Banks had a formal mechanism for 

examiners to report a divergent view. Furthermore, employees the OIG 

interviewed expressed concerns about whether channels would truly be 

independent of management or if any action would be taken in response 

to concerns they raised.

In response to the OIG’s findings, the Federal Reserve has taken or 

planned a number of steps, including the development of an independent 

channel at each Reserve Bank and within the Board’s Division of 

Supervision and Regulation and Division of Consumer and Community 

Affairs, which is outside of the normal chain of command for employees to 

voice supervisory concerns or disagreements. If employees believe there 

is evidence of wrongdoing, the OIG has a hotline and offers information 

on whistleblower protections, and some of the Reserve Banks, such as 

FRB Boston and FRBNY, have additional resources and training for staff 

to report suspected fraud, waste, or mismanagement of supervised 

institutions. In addition, we found that the OC now requires dedicated 

supervisory teams to include a slide in their annual assessment 

presentations that highlights areas of disagreement or divergent views for 

the LISCC Vetting Committee and OC to consider. Examiners we 

interviewed at FRBNY told us the teams documented divergent views for 

the annual assessment presentations, and two examiners told us the 

divergent-views slide was a helpful tool to communicate these views to 

the OC. Officials at the OC stated that dedicated supervisory teams may 

reach out to the OC after receiving written follow-up to vetting sessions 

before the OC finalizes the letter of findings to be delivered to the firm. 

However, officials told us that ultimately the OC has ownership of the 

messaging and rating and can accept or edit any proposed changes 

made by the dedicated supervisory team.

Several supervisory staff members we interviewed at the four LISCC 

Reserve Banks stated that they participated in OC-initiated horizontal 

examinations but that their actual collaboration with the OC varied. In 

particular, our interviews indicated that of the staff who participated in 

horizontal examinations, few had participated in the vetting of 

examination findings at the OC or Vetting Committee. According to Board 

officials, the Vetting Committee reviews and vets findings from horizontal 

examinations that occur outside the CCAR, CLAR, and SRP programs. 

The results of all horizontal examinations are incorporated into each firms’
Page 33 GAO-18-118 Large Bank Supervision

annual assessment. For horizontal examinations, the officials said that 

dedicated team CPCs or SSOs are invited to these vetting sessions, 

although management would have generally been working with the 

examination teams throughout the process.

In response to internal review recommendations, the four individual 

Reserve Banks have taken steps to implement LISCC policies to help 

reduce the likelihood of regulatory capture and mitigate threats to 

independence; however, we found that weaknesses in some internal 

controls—in particular with respect to guidance and monitoring 

mechanisms—limit assurance that these policies will be implemented 

consistently and effectively across the LISCC program. Internal reviews 

by the LISCC OC and the OIG, as well as our interviews with LISCC staff, 

show that implementation of LISCC policies has been inconsistent across 

the Reserve Banks. To some extent, this inconsistency may be related to 

the structure of the Federal Reserve; specifically, all 12 Reserve Banks 

operate semi-independently from one another, which allows for 

differences in the effectiveness of the Reserve Banks’ implementation of 

supervisory policies and procedures. However, under the LISCC 

program, the four Reserve Banks have the same program objectives in 

their supervision of the largest financial institutions, and the Board’s 

LISCC review notes the importance of ensuring that LISCC supervision 

has consistent and accurate outcomes across the program. Areas where 

we noted weaknesses include the following:

Program guidance. The Board of Governors does not have programwide guidance that documents how the Reserve Banks are to implement 

LISCC policies. The Board has issued broad guidance that outlines the 

objectives of the LISCC program and describes the program’s overall 

governance structure, but this guidance does not specify how Reserve 

Banks are to implement specific LISCC policies. For example, each of the 

four Reserve Banks has its own vetting guidelines. The Board has also 

issued guidance on supervising large financial institutions, but this 

guidance does not address specific LISCC features, such as the 

documentation requirements for the vetting process and horizontal 

examinations. For example, reviews indicate that FRBNY has had issues 

with insufficient documentation of vetting sessions, whereas FRB San 

Francisco’s documentation practices have been more effective.

According to a public supervisory letter from the Board of Governors to 

the Reserve Banks in 2012, the Board is taking a multistage approach to 

implementing the supervisory framework that includes the LISCC 

Weaknesses in Some

Internal Controls Limit 

Assurance That LISCC 

Policies Are Implemented 

Effectively
Page 34 GAO-18-118 Large Bank Supervision

program, and the letter states that the Board plans to develop additional 

supervisory and operational guidance.

55 Board officials we spoke with 

stated that the OC is in the process of drafting a program manual that is 

to describe all elements of the LISCC program, including minimum 

operating and documentation standards for supervisory activities to help 

ensure consistency across dedicated supervisory teams. Additionally, 

Federal Reserve officials have begun the process of formalizing 

additional expectations for both procedural and substantive elements of 

LISCC and that these enhancements are to take effect in 2018. Officials 

also said they are strengthening their examiner commissioning and 

training program to develop a curriculum tailored to the supervision of 

large institutions and overseeing the development of new training material 

to improve consistency of implementation of policies. Officials told us that 

three courses in the Large Financial Institutions Examiner Commissioning 

Program have been completed and are available to staff as of July 2017: 

Principles of Large Financial Institutions Supervision; Capital; and 

Liquidity. Remaining courses are under development and, based on 

current projections, are to come online over the remainder of 2017 and 

through June 2018. These remaining courses are to address recovery; 

governance and controls; parent and nonbank entities; resolution; and a 

capstone course. However, until the Board issues a program manual with 

specific guidance on the implementation of LISCC policies, it will continue 

instead to rely on dedicated supervisory teams’ execution of the program.

Federal internal control standards state that management should develop 

policies to guide how they implement their internal controls.56 Key 

attributes of effective implementation of this principle include documenting 

responsibilities through policies and communicating policies and 

procedures to personnel. In part due to the structure of the Federal 

Reserve system, the four Reserve Banks each have their own guidelines. 

However, without program-wide guidance from the Board on 

implementing LISCC policies, the Board may not have reasonable 

assurance that the Reserve Banks are effectively implementing policies 

that can help to mitigate threats to independence. Effective 

implementation of policies on documentation and vetting, in particular, 

 55The Federal Reserve announced the implementation of the Consolidated Supervision 

Framework for Large Financial Institutions in a multistage approach in public supervisory 

letter SR 12-17/ CA 12-14 on December 17, 2012.

56GAO-14-704G.
Page 35 GAO-18-118 Large Bank Supervision

can help mitigate threats to independence by helping to ensure that 

conclusions are transparent and are based on sound evidence.

Program monitoring. While internal reviews have been effective in 

identifying some issues regarding the implementation of the LISCC 

program, the Federal Reserve does not currently have a regular 

mechanism to review how LISCC staff are implementing LISCC policies 

and achieving objectives. Quality assurance and Board operations 

reviews focus on Reserve Banks’ general supervision practices, but they 

do not systematically address issues related to the LISCC program in 

particular. The Board’s LISCC review and the OIG review both examined 

the LISCC program across Reserve Banks, but the Board has not 

replicated these efforts. Federal internal control standards state that 

management should establish and operate ongoing activities to monitor 

the internal control system and evaluate the results.57 Federal Reserve 

officials told us and the documentation we reviewed outlined the process 

the Federal Reserve is undertaking to develop a LISCC oversight 

framework that will encompass all Board and Reserve Bank LISCC 

activities, including LISCC governance processes and the conduct of 

supervisory programs such as CCAR, and provide for a comprehensive 

assessment of program effectiveness. The officials said that this 

framework should be completed by the end of 2017 and that 

implementation will begin in 2018. However, until the Board has in place a 

mechanism for monitoring the LISCC program and regularly assessing 

the Reserve Banks’ implementation of LISCC, the Board of Governors 

may not have reasonable assurance that policies are being implemented 

appropriately and effectively.

 57GAO-14-704G.
Page 36 GAO-18-118 Large Bank Supervision

The Board of Governors and the four Reserve Banks that participate in 

the LISCC program have ethics programs intended to help ensure that 

individual LISCC program employees in various roles carry out their work 

in a way that benefits the public interest, not their private gain.58 These 

programs implement federal statutes and regulations and Federal 

Reserve policies that are designed to prevent employee conflicts of 

interest and the appearance of conflicts of interest and are not focused on 

preventing or mitigating regulatory capture, according to OGE and Board 

ethics officials.59 However, Federal Reserve officials said that these 

programs are another way in which they address risks related to 

regulatory capture and threats to independence. We found that the Board 

and four Reserve Banks maintain policies and procedures through 

multiple monitoring programs to oversee instances of conflicts of interest 

for various LISCC employees but limitations exist in the collection of data, 

including systematically maintaining data on the future employers of 

departing employees. We also found that some ethics program 

evaluations have occurred since 2011, but the Board has not carried out 

a self-assessment of its ethics programs, including procedures across the 

Board and four Reserve Banks, that apply to LISCC program employees.

The Federal Reserve implements ethics policies for LISCC employees 

through multiple procedures and programs that the Reserve Banks, the 

Board Division of Supervision and Regulation, and the Board Legal 

Division administer. The ethics programs include procedures to comply 

with federal statutory and regulatory requirements on preventing specified 

conflicts of interest.60 Supervisory employees—including examination 

 58Many ethics and conflict-of-interest policies are not specific to LISCC staff and may 

apply to other Federal Reserve employees. For the purposes of this report, we focused on 

policies that apply to LISCC program participants, including those that are not LISCCspecific.

59While conflict-of-interest and ethics policies can mitigate some threats that can lead to 

regulatory capture, they have limits in addressing less tangible but significant threats, such 

as those that arise from shared cultural values between employees of the regulating 

agency and the regulated institution. 

60This report focuses on concerns related to the criminal conflict-of-interest restrictions for 

current employees in 18 U.S.C. § 208, the post-employment restrictions in 18 U.S.C. § 

207, and the existing procedures for promoting compliance with those restrictions. We 

also examined Federal Reserve controls related to hiring, staffing, decision making, and 

employee exit procedures for supervisory personnel and officers. Our work does not 

address other federal ethics laws, such as those related to bribery and those involving the

representation of foreign entities.

Implementation of 

Policies to Identify 

and Mitigate Conflicts 

of Interest Is 

Hampered By Lack of 

Data and Program 

Evaluations

The Federal Reserve 

Implements Ethics Policies 

for LISCC Employees 

through Multiple Programs
Page 37 GAO-18-118 Large Bank Supervision

staff—are subject to specific policies to identify and mitigate conflicts of 

interest and are penalized for violations. These programs are among the 

strategies the Board and the four Reserve Banks told us they use to 

mitigate the risks of regulatory capture by focusing on individual 

employee behavior. Studies note that behavioral aspects of regulatory 

capture—such as long-term career ambitions, identification with the 

banking sector or individuals at the bank, and other threats that are not 

directly observable to ethics officials or even to the individual employee—

are difficult to mitigate at the individual level. In addition, OGE and 

Federal Reserve ethics officials noted that federal statutes and 

regulations on conflicts of interest—and federal ethics programs—are not 

explicitly intended to prevent regulatory capture. Nevertheless, policies 

and programs that monitor and restrict observable conflicts of interest are 

among the tools organizations can use to help mitigate the risks of 

regulatory capture among individual employees.

61

Three Federal Reserve components—the Reserve Banks, the Division of 

Supervision and Regulation, and the Board’s Legal Division—each 

maintain separate conflict-of-interest monitoring programs to oversee 

conflicts of interest for different types of LISCC employees.

• Reserve Banks. All Reserve Bank supervisory employees who 

conduct examinations—including LISCC program examinations—are 

subject to common ethics policies and procedures that their specific 

Reserve Bank ethics offices administer and that the Board’s Ethics 

Office and Division of Supervision and Regulation oversee.62

• Division of Supervision and Regulation. Within the Board of 

Governors, the Division of Supervision and Regulation oversees the 

Federal Reserve Banks’ conflict-of-interest and examiner 

commissioning and credentialing programs. This oversight role 

includes evaluating the execution of the Reserve Banks’ conflicts of 

interest and examiner credentialing program, as well as ensuring 

conflict-of-interest reviews for all Federal Reserve staff who 

participate in examinations and inspections are conducted, either by 

designated Reserve Bank or Board staff. These conflict reviews 

 61As noted previously in this report, some steps, such as training on the supervisory 

mindset or reminders of employees’ responsibilities, can be taken to address these 

unobservable issues.

62The Board’s Ethics Office plays a role with respect to administering certain requirements 

of the Board’s Federal Reserve Administrative Manual.

LISCC Ethics Programs and 

Procedures
Page 38 GAO-18-118 Large Bank Supervision

include LISCC staff who participate in single-firm examinations and 

inspections, as well as horizontal examinations.

• Legal Division. The Board of Governors ethics office within the Legal 

Division implements the federal ethics program for all Board 

employees, including employees of the Board’s Division of 

Supervision and Regulation. These Board employees include 

members of the OC and other staff who participate in the LISCC 

program.

Figure 5 illustrates the Federal Reserve’s ethics programs as they apply 

to LISCC employees.

Figure 5: Federal Reserve Ethics Programs and Procedures That Apply to LISCC Employees

a

A horizontal examination is a comparison of selected aspects of risk management or business 

practices at several institutions, completed over a defined time frame, in order to provide the firms 

with critical assessments for management action.

Federal Reserve employees at all Reserve Banks and the Board of 

Governors are subject to ethics policies that implement federal conflict-ofinterest laws and regulations, as well as other policies that the Board and 

Reserve Banks have developed to apply to employees with specific roles 

and responsibilities. For example, Federal Reserve employees with 

responsibilities for bank supervision—both staff who carry out 

examinations and those involved in nonexamination supervisory 

Ethics Policies That Apply to 

LISCC Employees
Page 39 GAO-18-118 Large Bank Supervision

matters—have some different conflict-of-interest requirements than other 

Federal Reserve staff.63 These policies are among the strategies that 

officials at the Board and the four LISCC Reserve Banks told us they use 

to mitigate the risks of regulatory capture.

According to Board and Reserve Bank ethics officials, the Board develops 

policies on ethics and conflicts of interest for supervisory employees in 

coordination with the Division of Supervision and the Reserve Banks. The 

Board’s Designated Agency Ethics Official, the chief ethics officers and 

other ethics staff of the Reserve Banks, and staff at the Division of 

Supervision and Regulation with ethics responsibilities hold quarterly 

teleconferences to discuss common issues. According to Federal 

Reserve officials, the Federal Reserve’s Conflicts Community of Practice 

holds bimonthly calls to discuss conflict-of-interest matters. Policies are 

included in the principal ethics policy documents—the Federal Reserve 

Administrative Manual and common Reserve Bank codes of conduct—

and the Board and Reserve Banks also issue supplemental guidance and 

policies as needed.

Key policies that apply to Federal Reserve supervisory employees include 

a general conflict-of-interest standard, investment and borrowing 

prohibitions, and restrictions on gifts, among others (see app. III for more 

details).

General conflict-of-interest standard. Federal Reserve employees are 

subject to the key federal criminal conflict-of-interest statute that prohibits 

a federal or Board or Reserve Bank employee, among others, from 

participating personally and substantially in an official capacity in a 

particular matter in which, to the employee’s knowledge, the employee or 

the employee’s spouse, general partner, or minor child, among others, 

has a financial interest, if the particular matter will have a direct and 

predictable effect on that interest.64 Federal employees are also 

prohibited from participating in matters that would directly affect an 

organization with which the employee is negotiating for or has any 

arrangement concerning prospective employment.65 Participation in a 

 63Some other types of Federal Reserve employees, such as staff with Federal Open 

Market Committee information access, and employees in FRBNY’s Markets Group, are 

subject to separate requirements as well. 

64See 18 U.S.C. § 208(a); 5 C.F.R. § 2635.402(a).

65See 18 U.S.C. § 208(a); 5 C.F.R. § 2635.402(b)(2)(v).
Page 40 GAO-18-118 Large Bank Supervision

particular matter includes matters that involve deliberation, decision, or

action that is focused upon the interests of specific persons, or a discrete 

and identifiable class of persons.66 Personal and substantial participation 

may occur when, for example, an employee participates through decision, 

approval, disapproval, recommendation, investigation or the rendering of 

advice in a particular matter.67

Investment prohibitions. Federal Reserve supplemental regulations and 

the Reserve Banks’ common code of conduct specify financial investment 

prohibitions for Board and Reserve Bank employees, while some 

supervisory employees have additional prohibitions, including a 

prohibition on seeking credit from institutions involved in the supervisory 

employee’s work assignments.68 Generally, all Federal Reserve 

employees are subject to prohibitions on investing in depository 

institutions.69 The prohibitions also apply to an employee’s spouse or 

minor child. For example, employees and their immediate family 

members generally are prohibited from holding stocks in banking 

institutions or investing in financial instruments such as mutual funds that 

have a policy of concentrating their investment in the financial services 

industry.70 Upon hiring, under Federal Reserve policy, new employees 

must divest these holdings within 90 days.71 In some cases, as will be 

discussed later in this report, employees may be permitted to retain 

otherwise prohibited financial interests. In such cases, they are recused 

(disqualified) from working on matters relating to the institution with which 

they have a conflicting interest.

Borrowing prohibitions and restrictions. Federal statute prohibits 

financial institution regulatory agency examiners from accepting loans or 

 665 C.F.R. § 2635.402(b)(3).

675 C.F.R. § 2635.402(b)(4). 

68See 5 C.F.R. § 6801.106(a).

69See 5 C.F.R. § 6801.103(a)(1); Reserve Banks’ common code of conduct § 5.3.

70See 5 C.F.R. § 6801.103. 

71Federal Reserve Administrative Manual (FRAM) § 5-035 (internal policy applicable to all 

supervision & regulation employees incorporating 90-day divestiture policy for examiners 

in FRAM § 5-041); Federal Reserve Board AD letter 14-11 / CA Admin letter 14-7 (Apr. 

11, 2014, internal guidance restating 90-day divestiture policy).
Page 41 GAO-18-118 Large Bank Supervision

gratuities from a financial institution the agency oversees.72 Under this 

statute, and related Federal Reserve policies, examiners (including 

assistant examiners) are prohibited from directly or indirectly borrowing 

from an institution for which the Federal Reserve is the primary supervisor 

(other than through certain credit cards or loans secured by their primary 

residence).73 Nonexaminers may be subject to less restrictive recusal 

requirements and may, depending on the type of borrowing, be allowed to 

work on matters concerning institutions with which they have a 

preexisting loan. As a result, full-time examiners have more stringent 

borrowing restrictions than members of the LISCC OC. 

Restrictions on accepting gifts. Federal Reserve Board and Reserve 

Bank employees who participate in the LISCC program are subject to 

federal laws and regulations and the Reserve Banks’ common code of 

conduct that prohibit federal employees from accepting gifts offered 

because of their official positions or from “prohibited sources,” a term 

which includes regulated entities. Federal ethics regulations applicable to 

Board of Governors employees and the common Reserve Bank code of 

conduct provide some exceptions under which nonexaminer employees 

may accept gifts from those firms. Such exceptions include, for example, 

gifts worth $20 or less and gifts given on the basis of a personal 

relationship. However, according to the Federal Reserve Administrative 

 72See 18 U.S.C. § 213(a). In addition, financial institutions may not make any loans or 

grant any gratuities to examiners who examine or have the authority to examine the 

institution or its branches, among other things. See 18 U.S.C. § 212(a).

73Federal criminal law prohibits an examiner from accepting a loan or gratuity from a 

financial institution the examiner examines (see 18 U.S.C. § 213(a)); Federal Reserve 

policy broadened that restriction to include all financial institutions for which it is the 

primary supervisor. The Federal Reserve is the primary supervisor for state member 

banks; bank holding companies; nonbank subsidiaries of bank holding companies that are 

not thrifts or functionally regulated subsidiaries; nonbank financial companies designated 

by the Financial Stability Oversight Council for enhanced supervision; Edge Act and 

agreement corporations; and U.S. branches and agencies, representative offices, and 

nonbank subsidiaries of foreign banks that are not functionally regulated subsidiaries. The 

Federal Reserve is not the primary supervisor for national banks, nonmember banks, 

limited special-purpose banks or nonbank banks authorized under section 4 of the Bank 

Holding Company Act (provided they are not state member banks), thrift institutions, and 

functionally regulated subsidiaries of bank holding companies. While the Federal Reserve 

may have umbrella supervisory authority over such organizations (i.e., when they are 

owned by bank holding companies), those institutions’ primary supervisors are other 

federal or state regulatory agencies. Federal Reserve examiners may borrow from 

financial institutions for which the Federal Reserve is not the primary supervisor but are 

recused from examining the institution and, depending on the type of borrowing, may also 

be recused from examining all affiliates of the lender.
Page 42 GAO-18-118 Large Bank Supervision

Manual and the Reserve Bank code of conduct, a Federal Reserve bank 

examiner may not accept a $15 sweatshirt from a bank that he or she 

examines, even where the common Reserve Bank code of conduct would 

permit other bank personnel to accept such a gift.74

Federal laws and regulations and Federal Reserve policies include 

exemptions to some of the prohibitions and restrictions previously noted 

and federal law permits agencies to waive some conflicts. For example, 

the key criminal conflict-of-interest statute allows for waivers for individual 

employees if the employee’s conflict is not so substantial as to be 

deemed likely to affect the integrity of the services which the government 

may expect from such officer or employee.75 OGE regulations also 

exempt certain investments from restrictions, including investments held 

through a diversified mutual fund or unit investment trust, an interest in 

any Federal Reserve retirement or thrift plan, federal government 

securities with maturities of 1 year or less, and U.S. Savings bonds.76

In addition, the Federal Reserve allows some exceptions to investment, 

borrowing, or gift restrictions. For example, Federal Reserve employees 

are not subject to any restrictions for holding credit cards or mortgages on 

their primary residence, although under Federal Reserve policy, 

examiners may not examine the legal entity that owns their primary 

residence’s mortgage. In addition, an employee’s immediate family 

member may be allowed to retain an otherwise prohibited financial 

interest, such as stock in a depository institution, if the interest was 

acquired before marriage or before the employee began work at the 

Federal Reserve and if the employee can be recused from working on 

matters related to the firm. Ethics officers and supervisors generally must 

review and approve such exceptions.

The Federal Reserve requires examiners whose conflicts qualify for an 

exemption from conflict-of-interest policies to be recused from working on 

the institution with which they have a conflict. Examiners generally face 

more restrictive recusal requirements than supervisory employees who do 

 74Employees may accept small items of minimal value, such as pens. 

75See 18 U.S.C. § 208(b)(1).

76See 5 C.F.R. pt. 2640, subpt. B. The Director of the Office of Government Ethics may, 

by regulation, exempt from the general prohibition financial interests that are too remote or 

too inconsequential to affect the integrity of the services of the employees to which the 

prohibition applies. 18 U.S.C. § 208(b)(2). 

Exemptions
Page 43 GAO-18-118 Large Bank Supervision

not work on examinations and other Federal Reserve employees who do 

not participate in supervisory matters. Federal Reserve employees who 

are not examiners may be permitted to work on matters related to 

institutions with which they have an interest when the interest is de 

minimis, if a regulatory exemption or exception within the Reserve Banks’

common code of conduct applies, or if a waiver has been granted. 

Generally, however, examiners and nonexaminers are recused where 

they have conflicting interests. See appendix III for more details about 

Federal Reserve conflict-of-interest investment and borrowing prohibitions 

for examiners and other employees and related recusal requirements.

Federal Reserve employees who violate any of these statutes, 

regulations, and policies are subject to penalties under federal law or 

regulation, or Federal Reserve policy, depending on the violation. These 

penalties include prison, fines, termination, and administrative sanctions. 

For example, a senior examiner who violates the 1-year restriction on 

working for a firm he or she supervised is subject to removal from the 

prohibited position, as well as an industry-wide employment prohibition for 

up to 5 years, a civil penalty of up to $250,000, or both.77

The Board of Governors and Reserve Banks monitor and address 

violations of federal statutes, regulations, Federal Reserve ethics policies, 

and the Reserve Banks’ common code of conduct. OGE officials told us 

that it is important to track and address violations, not only to help ensure 

that staff comply with statutory and agency requirements, but also 

because identifying violations is a key indicator that an ethics program is 

effective in uncovering problems. From 2011 through 2015, FRBNY 

recorded 42 violations among LISCC personnel, while two other Reserve 

Banks recorded no violations, and one recorded a violation of a nonLISCC program examiner. According to FRBNY ethics officials, the higher 

number of violations reported are due in part to the Reserve Bank’s 

automated Personal Trading Compliance Program, which enables the 

ethics office to monitor employees’ brokerage accounts directly.78 In 

addition, officials said, the Reserve Bank’s training and education on 

 77See 12 U.S.C. § 1820(k).

78FRBNY’s automated Personal Trading Compliance Program requires employees to 

disclose their brokerage accounts and to pre-clear transactions in those accounts. 

According to FRBNY, pre-clearance gives employees assurance that their trades conform 

to the bank’s investment rules and reminds them not to trade on nonpublic information. 

The Personal Trading Compliance Program is similar to trading compliance systems found 

at investment banks, broker dealers, and institutions supervised by the Federal Reserve.

Penalties
Page 44 GAO-18-118 Large Bank Supervision

ethical values encourages employees to self-report violations. Another 

reason FRBNY may have recorded more violations among LISCC 

program employees than other Reserve Banks is that the Reserve Bank 

employs the majority of the examiners who work on the LISCC program. 

The Board of Governors also reported no violations of Division of 

Supervision and Regulation staff from 2011 through 2016.

Of the 42 violations by LISCC staff at FRBNY from 2011 through 2015, 

the Reserve Bank’s Personal Trading Compliance Program identified 34 

violations. The remaining 8 violations were identified principally through 

employee self-disclosure to the Ethics Office, including the Ethics Office’s 

review of employee financial disclosures. In all cases, employees were 

required to divest their prohibited holdings. Most of the violations were 

one-time violations, but 6 employees had more than one violation. Of 

these 6 employees, 1 was terminated, 1 received an official warning, 2 

were told to make sure their financial advisors were aware of the Federal 

Reserve’s rules, 1 was told to switch financial advisors because of the 

advisor’s repeated violations of Federal Reserve rules, and 1 left the bank 

voluntarily.

Federal statutes and regulations and Federal Reserve policies permit 

supervisory employees to receive temporary waivers from certain 

prohibitions under extenuating circumstances.79 The Board of Governors

Designated Agency Ethics Official, in consultation with the relevant 

division head, may issue waivers for Board employees for certain 

prohibitions, including financial-interest or borrowing prohibitions.

80

Federal Reserve officials clarified that these waivers only allow an 

individual to maintain an impermissible holding or investment; they do not 

waive restrictions. Examples of conflicts that may be eligible for waivers 

include situations in which an employee holds restricted stock or stock 

options as part of his or her compensation from a prior financial industry 

 79See, e.g., 18 U.S.C. § 208(b). The restrictions regarding personal financial interest do 

not apply if the employee advises the appointing government official about the particular 

matter, makes a full disclosure of the financial interest, and receives in advance a written 

determination by such official that the interest is not so substantial as to be deemed likely 

to affect the integrity of the services which the government may expect from the 

employee.

80See 5 C.F.R. § 6801.103(c) and § 6801.106(d).

Employee Waivers from 

Certain Prohibitions
Page 45 GAO-18-118 Large Bank Supervision

employer that cannot be divested until a future date without forfeiting the 

investment.81

Any waiver granted to an examiner must be in writing, consider whether 

the conflict would interfere with the examiner’s duties, and take into 

account the potential appearance of a conflict of interest. In the case of a 

financial interest waiver because of a restricted stock holding, the 

employee must be recused from working on matters related to the 

financial institution in which he or she holds the restricted stock, including 

horizontal matters related to the institution. Reserve Banks also may 

issue waivers from recusal requirements—for example, in cases in which 

an employee’s immediate family member works at a supervised firm. In 

addition, examiners and other division staff with waivers may not be 

eligible to participate on horizontal examinations, depending on the 

circumstances of the waiver.82

The Federal Reserve amended its waiver policy in 2014 to eliminate

permanent financial interest waivers for supervisory employees to better 

meet the Federal Reserve’s goal of preventing both actual and apparent 

conflicts of interest, and in turn help mitigate risks of regulatory capture. 

Prior to that policy change, Federal Reserve supervisory staff could, for 

example, receive a waiver allowing them to hold prohibited investments in 

a financial firm indefinitely as long as they were recused from working on 

matters affecting that firm. Since 2014, Federal Reserve staff have been 

required to divest these prohibited holdings within a fixed time period.83

We received 62 waivers granted from 2011 through December 2015 (the 

most recent available at the time of our review) for LISCC employees of 

 81Examples include restricted stock and investments that have not vested, have no market 

value, are under litigation, are held jointly with other family members, or are in trusts for 

dependent children or other beneficiaries. Restricted stock are securities sold by an issuer 

to an individual that are subject to a holding period before the individual can sell the 

securities to the public.

82When Federal Reserve employees from outside of the Division of Supervision and 

Regulation are assigned to participate in supervision and regulation matters, they also 

become subject to these same waiver and recusal requirements that apply to examiners 

or supervisory personnel.

83Staff who held permanent financial waivers at the time of the policy change were 

required to divest their holdings within 2 years and provide proof of divestment.
Page 46 GAO-18-118 Large Bank Supervision

the four Reserve Banks.84 Of the 62 waivers, 56 waivers focused on 

federal financial conflict-of-interest prohibitions, 5 waivers focused on a 

relative’s employment with a supervised firm, and 1 related to prior 

employment.

Of the 62 waivers we reviewed, 10 were granted in 2014 and 2015, after 

the elimination of permanent waivers related to financial interests. We 

found that 6 of the 10 waivers were temporary waivers related to 

restricted stock. In these cases, the employee was recused from working 

on matters related to the firm with which the employee had the conflict. In 

2 cases, a waiver was granted for the employee’s child’s investments; in 

1 case, an employee received a waiver for a pre-existing pension; and in 

another case, a conditional waiver was granted permitting an employee to 

work on matters affecting an institution that employed the employee’s 

spouse. Generally, the waivers reflected OGE regulations and Federal 

Reserve policy. Specifically, the waivers stated that they were based on 

OGE guidelines; were reviewed by the Reserve Bank’s ethics office and 

senior management at the Reserve Bank or the Board of Governors; and 

were made in consultation with the employee’s supervisor.

In addition to the 62 waivers issued for Reserve Bank employees, we also 

requested waivers issued by the Board of Governors for the 13 OC 

members who are Board employees (the remaining OC members are 

Reserve Bank employees). According to the Board, no waivers were 

issued during the period of our review, 2011–2016.85

 84For example, OGE regulations state that waivers may take into account the nature and 

importance of the employee’s role in a matter, including the extent to which the employee 

is called upon to exercise discretion in the matter; the matter’s sensitivity; difficulty of 

reassigning the matter to another employee; and possible adjustments that may be made 

in the employee’s duties that would reduce or eliminate the likelihood that the integrity of 

the employee’s services would be questioned by a reasonable person. See 5 C.F.R. § 

2635.502(d). A few waivers granted at FRBNY documented voluntary divestitures and 

waivers of conflicts previously granted. However, no waivers of this type had been issued 

since the 2014 policy change.

85The Board reported 1 waiver that was dated from 2008—prior to the start of the LISCC 

program—for conflicts that the Board documented were resolved by 2012. 
Page 47 GAO-18-118 Large Bank Supervision

Our review of the processes used to review conflicts of interest for LISCC 

program participants found that the Reserve Banks, Division of 

Supervision and Regulation, and Board of Governors generally collect the 

information necessary to complete these reviews. However, we also 

found that they collect and store this information inconsistently because of 

the different requirements for different types of LISCC program 

participants. These differences may hinder the efficiency and 

effectiveness with which the Board uses the data to oversee its conflictof-interest review processes as they apply to LISCC employees.

All Reserve Banks are responsible for implementing ethics policies and 

procedures for their supervisory employees, including those who 

participate in the LISCC program. As of July 2016, the LISCC program 

included approximately 469 full-time examiners at the four LISCC 

Reserve Banks. Generally, Reserve Bank ethics officials follow a 

common process for monitoring conflicts of interest throughout a 

supervisory employee’s tenure (see fig. 6).

Figure 6: Conflict-of-Interest Disclosure and Review Process for Reserve Bank Examiners

a

The Review team is a group of Division of Supervision and Regulation and Reserve Bank ethics staff 

who review pre-hire questionnaires.

b

Senior examiners include those who served as central point of contact or lead on a single 

supervisory team.

LISCC Employee Conflictof-Interest Review 

Information Is Collected in 

a Manner That Does Not 

Facilitate the Review 

Process

Conflict-of-Interest Reviews for 

Full-time Examination Staff at 

Reserve Banks
Page 48 GAO-18-118 Large Bank Supervision

Candidates for hire fill out a pre-hire questionnaire that includes questions 

about financial and other potential conflicts of interest. A team of 

reviewers, made up of division staff and rotating ethics staff from the 

Reserve Banks, reviews these questionnaires and develops an action 

plan that it returns to relevant Reserve Bank staff. This plan details any 

actions the candidate would need to take to resolve conflicts upon hiring. 

Once hired, the candidate must fill out a full disclosure form, which the 

relevant Reserve Bank ethics staff review, generally within the first week 

of the candidate’s hiring.

A Federal Reserve electronic data system—known as the Conflict-ofInterest (COFI) application—stores financial disclosure and other 

information about potential or actual conflicts, such as employment of a 

spouse at a supervised firm, for examiners at all Reserve Banks, 

including the four LISCC Banks.86 This COFI application is linked with the 

Division of Supervision and Regulation’s electronic scheduling software 

system, which manages staff assignments to examinations.87 When an 

employee is assigned to an examination that involves a firm with which 

the employee has a conflict, the conflict is flagged and the schedulers are 

alerted.88 This alert system prompts discussion regarding the conflict with 

the employee, the employee’s manager, and ethics staff, as appropriate, 

and may result in the employee being removed from the examination, 

according to division officials.

Before performing any examination or inspection work, newly hired 

Federal Reserve employees must obtain a credential from the Board of 

Governors. This credential serves in part as an internal control to help 

ensure that examination staff are free of conflicts of interest. Both the 

 86The COFI application enables employees to update their financial disclosure and other 

potential conflict-of-interest information throughout the year as needed and enables ethics 

officials and conflicts staff to review this information.

87A designated Federal Reserve staff member is responsible for entering examination 

assignments into this software application, which is used to schedule examinations.

88As part of its role overseeing the Federal Reserve’s general supervision program across 

the 12 Reserve Banks, the Board’s Division of Supervision and Regulation has 

implemented common systems to help Reserve Banks collect information for, and 

monitor, conflicts for all supervisory staff.
Page 49 GAO-18-118 Large Bank Supervision

Reserve Banks and the Board review employee disclosures and then, if 

appropriate, the Board issues an examiner credential.89

During an employee’s tenure, the employee is responsible for notifying 

ethics officials of potential conflicts and for updating the COFI application 

throughout the year with any changes. The employee must attest 

annually to the accuracy of the disclosure information in the COFI 

application. Ethics office staff at each Reserve Bank must review these 

attestations and follow up with employees to resolve any issues. When an 

employee is assigned to a new firm for examination, the Federal 

Reserve’s scheduling software alerts schedulers about any conflicts 

related to the firm.

We reviewed COFI application data for examiners who participated in the 

LISCC program from 2011 through July 2016 to assess the extent to 

which the application and data reflected the Federal Reserve’s policies. 

We found that the application maintains information in a format that 

allows ethics officials to monitor and address conflicts across Reserve 

Banks for full-time examination staff. The application also allows officials 

to aggregate and analyze data to assess ethics program effectiveness. 

These features demonstrate the internal control component of monitoring, 

which highlights the importance of embedding tools for the ongoing 

monitoring of controls and notes that automated tools can improve 

efficiency.90

We analyzed conflict data for 469 LISCC program employees in the four 

Reserve Banks by type of conflict from 2011 through July 2016 (see app. 

IV for more information). On average, employees had approximately two 

active conflict types from 2011 through July 2016. The most common 

types of conflicting interest were mortgages or insurance plans; conflicts 

 89While the existence of a conflict would not bar an employee from receiving a standard 

credential, the employee would be recused from participating in any matter related to the 

institution with which they had a conflict. In cases in which a newly hired examiner must 

divest certain financial holdings, the examiner has 90 days to do so. During that period, 

the Board grants the examiner a credential with an expiration date to help ensure the 

examiner resolves the conflict. In some cases, a newly hired examiner may hold restricted 

stock that cannot be divested until a specific date in the future. In these cases, the 

examiner receives a credential with a stated expiration date, which is only renewed after 

the date the stock is divested. The examiner is also provided with a waiver that permits 

the examiner to retain the stock temporarily, provided that the examiner is recused from 

working on the firm with which he or she has a conflict.

90GAO-14-704G.
Page 50 GAO-18-118 Large Bank Supervision

related to an employee or family member’s financial interests; and auto or 

student loans, business loans, or mortgages or lines of credit secured by 

nonprimary residences. To address such conflicts of interest, generally 

employees must divest such interests or be recused from matters 

affecting the firm in which they have the interests, depending on the 

policy requirements and ethics officials’ review.91

Horizontal examinations entail reviews of common functions across 

LISCC firms, and Federal Reserve employees assigned to horizontal 

examinations are generally assigned temporarily—as these examinations 

generally take less than a year—and have other responsibilities when not 

working on these examinations. Staff who participate in these 

examinations include Reserve Bank credentialed, full-time examiners; 

Board Division of Supervision and Regulation staff; and nonsupervisory 

Board employees from other divisions, such as Financial Stability and 

Legal.92 The division does not maintain a comprehensive roster of Board 

employees who are LISCC participants but provided us with aggregated 

data for Board staff who worked on the LISCC program. According to the 

data, out of 480 division employees, approximately 80 staff and managers 

worked full-time on the LISCC program in 2016, and 191 division staff 

worked part-time on horizontal examinations.93 In addition, approximately 

196 Board employees worked on LISCC matters.94

Nonsupervisory employees assigned to a horizontal examination must fill 

out a conflict-of-interest disclosure form different from the one completed 

 91As noted previously in this report, approximately 62 employees received waivers 

between 2011 and 2015 (most due to conflicting financial interests) although the Reserve 

Banks granted only 10 waivers in 2014–2015, after the Federal Reserve amended its 

waiver policy to eliminate permanent waivers for conflicts of financial interests.

92Supervisory employees at Reserve Banks who are full-time examiners on a dedicated 

supervisory team may be assigned to a horizontal examination. If so, they undergo a 

second conflict-of-interest review by Division of Supervision and Regulation staff before 

they are approved to work on the horizontal examination.

93We did not analyze data for nonsupervisory staff assigned to horizontal examinations 

because the scope of our review included full-time supervisory staff and officials in the 

LISCC program. In addition, LISCC program representatives said they did not maintain a 

roster of employees who worked on all horizontal examinations during the period of our 

review, 2011 through 2016, although they provided us with aggregated data on the 

number of staff, responsibilities, and estimates of proportion of staff time devoted to 

horizontal examinations.

94Board of Governors employees totaled 2,789 in 2016. 

Conflict-of-Interest Reviews for 

Staff Assigned to Horizontal 

Examinations
Page 51 GAO-18-118 Large Bank Supervision

by full-time examination staff, which division staff review.95 Some of these 

employees may not need credentials, but others may require temporary 

credentials to carry out horizontal examination work. Those who require 

credentials generally must meet the same conflict-of-interest standards as 

full-time examiners. Division staff told us that one 2016 horizontal 

examination—the CCAR examination—included approximately 120 

nonsupervisory Board staff without credentials out of a total of 900 staff 

assigned to that examination. According to division staff, the conflict-ofinterest disclosure form differs from the form full-time examiners fill out in 

the COFI application in that it focuses only on ensuring that 

nonsupervisory employees assigned to the horizontal examination are 

free of conflicts with the specific firms they will be examining.96 In 

contrast, the full-time examiner disclosure must include information about 

all financial firms with which examiners may have conflicts. Division staff 

members told us that the division stores these horizontal examination 

staff conflict-of-interest forms in a separate part of COFI because these 

employees are only assigned to horizontal examinations temporarily and 

are not subject to the annual attestation process that the COFI application 

is designed to facilitate.

The Board’s ethics program is led by an Assistant General Counsel in the 

Legal Division and is subject to OGE requirements and program 

guidance. As required by OGE regulations, the Board of Governors 

maintains a process for reviewing the conflicts of newly hired Board 

employees, training employees on ethics policies, and reviewing annual 

financial disclosures. The Board’s ethics program administers the OGErequired annual financial disclosure process and collects more than 1,200 

financial disclosure forms from Board of Governors employees, including 

Division of Supervision and Regulation employees. These division 

employees include members of the LISCC OC who file annual public 

financial disclosures and others who are required to file confidential 

financial disclosures. OGE requires senior federal executive branch 

employees who are required to file public financial disclosures to use 

 95For example, examiners and employees working on other supervisory matters may not 

seek credit from any of the particular institutions they are examining or otherwise 

supervising during the examination or matter and for 3 months following its conclusion. 

This policy includes any Federal Reserve employee assigned to a horizontal examination. 

96According to division staff, the Division of Supervision and Regulation also has controls 

in place to prevent CCAR examination staff members from gaining access to horizontal 

examination workpapers and data until after the conflict-of-interest review has been 

completed and all conflicts have been resolved.

Board of Governors Ethics 

Program
Page 52 GAO-18-118 Large Bank Supervision

OGE’s Integrity online filing system, and the Board of Governors ethics 

program uses Integrity in this way.97 OGE officials told us they also 

recommend that ethics programs with more than five employees required 

to file public disclosures have their own electronic systems to track 

financial disclosures, and the Board ethics program has such an 

electronic system. The tracking system does not store the disclosure 

information, however; information on these employees is stored 

separately from that of supervisory employees, in hard copy.

In addition to reviewing data from the COFI application for full-time 

examiners, we analyzed data on the annual financial disclosures filed by 

the 13 LISCC OC members employed at the Board of Governors from 

2013 through 2016.98 We found that one OC member had a mortgage on 

a rental property from a LISCC bank, but according to Board officials, 

because the OC member is not a full-time examiner, he is not subject to 

the federal statutory restrictions on borrowing by examiners. Rather, 

according to Board officials, he was subject to Federal Reserve policy

requiring recusal from supervisory matters other than examinations and 

inspections related to the LISCC bank. This policy permits him to retain 

the loan.

The Board of Governors ethics program stores financial disclosure 

information for LISCC program participants in the same hard-copy format 

as that of other Board employees, which is consistent with OGE 

requirements but is not compatible with the electronic COFI application 

used for examiners. Specifically, the conflicts information of Board of 

Governors employees required to file public financial disclosure forms is 

submitted using Integrity, because of statutory requirements. These 

disclosure forms are stored in hard-copy format, which OGE permits, 

although OGE encourages use of electronic filing formats.

Federal internal control standards state that management should use 

quality information to achieve the entity’s objectives. As noted, full-time 

examination staff conflict information is stored electronically in the COFI 

application and is linked with the division’s scheduling software, which 

 97Confidential financial disclosure forms are submitted using OGE Form 450. With OGE 

approval, agencies are permitted to store confidential financial disclosure information in 

their own electronic systems.

98The remaining OC members were based at Reserve Banks, so their information was 

included in the conflict-of-interest data discussed previously if they worked at FRB Boston, 

FRBNY, FRB Richmond, or FRB San Francisco. 
Page 53 GAO-18-118 Large Bank Supervision

automatically alerts staff responsible for scheduling of conflicts when an 

employee is assigned to an examination. In contrast, the division relies 

primarily on manual checks for Board nonsupervisory staff, whose 

conflict-of-interest disclosure information is stored separately. These 

manual steps reduce operational efficiencies and may expose the LISCC 

program to the potential that conflicts will be missed. Further, in part 

because LISCC program participants are based in different divisions at 

the Board and at different Reserve Banks, the division does not maintain 

a comprehensive roster of Board staff who participate in the LISCC 

program, which may make it difficult for the division staff who review 

conflict-of-interest disclosures to have a full understanding of LISCC 

program participants’ responsibilities. Such an understanding is 

necessary to assess, for example, whether participating in a particular 

matter may constitute a conflict of interest.

A significant number of Board staff work on LISCC program activities. 

Without consistent systems for collecting and storing conflict-of-interest 

data, the efficiency and effectiveness with which the Board uses these 

data to ensure that Board employees are free of conflicts of interest in the 

LISCC program may be limited.

The Federal Reserve has policies in place that are intended to mitigate 

what is commonly known as the revolving door—the risk that an 

employee may place the interests of supervised financial institutions 

ahead of the public mission of the Federal Reserve, due to the 

employee’s prior employment or prospect of future employment by a 

financial firm—but the policies do not address regulatory capture risks to 

the fullest extent possible, and the Reserve Banks and the Board have 

not systematically collected post-employment data. Specifically, although 

the four Reserve Banks and Board of Governors ethics staff generally 

have recorded an employee’s previous employer or employers when

hired, two of the four Reserve Banks and the Board have not 

systematically recorded departing employees’ future employer, if any, 

when they leave the Federal Reserve. Such information is not legally 

required, but two LISCC Reserve Banks and other federal financial 

regulators have procedures to systematically record such information. 

Without systematically collecting and maintaining post-employment 

information, the Board and Reserve Banks may not be able to implement 

post-employment policies effectively for the LISCC program.

Federal Reserve Policies 

and Data Collection 

Procedures May Not Fully 

Mitigate Risk Associated 

with the Revolving Door
Page 54 GAO-18-118 Large Bank Supervision

The Federal Reserve has policies in place that are intended to mitigate 

revolving-door risk. However, these policies may not fully mitigate risks of 

regulatory capture.

Federal statute restricts contacts between former and current Federal 

Reserve employees, and Federal Reserve policies reflect these 

statutes.99 Employees who leave the Federal Reserve face restrictions on 

engaging in certain employment activities with supervised firms. 

Specifically, all Federal Reserve employees are subject to federal 

restrictions that prohibit them from representing their new employer 

before the Federal Reserve regarding particular matters with which they 

were involved while at the Federal Reserve. Federal Reserve employees, 

like all federal employees, also are prohibited from participating in any 

work on a financial institution with which they are seeking employment. In 

addition, the Intelligence Reform and Terrorism Prevention Act of 2004 

and implementing regulations prohibit an examiner who served as the 

“senior examiner” for a depository institution or depository institution 

holding company for 2 or more months during the examiner’s final 12 

months of employment from working for that depository institution or 

holding company, or certain related entities, for 1 year.100

In addition to these requirements, the Federal Reserve implements 

policies that apply to supervisory staff and officers. For example, 

supervisory employees hired from firms in the financial industry are 

subject to a 1-year recusal from working on matters specifically involving 

the firm from which they were hired, and Reserve Banks have the 

discretion to extend the recusal if an employee’s position warrants further 

restrictions. Further, if an examiner leaves for a firm he or she examined 

in the previous 12 months, the Federal Reserve is to review the 

employee’s workpapers from the previous 12 months related to his or her 

 99See 18 U.S.C. § 207(a)(1)-(2). Former Board personnel are permanently barred from 

communicating with or appearing before, with the intent to influence, their former agency 

on behalf of their new employer for particular matters on which they were personally and 

substantially involved, which involved a specific party or parties at the time of such 

participation. For 2 years after leaving federal service, former Board personnel may not 

communicate with or appear before, with the intent to influence, their former agency on 

behalf of their new employer on particular matters that were pending under their official 

responsibility in their last year of service, which involved a specific party or parties at the 

time it was pending, even if the employee was not directly involved with the matter.

100See Pub. L. No. 108-458, § 6303(b), 118 Stat. 3638, 3751 (codified at 12 U.S.C. § 

1820(k)); 12 C.F.R. § 264a.3.

Policies on pre- and postemployment (revolving door)
Page 55 GAO-18-118 Large Bank Supervision

new employer to help assure that the employee was not influenced by the

prospect of future employment.101

In 2016, the Federal Reserve expanded the types of senior examiners 

subject to the post-employment prohibition established in the Intelligence 

Reform and Terrorism Prevention Act of 2004, in part to better mitigate 

the risk of regulatory capture. Prior to this expansion, only the senior-most 

examiner—the senior supervisory officer or central point of contact—was 

subject to this prohibition, although FRBNY extended the prohibition to 

deputy senior supervisory officers in 2012. However, each examination 

team includes other senior managers with key decision- making 

responsibilities. Therefore, to mitigate regulatory capture more effectively, 

a broader application of the policy was needed, according to one Reserve 

Bank ethics official. The expanded policy applies to these other 

examiners and includes any examiner who is serving as the dedicated 

central point of contact, deputy central point of contact, enterprise risk 

officer, senior supervisory officer, deputy senior supervisory officer, or 

supervisory team leader for a single depository institution, group of 

affiliated depository institutions, or depository institution holding company.

We found that Federal Reserve policies generally reflect federal postemployment requirements, but they may not fully mitigate threats to 

independence posed by the revolving door. For example, the Federal 

Reserve’s expanded application of the rule restricting employment of 

senior examiners at firms they supervised excludes those leading 

horizontal examinations.102 Specifically, the Federal Reserve policy

applies only to an individual serving in a leadership role who is dedicated 

to supervising a single depository institution (or group of affiliated 

depository institutions) or depository institution holding company for 2 or 

more months during the examiner’s final 12 months of employment with a 

Reserve Bank. It excludes examiners who serve in a leadership role for 

 101Federal Reserve officials told us that the Board has interpreted these policies to apply

to nonbank supervised firms, such as nonbank SIFIs.

102The restriction applies to a covered individual for 1 year after the individual terminates 

his or her employment with the Reserve Bank. If an examiner violates the 1-year 

restriction, the statute requires the appropriate federal bank regulatory agency to seek an 

order of removal and industry-wide employment prohibition for up to 5 years, a civil money 

penalty of up to $250,000, or both. See 12 U.S.C. § 1820(k). In special circumstances, the 

Chairman of the Board of Governors may waive the restriction for a “senior examiner” of 

the Federal Reserve by certifying in writing that granting the individual a waiver of the 

restriction would not affect the integrity of the Federal Reserve’s supervisory program. See

12 C.F.R. § 264a.4(b).
Page 56 GAO-18-118 Large Bank Supervision

multiple institutions at the same time or who perform only periodic, shortterm examinations that last less than 2 months in a year to that institution.

However, these examiners may face similar revolving-door risks to those 

who work on single-firm examinations. Without assessing these policies 

in light of the Federal Reserve’s increasing reliance on horizontal 

examinations, the Board may be missing opportunities to improve the 

policies’ effectiveness in mitigating the risk of regulatory capture.103

We requested data from the four Reserve Banks and the Board of 

Governors on the prior and subsequent employment of LISCC staff from 

2011 through July 2016 and found that the four Reserve Banks and the 

Board generally collect data on the hiring and departure dates of 

employees and prior employers of newly hired Federal Reserve 

employees. However, we also found that two of the four Reserve Banks 

and the Board did not systematically record the future employers of 

departing Reserve Bank examiners.

The four Reserve Banks have used the COFI application among other 

electronic systems to store information on the hiring and departure dates 

and the previous employers of current staff since 2013. Data from the four 

Reserve Banks showed the total number of examination staff hired and 

total number who departed from 2011 through July 2016, as well as data 

on prior and subsequent employers for employees who began 

employment with the Reserve Banks between 2011 and July 2016. We 

found that FRBNY and FRB Richmond maintain their own electronic 

systems to record the prior and subsequent employers of employees who 

enter and leave the bank. FRBNY routinely requests that departing 

employees provide the name of their new employer, though FRBNY was 

not able to provide us with complete data for departed FRBNY LISCC 

staff because some employees did not provide information on their future 

plans at the time of their departure.104 In contrast, FRB Boston did not 

collect this information (though manually compiled data for us) and FRB 

San Francisco tracked only whether an employee left for a supervised 

firm. FRB San Francisco officials told us in October 2017 that they 

recently began to request information about future employers from all 

departing employees. 

 103We discuss the need for an assessment of ethics policies in greater detail later in this 

report.

104For example, according to FRBNY staff, some departing employees, such as retirees, 

did not have future employment plans.

Limited Data on Prior and 

Subsequent Employment
Page 57 GAO-18-118 Large Bank Supervision

Table 1 presents a summary of available pre- and post-employment 

information for Reserve Bank LISCC program examiners from 2011 

through July 2016. Although the Reserve Banks recorded the date of hire 

and date of departure of employees during this period, some data were 

missing for the future employers of departed examiners. In addition, the 

table shows total numbers of employees in each category. Some of the 

employees hired from 2011 through July 2016 still worked at the Reserve 

Banks as of July 2016; some who departed during this period were hired 

prior to 2011.

Table 1: Summary of Available Pre- and Post-Employment Information of Federal Reserve Bank LISCC Program Examiners 

Employed 2011–July 2016

Reserve Bank Total employed in 

LISCC supervision 

Employees hired 

from financial 

industry firms (of 

those, hired from 

LISCC firm)a

Total employees 

who departed 

Employees who 

departed for 

financial industry 

firms (of those, 

departed to LISCC 

firm)b

Employees who did 

not identify their 

future employerc

FRB Boston 53 19 (2) 15 5 (0) 2

FRB New York 514 131 (52) 143 69 (34) 54

FRB Richmond 52 7 (2) 25 4 (2) 5

FRB San Francisco 63 27 (7) 15 2 (1) 10

Totals 682 184 (63) 198 80 (37) 71

Source: GAO analysis of Federal Reserve Bank data. | GAO-18-118

Notes: Although the Reserve Banks recorded the date of hire and date of departure of employees 

during this period, there were significant numbers of employees for whom either no information was 

available about either their prior or future employers, or their hiring or departure occurred outside of 

the date GAO requested. In addition, the table shows only total numbers of employees in each 

category. Some of the employees hired from 2011 through July 2016 are still working at the Reserve 

Banks; some who departed during this period were hired prior to 2011. As such, the table represents 

results from the data that were available. Because of the limited nature of the available data, our 

analysis cannot be generalized to the entire LISCC program or to the Federal Reserve supervisory 

program as a whole.

LISCC = Large Institution Supervision Coordinating Committee.

a

For the purposes of this analysis, we defined a “financial industry” company as any company that 

explicitly operates within the financial industry or in a financial capacity. This includes law firms, 

accounting firms, or consulting firms in addition to banks or securities brokers, that list in their 

company description that the services they provide primarily engage with other financial firms or 

operate within financial markets, including banking, investments, or insurance.

b

Officials in FRB Boston and FRB San Francisco told us they did not systematically record departing 

employees’ destination when they leave the Federal Reserve. FRB San Francisco tracked only 

whether an employee left for a supervised firm and FRB Boston manually compiled the data for us. 

FRBNY told us that some data were missing because some of those employees may have retired or 

otherwise left FRBNY without a plan for immediate future employment.

c

Total number of missing data fields for future employer information.
Page 58 GAO-18-118 Large Bank Supervision

We analyzed the data from the Reserve Banks to identify Reserve Bank 

staff who were hired from the financial industry and who subsequently left 

the Federal Reserve for a financial institution from 2011 through July 

2016. We found that 14 out of 198 former Reserve Bank examiners for 

whom we had data were hired from, and departed for, financial 

institutions during this period. Of these, 8 were hired from and departed 

for financial institutions that are not part of the LISCC program (see fig. 

7).105 We found that 4 LISCC program staff hired from a LISCC firm 

eventually left for a position at a LISCC firm. However, because the 

information is limited, a comprehensive analysis was not possible.

Figure 7: Summary of Available Data on Federal Reserve Bank LISCC Examiners 

Hired from the Financial Industry Who Left Reserve Banks for the Financial 

Industry, 2011–July 2016

Note: Of the 682 examiners employed in the Large Institution Supervision Coordinating Committee 

program from 2011 through July 2016, information on the name of the employee’s prior employer was 

not provided for 320 staff because their hiring occurred outside of the 2011–July 2016 period GAO 

requested. Of the 198 who departed during this period, the name of the departed employee’s future 

employer was not provided for 71 staff. Because of the limited nature of the available data, our 

analysis cannot be generalized to the entire LISCC program or to the Federal Reserve supervisory 

program as a whole.

a

LISCC = Large Institution Supervision Coordinating Committee. For the purposes of this analysis, we 

defined a “financial industry” company as any company that explicitly operates within the financial 

industry or in a financial capacity. This includes law firms, accounting firms, or consulting firms in 

addition to banks or securities brokers, that list in their company description that the services they 

provide primarily engage with other financial firms or operate within financial markets, including 

banking, investments, or insurance.

 105Because of the limited nature of the available data, our analysis cannot be generalized 

to the entire LISCC program or to the Federal Reserve supervisory program as a whole.
Page 59 GAO-18-118 Large Bank Supervision

While we were able to analyze some of the data from the Reserve Banks, 

we were unable to conduct a similar analysis for Board-based LISCC staff 

because the Board does not collect information systematically for LISCC 

program staff. Instead, the Board collects information for Board 

employees required to file public or confidential financial disclosures, 

regardless of whether they work on the LISCC program.106 According to 

Board officials, for instance, the Board of Governors ethics program 

collects pre-employment information for Board employees who file public 

financial disclosure forms and must report the source of income received 

(and thus prior employers) during the previous calendar year and the 

current year up to the date of filing. Further, Board ethics officials told us 

that they learn about post-employment plans in the course of counseling 

employees about the restrictions related to seeking employment and 

conflicts, but they do not routinely collect this information for departing 

employees. In addition, Board employees who file public financial 

disclosures must file a statement with the Ethics Office within 3 business 

days of commencing employment negotiations with a nonfederal 

employer.107

Without systematically collecting post-employment information, the Board 

and the Reserve Banks may not be able to implement post-employment 

policies effectively for the LISCC program. For example, as noted, the 

Board requires a 12-month workpaper review for examiners who leave 

the Federal Reserve to work at a financial institution they examined in the 

year prior to their departure. In addition, federal regulation prohibits 

examiners who served as the “senior examiner” for a depository 

institution or depository institution holding company for 2 or more months 

during the examiner’s final 12 months of employment from working for 

that depository institution or holding company, or certain related entities, 

for 1 year.

108 The Federal Reserve’s 2016 policy change that expanded 

the definition of senior examiners subject to this 1-year post-employment 

restriction on working for a firm they supervised also includes a 

requirement that Reserve Banks maintain such information 

 106As noted previously, the Board Division of Supervision and Regulation does not 

maintain a roster of LISCC employees.

107This notification is mandated by the Stop Trading on Congressional Knowledge Act of 

2012, Pub. L. No. 112-105, § 17(a); 126 Stat. 291, 303 (codified at 5 U.S.C. app. 101 

note).

108See 12 C.F.R. § 264a.3. 
Page 60 GAO-18-118 Large Bank Supervision

electronically.109 As noted, systematic collection of pre- and postemployment information is not legally required, but FRBNY and FRB 

Richmond, as well as the Securities and Exchange Commission, have 

collected such information.110 In addition, internal control standards 

emphasize the importance of collecting quality information. Until the 

Federal Reserve implements mechanisms that systematically collect and 

maintain both pre- and post-employment information at all four LISCC 

Reserve Banks and the Board, the Federal Reserve is limited in its ability 

to implement revolving door policies effectively.

We found that the Division of Supervision and Regulation conducted 

operations reviews of Reserve Bank ethics offices during the period of our 

review, 2011 through 2016, and that OGE reviewed the Board of 

Governors ethics program in 2014. However, although the development 

of the LISCC program entailed changes to ethics policies and procedures, 

the Board of Governors has not carried out a self-assessment of its ethics 

program and procedures during this period. OGE regulations state that 

agency ethics officials are responsible for periodically carrying out selfassessments, which are in addition to external evaluations or 

investigations by OGE and others.111 In addition, internal control 

standards emphasize the importance of identifying, analyzing, and 

responding to significant changes.

The Division of Supervision and Regulation and Reserve Banks 

conducted a periodic operation or internal quality assurance review, 

respectively, of each of the four LISCC Reserve Banks’ ethics offices 

during 2011 through 2016, the period of our review, as part of their 

oversight roles. These reviews found areas for improvement, which the 

 109In October 2017, the Board Division of Supervision and Regulation provided us with a 

May 2017 report in which the division recommended changes to the COFI application, 

including adding the ability to record the future employer of departing Reserve Bank 

examiners. As noted, information about departing Board employees is not included in the 

COFI application. 

110We reported in 2011 that among financial regulatory agencies, only the Securities and 

Exchange Commission systematically collected and maintained a database of where 

employees went after leaving the agency. See GAO, Securities and Exchange 

Commission: Existing Post-Employment Controls Could Be Further Strengthened, 

GAO-11-654 (Washington, D.C.: July 12, 2011). 

111See 5 C.F.R. § 2638.104(c)(16).

Board of Governors Has 

Not Assessed Ethics 

Policies and Procedures 

That Apply to LISCC 

Program Participants

Reserve Bank Ethics Program 

Assessments
Page 61 GAO-18-118 Large Bank Supervision

four Reserve Banks subsequently addressed, according to the Board, the 

Reserve Banks, and our reviews. For example:

• Policies and procedures. Three of the four Reserve Banks (FRB 

Boston, FRBNY, and FRB Richmond) did not have a procedure under 

which ethics officials reviewed individual conflict-of-interest 

disclosures of examination staff prior to these employees’ 

assignments to new examinations. One Reserve Bank (FRB San 

Francisco) did not ensure that internally transferred examiners were 

properly credentialed prior to being staffed on an examination. The 

four banks took steps to address these deficiencies, according to 

Reserve Bank and our reviews.

• Training. In addition, the division found that three Reserve Banks 

(FRB Boston, FRBNY, and FRB Richmond) lacked sufficient training 

of supervision managers or staff about conflict-of-interest 

requirements and staff compliance responsibilities. These banks have 

subsequently added training in these areas, according to Reserve 

Bank and our reviews.

• Post-employment policy. One Reserve Bank (FRB San Francisco) 

was found not to have fully complied with the Federal Reserve 

System policy requirement for a workpaper review of all examiners 

who leave the Federal Reserve for a financial firm they supervised. In 

response, the Reserve Bank immediately amended its internal written 

policies to ensure that the policies covered all of its examiners.

• Use of the COFI application. One bank (FRB Boston) did not 

maintain accurate information on conflicts in the Federal Reserve’s 

COFI application and did not undertake supervisory review of staff 

financial disclosure forms. FRB Boston officials told us that this 

information is now routinely collected and forms are now reviewed 

and approved at the officer level.

In 2014, OGE carried out its most recent periodic review of the Board of 

Governors ethics program. The review found that the Board’s ethics 

program met key indicators for program design and implementation. For 

example, OGE reported that the Federal Reserve maintains an ethics 

handbook, which the Board provides to new employees, as well as the 

procedures for the Board’s administration of the financial disclosure 

process. The handbook includes an introductory letter from the Board 

Chair emphasizing the importance of impartiality; the key federal criminal 

statutes and OGE regulations that employees must follow; a summary of 

conflict-of-interest exemptions; and contacts for Board ethics officials. 

Board of Governors’ annual responses to the OGE questionnaires, which 

we reviewed for 2011 through 2016, included basic information on the 

OGE Assessment of the Board 

of Governors Ethics Program
Page 62 GAO-18-118 Large Bank Supervision

program, such as the number of employees who file financial disclosures, 

the number of Board staff who review these disclosures, and key 

challenges for their work. For example, among the challenges they listed 

were continuing to provide quality advice and counseling in a shifting 

regulatory environment and the implementation of the OGE Integrity 

public disclosure filing system.

However, an OGE official confirmed that the 2014 Federal Reserve 

review did not include the Division of Supervision and Regulation or 

Reserve Bank ethics programs or procedures related to supervisory 

personnel. Another OGE official told us that OGE does not oversee 

implementation of Board supplemental regulations or federal statutes that 

apply to specific agencies or agency activities—such as federal borrowing 

restrictions for examiners or the federal law restricting for 1 year 

employment of senior examiners at firms they supervised.112

OGE regulations state that, as of January 1, 2017, agency ethics officials 

are responsible for periodically evaluating agency ethics programs, 

among other responsibilities. However, the Board stated in annual survey 

responses submitted to OGE between 2011 and 2016 that it had not 

assessed its ethics procedures. Board ethics officials noted that, prior to 

January 1, 2017, agency self-assessments were not required by OGE.

However, OGE reported in 2016 that 60 percent of federal agencies 

undertook such self-assessments in 2015.

OGE provides suggested self-assessment methods, such as 

administering questionnaires to agency staff. Further, the OGE annual 

questionnaire that agencies submit asks agencies to describe the 

purpose of their self-assessment (if they have undertaken one) and lists 

the following among the potential answers: assessing employee 

perceptions about the ethics program; employee knowledge of ethics 

rules; employee perceptions about the agency’s ethical culture; 

evaluation of compliance with applicable ethics laws and regulations; 

 112The Board of Governors submits responses to OGE’s annual questionnaire to federal 

agency ethics officials. The annual questionnaire to the Board of Governors ethics officials 

does not include details about the ethics programs of Reserve Banks.

Lack of Self-Assessment of 

Board Ethics Procedures
Page 63 GAO-18-118 Large Bank Supervision

assessment of employee knowledge before or after training; and 

assessment of employee satisfaction with training offered.113

Internal control standards for monitoring highlight the value of not only 

separate, external evaluations, but also internal assessments. In addition, 

internal control standards state that management should identify, analyze, 

and respond to significant changes. The development of the LISCC 

program included some changes to ethics policies and procedures, and 

the lack of a comprehensive evaluation of ethics policies and procedures 

means that the Board cannot be assured of effectively meeting its 

objectives for ethical behavior in the LISCC program. For example, as 

noted, the Board recently revised its policies restricting employment of 

senior examiners at firms they supervised, in part to mitigate regulatory 

capture risks, but this change excludes examiners leading horizontal 

examinations. The LISCC program also increasingly relies on horizontal 

examinations, which heightens the need for employees to fully 

understand financial restrictions. Without a comprehensive evaluation of 

these and other policies and procedures—and employee perceptions and 

knowledge of ethics policies and procedures—the Board may be missing 

opportunities to help ensure that ethics and conflict-of-interest policies are 

as effective as possible at mitigating risks of regulatory capture.

The Board of Governors established the LISCC program to respond to 

risks that the largest financial institutions pose to the financial system. 

The program’s effectiveness depends, in part, on addressing the risk of 

regulatory capture and maintaining independence throughout the 

supervisory process. One means of addressing the risk of regulatory 

capture is through an ERM framework. The Board began to develop an 

ERM framework in 2017, but has not yet implemented this framework and 

has not developed key framework elements identified by OMB. Although 

the Reserve Banks’ ERM frameworks can be used to mitigate risks 

associated with regulatory capture through policies in supervision and 

ethics functional areas, these policies were not designed to address this 

risk. Moreover, the Board is still developing an ERM framework and has 

 113In October 2017 the Board provided us with documentation that showed that Board 

ethics staff monitor some aspects of its ethics program for Board employees, such as 

ensuring that employees file required financial disclosure forms and updating the Board’s 

intranet site with information on ethics policies and procedures. Based on our review, the 

Board did not assess LISCC program employees’ knowledge or understanding of ethics 

policies and procedures or perceptions of the Federal Reserve’s ethical culture. 

Conclusions
Page 64 GAO-18-118 Large Bank Supervision

not had the ability to comprehensively review supervision and ethics 

functions to identify, assess, and monitor sources of reputational risk—

including the risk of regulatory capture.

In addition, while the LISCC program includes policies that can help to 

mitigate threats to supervisory independence if implemented effectively, 

weaknesses in some related internal controls impact the effectiveness of 

these policies. First, the Board has not finalized and implemented 

minimum operating and documentation standards for supervisory 

activities, and it does not have a regular mechanism for monitoring 

Reserve Banks’ implementation of LISCC policies. Until these initiatives 

are completed, the Board will have limited assurance that LISCC policies 

are being effectively implemented to mitigate the risk of regulatory 

capture and threats to independence.

Finally, the Federal Reserve has ethics policies and procedures to help 

ensure that employees act in the public interest rather than in their own 

personal interest. Because these policies and procedures were designed 

to prevent conflicts of interest rather than to prevent regulatory capture, 

they have some inherent limitations. For example, the Board does not 

systematically collect the post-employment information for LISCC 

program participants that would be necessary to mitigate the revolving 

door threat. In addition, the Board has not conducted a self-assessment 

of the effectiveness of ethics and conflict-of-interest procedures for the 

LISCC program. As a result, the effectiveness of these policies in helping 

to ensure the independence of LISCC employees, and mitigating 

regulatory capture, may be limited.

We are making the following six recommendations to the Board of 

Governors of the Federal Reserve System. Specifically:

• As the Board of Governors implements plans to develop an ERM 

framework, it should include a component to identify and assess risks 

of regulatory capture across the LISCC program. (Recommendation 

1)

• The Board of Governors should finalize and implement program-wide 

guidance for the LISCC Reserve Banks on implementing LISCC 

policies. (Recommendation 2)

• The Board of Governors should finalize and implement a mechanism 

to monitor and regularly assess Reserve Banks’ implementation of 

LISCC policies and procedures. (Recommendation 3)

Recommendations for 

Executive Action
Page 65 GAO-18-118 Large Bank Supervision

• The Board of Governors should streamline its conflict-of-interest 

disclosure review process for participants in the LISCC program, such 

as by storing disclosure information in compatible electronic systems. 

(Recommendation 4)

• The Board of Governors should systematically collect and maintain 

information on the institutions supervisory employees work for before 

they are hired by the Federal Reserve and their employment

destination when they leave. (Recommendation 5)

• The Board of Governors should conduct a periodic self-assessment of 

ethics programs, policies, and procedures that apply to LISCC 

program participants. (Recommendation 6)

We provided a draft of this report to the Board of Governors for review 

and comment. The Board provided written comments that we have 

reprinted in appendix V. The Board also provided technical comments 

that we have incorporated, as appropriate.

In its overall comment, the Board noted that we did not find evidence of 

regulatory capture in our review. However, the scope of this engagement 

did not include assessing evidence for the presence or absence of 

regulatory capture. As we noted in the report, regulatory capture is a 

complex and significant threat to effective regulation that takes many 

forms and can result in biases in judgment that are difficult to identify 

definitively. Our review examined the Federal Reserve policies and 

procedures to identify and manage threats to supervisory independence 

and risks of regulatory capture across the Federal Reserve LISCC 

program. We found weaknesses in the Federal Reserve’s mitigation 

strategies and practices which, if left unaddressed, expose the Federal 

Reserve to risks of regulatory capture.

In its written comments, the Board neither agreed nor disagreed with the 

report’s six recommendations. The Board provided the following 

comments: 

• Regarding our recommendation to include a component to identify 

and assess risks of regulatory capture across the LISCC program as 

the Board implements plans to develop an ERM framework, the Board 

notes in its letter that it is developing an ERM framework that would 

provide a strategic view for comprehensively managing all material 

risks faced by the Board that would provide additional executive 

attention for their management. In its comments, the Board said that 

Agency Comments 

and Our Evaluation
Page 66 GAO-18-118 Large Bank Supervision

the ERM framework will assess all strategic risks, including regulatory 

capture.

The letter further notes that the Board believes that it is already 

effectively managing the risks of regulatory capture in the supervision 

of large financial institutions through day-to-day management of these 

risks under the LISCC program and does not expect the ERM 

framework to significantly alter the way it manages the risk of 

regulatory capture. As we noted in the report, capture is a complex 

and significant threat to effective regulation, and the potential negative 

effects of capture on bank regulation and supervision require welldesigned preventative measures by prudential banking regulators. As 

a result, we maintain that the LISCC program can be enhanced by an 

effective ERM to mitigate the risk of regulatory capture. We also noted 

in the report, that the Federal Reserve already has in place local 

mechanisms to help manage these risks at the Reserve Banks. 

However, the Board has not yet implemented an ERM framework to 

identify and assess the combined impact of risks as an interrelated 

portfolio. Unless the Board uses its ERM framework to assess its 

supervision, ethics, and other functions across the Federal Reserve 

System, it will miss an opportunity to enhance its ability to mitigate 

regulatory capture. We plan to continue to monitor the development 

and implementation of the framework to determine whether it 

ultimately addresses our recommendation.

• Regarding our recommendation to finalize and implement programwide guidance for the LISCC Reserve Banks on implementing LISCC 

policies, the Board agreed with the importance of written programwide policies and procedures to ensure all staff working on the LISCC 

program have clarity on their roles and responsibilities and to 

minimize threats to independence of supervisory staff. The Board 

notes that during the course of our review it was memorializing 

aspects of the LISCC program in a LISCC program manual that 

describes the objectives and organization of the program as well as

its governance structure. We have noted this in our report. 

Additionally, the Board notes that it has recently established an 

additional framework to further develop policies, procedures, and 

guidance for LISCC staff on documentation, deliverable requirements, 

and other areas, which it expects to take effect in 2018. It will be 

important for the Board to follow through on its plans to implement the 

LISCC program manual, as well as additional planned policies, 

procedures, or other guidance. This is necessary to provide 

reasonable assurance that the Reserve Banks are effectively 

implementing policies that can help mitigate threats to independence 

to LISCC supervisory staff. 
Page 67 GAO-18-118 Large Bank Supervision

• Regarding our recommendation to finalize and implement a 

mechanism to monitor and regularly assess Reserve Banks’ 

implementation of LISCC policies and procedures, the Board noted 

that although it has a continuous oversight program that assesses the 

effectiveness of the Reserve Banks’ supervision functions, including 

their adherence to System guidance, formalizing the monitoring and 

assessment of the LISCC program would provide greater assurance 

on the implementation of LISCC guidance. The Board stated that it is 

in the process of augmenting its oversight program through the 

development of a LISCC-specific oversight framework that is to 

encompass all Board and Reserve Bank LISCC activities and provide 

for a comprehensive assessment of program effectiveness for 

implementation in 2018. Until this framework is put into place, the 

Board may not have reasonable assurance that policies are being 

implemented appropriately and effectively. 

• Regarding our recommendation to streamline the conflict-of-interest 

disclosure review process for participants in the LISCC program, such 

as by storing disclosure information in compatible electronic systems, 

the Board noted that it would explore options for streamlining its 

approach, including assessing the feasibility of integrating existing 

systems. 

• Regarding our recommendation to systematically collect and maintain 

information on the institutions where supervisory employees worked

before they are hired by the Federal Reserve and their employment 

destination when they leave, the Board agreed that “revolving door” 

risk can pose a threat to supervisory objectivity. The Board said it 

would assess how existing practices could be modified to ensure a 

more systematic approach to collecting pre- and post-employment 

data, including through the use of electronic systems. The Board 

noted that, as we acknowledge in our report, departing employees 

have no obligation to disclose their destination.

• Regarding our recommendation to conduct a periodic self-assessment 

of ethics programs, policies, and procedures that apply to LISCC 

program participants, the Board agreed that self-assessment plays an 

important role in ensuring a healthy and robust program. It noted that 

its ethics office has approached the Division of Supervision and 

Regulation to explore potential avenues for conducting periodic 

reviews of the ethics program as applied to LISCC participants. 

However, we noted in our report that the Board’s annual survey 

responses submitted to OGE between 2011 and 2016 stated that it 

had not conducted a self-assessment of its ethics procedures since 

the start of the LISCC program. In October 2017, the Board provided 
Page 68 GAO-18-118 Large Bank Supervision

additional information to us about its ethics program monitoring 

efforts, which it highlights in its letter, and we have added this new 

information to our report. The Board’s letter states that OGE told the 

Board that these monitoring efforts satisfy OGE’s new self-evaluation 

requirements. However, based on our review, this information largely 

describes monitoring activities rather than a comprehensive selfassessment of ethics program policies and procedures. We 

subsequently clarified in our report that without a comprehensive 

evaluation of Board and Reserve Bank ethics policies and 

procedures—and of employee perceptions and knowledge of ethics 

policies and procedures—the Board may be missing opportunities to 

help ensure that ethics and conflict-of-interest policies are as effective 

as possible at mitigating the risk of regulatory capture. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the House Committee on 

Financial Services and the Federal Reserve. In addition, the report will be 

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made major contributions to this report 

are listed in appendix VI.

Lawrance L. Evans, Jr

Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope and 

Methodology

Page 69 GAO-18-118 Large Bank Supervision

This report examines the Federal Reserve System’s (Federal Reserve) 

policies and procedures for (1) managing risks of regulatory capture 

across the Large Institution Supervision Coordinating Committee (LISCC) 

program using an enterprise risk management (ERM) approach; (2) 

identifying and mitigating conflicts of interest among supervisory 

personnel in the LISCC program; and (3) identifying and mitigating threats 

to supervisory independence for the LISCC program.

We conducted background research to understand the potential for 

regulatory capture to compromise effective regulation and identify ways in 

which banking supervisors might experience regulatory capture and 

strategically mitigate it. Specifically, we reviewed and summarized 

academic studies that provided definitions of regulatory capture and 

discussed with academic experts how regulatory capture might operate in 

banking supervision. Additionally, we reviewed and summarized 

academic literature to identify mitigation strategies to reduce threats to 

bank supervisory independence and regulatory capture. See appendix II 

for a brief summary of the results of our literature review.

To assess the extent to which the Federal Reserve manages risks of 

regulatory capture across the LISCC program using ERM, we reviewed 

and analyzed documents provided by the four Reserve Banks related to 

their ERM frameworks. Those Reserve Banks are the Federal Reserve 

Banks of Boston (FRB Boston), New York (FRBNY), Richmond (FRB 

Richmond), and San Francisco (FRB San Francisco).1 We also 

interviewed senior risk management officials at the Banks and senior 

officials at the Board of Governors of the Federal Reserve System (Board 

of Governors or Board). We assessed the extent to which the frameworks 

included a mechanism to address risks of regulatory capture across the 

supervisory and ethics functions.

In order to gather information related to supervisory policies and 

procedures and their implementation, we visited the four Federal Reserve 

Banks that supervise at least one LISCC firm. To describe the policies 

and procedures the Reserve Banks use to supervise LISCC firms, we 

reviewed relevant supervisory manuals and interviewed officials prior to 

our visits. We also reviewed Federal Reserve internal review 

documentation for 2012 through 2016, including reviews of the LISCC 

program conducted by the Reserve Banks and by the Board of 

Governors. We also interviewed LISCC Operating Committee (OC) staff 

 1

FRB Richmond’s field office in Charlotte, North Carolina houses the majority of the team 

that supervises Bank of America.

Appendix I: Objectives, Scope and 

Methodology
Appendix I: Objectives, Scope and 

Methodology

Page 70 GAO-18-118 Large Bank Supervision

and other Board of Governors staff who execute policies and procedures 

related to the LISCC program. 

To examine the implementation of the Federal Reserve’s policies and 

procedures for mitigating threats to supervisory independence, we 

conducted individual interviews with LISCC supervisory staff at the 

Reserve Banks. We conducted approximately 77 interviews with Federal 

Reserve staff on 9 of the 13 LISCC firm dedicated supervisory teams.2

For selecting interviewees at FRB Boston, FRB San Francisco, and FRB 

Richmond, we randomly selected from all LISCC supervisory staff. For 

FRBNY, due to the larger number of LISCC firms it supervises, we 

judgmentally selected five LISCC dedicated supervisory teams. In 

selecting these teams, we considered total assets and primary lines of 

business of the supervised firms, and we included one foreign banking 

organization in this group of five. We requested lists of all staff on each 

firm dedicated supervisory team for each LISCC Reserve Bank, in 

addition to their title and whether or not they were staff on a horizontal 

exam. After receiving the information, we used a random selection

method to determine which individuals to speak with based on our 

designation of staff into the categories of examiners, examiners who had 

or were currently engaged on horizontal examination work, and 

management. We assigned random numbers to the staff members of 

each category and selected those with the largest numbers for interviews. 

We selected approximately the same number of staff from each category. 

In addition, to ensure that every category we assigned had staff available 

to interview, where necessary, we selected alternates. Reserve Bank 

management noted that they needed some flexibility in the event that staff 

who were selected were unable to participate due to vacation, training, or 

other scheduling conflicts. We compiled responses to our questions and 

used a content analysis process to define themes that emerged. 

To examine Reserve Bank LISCC supervisory staff views on the 

implementation of policies and procedures, we conducted focus groups. 

We conducted a series of 9 focus groups with approximately 81 Federal 

Reserve staff on 9 of the 13 LISCC firm dedicated supervisory teams. For 

FRB Boston, FRB San Francisco, and FRB Richmond, we sampled all 

supervisory staff. For FRBNY, due to the larger number of LISCC firms it 

supervises, we judgmentally selected staff from five LISCC dedicated 

supervisory teams. Again, in selecting these teams, we considered total 

 2 Following the conclusion of our audit work on September 29, 2017, FSOC voted to dedesignate AIG as a Non-Bank SIFI; as a result, AIG is no longer subject to supervision by 

the Federal Reserve.
Appendix I: Objectives, Scope and 

Methodology

Page 71 GAO-18-118 Large Bank Supervision

assets and primary lines of business of the supervised firms, and we 

included one foreign banking organization in our sample. We requested 

lists of all staff for each LISCC Reserve Bank with three categories of 

identification to be used in selection: 1) being on a firm dedicated 

supervisory team, 2) their title, and 3) whether or not they were staff on a 

horizontal exam. After receiving the information, we used a random 

sample method to select individuals to participate in the focus groups 

based on our designation of staff into categories of examiners, examiners 

who had or were currently engaged on horizontal examination work, and 

management. We assigned random numbers to each category of staff 

and selected for our focus groups those with the largest number that had 

not participated in our interviews. We selected approximately the same 

number of staff from each category. In addition, to ensure that every 

category we assigned had staff available to participate in our focus 

groups, where necessary, we selected alternates. Reserve Bank 

management noted that they needed some flexibility in the event that staff 

who were selected were unable to participate due to vacation, training, or 

other scheduling conflicts. We conducted focus groups on-site for staff on 

supervisory teams located at FRBNY and FRB Richmond. Staff at FRB 

Boston and FRB San Francisco participated in focus groups together over 

a shared videoconference line. Staff at FRB Boston and FRB San 

Francisco were sampled together and were selected based on the 

designation of staff into the categories described previously in order to 

obtain representation from each supervisory firm team. In addition, to 

ensure that every asset class represented had a participant in the focus 

group, where necessary, we selected alternates. 

A GAO methodologist facilitated each focus group. Our discussion topics 

focused on the following:

• the supervisory process and circumstances that may arise related 

to threats to independence;

• supervisory procedures and how staff implement them and;

• staff’s ability to raise divergent views and team dynamics with 

management.

GAO staff took notes, which we used to prepare records of discussion 

that were content analyzed to develop our findings. Results from the 

focus groups were also used to corroborate information we obtained in 

our interviews regarding the supervisory process, supervisory procedures 

and their implementation by staff, and staff’s ability to raise divergent

views on supervisory topics. Throughout this report, we use certain 

qualifiers when describing results from focus groups and interview 

participants, such as “a couple,” “some,” and “several.” We define a 

couple as two; some as three or four; and several as more than four. 
Appendix I: Objectives, Scope and 

Methodology

Page 72 GAO-18-118 Large Bank Supervision

While the information we collected from the focus groups provided 

context on the issues discussed, it was not generalizable to the entire 

population of LISCC supervisory staff.

To assess the Federal Reserve’s policies and procedures for identifying 

and mitigating conflicts of interest among individual supervisory 

employees, we reviewed federal statutes and regulations, the Federal 

Reserve Administrative Manual and supplemental guidance, the Reserve 

Banks’ codes of conduct, and other documentation and training materials. 

We collected and analyzed data from the Reserve Banks about LISCC 

staff conflicts of interest from 2011 through July 2016. We assessed 

these data and determined that they were sufficiently reliable for the 

purposes of our analysis. We also collected and analyzed financial 

disclosure information for the members of the OC from 2013 through 

2016. We also collected and analyzed information on waivers issued to 

Federal Reserve employees to enable them to continue working on 

supervisory matters in spite of conflicts of interest. We collected and 

analyzed available data on where Federal Reserve employees worked 

prior to joining the Federal Reserve and where employees went to work 

after leaving the Federal Reserve. We analyzed information about 

violations of Federal Reserve ethics policies. Finally, we also interviewed 

ethics officials at the Board of Governors and the four Reserve Banks.

We conducted this performance audit from February 2016 to November

2017 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 73 GAO-18-118 Large Bank Supervision

A wide body of academic literature has focused on factors that can 

increase the risks of regulatory capture in the banking system and 

identified various strategies to mitigate these risks. While there is no set 

definition of regulatory capture that is used throughout the literature, in 

general, regulatory capture occurs when a regulator acts in service of 

private interests at the expense of the public interest.1

Asymmetry in information and participation. Information asymmetry 

refers to an imbalance in relevant information between two parties to a 

transaction or interaction. Some scholars argue that information 

asymmetry can facilitate threats to supervisory independence and 

increase the risk of regulatory capture by enabling supervised firms to 

hide information from the supervisory agency.2 This information 

differential can mean that supervisors are dependent on supervised firms 

for information and may be unable to view that information skeptically or 

effectively. For example, large complex banks have significantly more 

resources and expertise than their supervisors and can present obstacles 

for supervisors to examine them effectively. This informational imbalance 

and dependence on the regulated entity for the relevant information may 

also result in relationship dynamics that lead to a decline in professional 

skepticism. A number of studies also argue that asymmetric participation 

may pose a risk of regulatory capture.3 These studies explain that in the 

financial sector, compared to smaller and less capitalized firms, large and 

powerful firms have more resources and incentives to overcome 

collective action obstacles, hire experts, and lobby effectively. The 

research also acknowledge that some firms may be seen as being so 

structurally important to the economy that they receive differential 

treatment by the regulator.

Asymmetry also can occur when regulators and industry have differing 

degrees of access to expertise. Several articles argued that regulated 

firms have more expertise than regulatory agencies because firms 

 1

See, for example, D. Carpenter and D. A. Moss, Preventing Regulatory Capture: Special 

Interest Influence and How to Limit it. (New York, NY: Cambridge University Press, 2014). 

2

See, for example, D. Carpenter and D. A. Moss (eds.), Preventing Regulatory Capture, 

71-98.

3

See, for example, S. Pagliari, Making Good Financial Regulation: Towards a Policy 

Response to Regulatory Capture, (United Kingdom: Grosvenor House Publishing, Limited, 

2012).

Appendix II: Literature on Regulatory 

Capture in Financial Banking Supervision

Factors That Can Increase 

the Risk of Regulatory 

Capture and Threats to 

Supervisory Independence
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 74 GAO-18-118 Large Bank Supervision

generally have more resources.4 According to these articles, an agency’s 

lack of expertise can limit a regulator’s ability to evaluate industry 

practices. According to these articles, the experts agencies hire typically 

come from the regulated industry, which has likely affected their views.

Revolving door. A situation in which personnel move back and forth 

between an industry and a regulator is known as a “revolving door.” The 

movement may occur because of a salary differential between the 

supervised industry and supervisory agency, where a regulated firm can 

offer regulators higher salaries. Such situations may threaten supervisory 

independence by making regulators less willing to challenge firms. 

Several articles note that a salary differential between the regulated 

industry and regulatory agency contributes to the revolving door.5 The 

articles note that the revolving door can result in social ties that can 

threaten supervisory independence because firms may take advantage of 

social ties to pressure regulators in a particular direction. Former 

regulators who have been hired by firms may have lingering social ties 

and insight into the regulatory agency, which they may use to exert 

influence over the regulator. Shared social ties may also simply give the 

regulated firms additional access to regulatory agencies. Moreover, the 

literature explains that this mobility of workers may contribute to a narrow 

social network that promotes regulators’ shared way of thinking or limits 

their objectivity. However, a few articles caution that the existence of a 

revolving door does not mean that an agency is captured; indeed, a 

revolving door may enhance a regulator’s ability to serve the public 

interest and improve the performance and stability of regulated firms.6

Cultural capture. The supervisory process also may be subject to 

capture through the shared world view of participants, sometimes called 

cultural or intellectual capture. Some studies indicate that a regulatory 

agency can come to share the beliefs, views, and perspectives of the 

regulated industry.7 Additional studies state that supervisors come to 

 4

See, for example, S. Gadinis, From Independence to Politics in Financial Regulation 

(Berkeley, Ca.:Berkeley Law Scholarship Repository, April 2013). 

5

See, for example K. Dowd, M. Hutchinson, S. Ashby, and J. Hinchliffe, Capital 

Inadequacies: The Dismal Failure of the Basel Regime of Bank Capital Regulation, Policy 

Analysis No. 681 (Washington, D.C.: CATO Institute, July 2011).

6

See, for example, D. Lucca, A. Seru, and F. Trebbi, The Revolving Door and Worker 

Flows in Banking Regulation, Federal Reserve Bank of New York Staff Report No. 678 

(New York, NY: Federal Reserve Bank of New York, June 2014).

7

See, for example Carpenter and Moss, Preventing Regulatory Capture, 71-98.
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 75 GAO-18-118 Large Bank Supervision

value relationships developed through repeated interactions and may 

avoid making decisions that could deteriorate those relationships.8 Two 

articles note that past employment or a shared professional background 

can also facilitate cultural capture and affect the regulator’s confidence in 

and trust of the regulated industry. Similarly, some studies note that 

shared educational background and social networks can lead regulators 

to identify closely with the regulated industry.9 According to this literature, 

when a regulatory agency lacks a clear mission to pursue and prioritize 

public interests, there is a risk of regulatory capture in which agencies 

become passively persuaded by regulated parties.

Agency funding structure. How an agency is funded can affect the 

agency’s risk of regulatory capture. Regulators may be funded through 

legislative appropriations (e.g., the Commodities Futures Trading 

Commission), where funding levels are determined through the legislative 

process, or through the agencies’ process, in the form of fees and 

assessments to regulated parties (e.g., the Office of the Comptroller of 

the Currency and Federal Reserve System). Regulatory capture may 

occur in either case. For example, in the former, lobbyists may pressure 

legislators to restrict funding, while in the latter regulated parties may 

choose to change regulators by selecting different charters. Where there 

is a risk of regulatory shopping or arbitrage, regulators may feel 

pressured to promote legislation or make decisions that favor regulated 

firms in order to attract and retain the regulated entities. For example, to 

the extent that a regulated entity may choose one agency or another as 

its regulator, the entity could “charter shop” and choose as its regulator 

the agency that promotes regulatory or supervisory decisions that favors 

the entity.

External pressure. External pressure, such as from the political sphere, 

is another factor that can subject the financial institution supervisory 

process to regulatory capture.10 Political or electoral factors can put 

pressure on regulators or lead political actors to distance themselves from 

a regulatory agency. Regulators may avoid decisions that could upset 

 8

See, A. Baker, “Restraining Regulatory Capture: Anglo-America, Crisis Politics and 

Trajectories of Change in Global Financial Governance,” International Affairs, vol. 86, no. 

3 (2010) and Pagliari, Making Good Financial Regulation.

9

See, for example, Carpenter and Moss, Preventing Regulatory Capture, 71-98.

10See, for example, K. Young, “Policy Takers or Policy Makers? The Lobbying of Global 

Banking Regulators,” Business Horizon, vol. 56, (2013).
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 76 GAO-18-118 Large Bank Supervision

politicians or distract from important problems. In addition, regulated firms 

may be influential campaign donors with the ability to pressure politicians 

when they disagree with the regulators. Two articles also note that the 

level of external pressure may vary depending on the salience of the 

issue.11

Our review identified various strategies that can help mitigate threats to 

supervisory independence and risks of regulatory capture.

Increase transparency and accountability. Studies indicate regulators 

can mitigate threats to supervisory independence and risks of regulatory 

capture by increasing the transparency of supervisory accountability. A 

regulator can adopt several strategies for doing this, including making 

more visible its movement of supervisory staff to the industry, operating 

procedures, and key decisions.12 In addition, a regulator could conduct 

additional legal and external third-party reviews of its decisions. Such 

accountability can facilitate better detection of, deterrence of, and 

responses to abuse of supervisory authority.

Strategically manage supervisory teams. Some studies propose 

practices that regulators may use to manage, hire, and organize their

supervisory teams to reduce the risk of threats to supervisory 

independence and regulatory capture.13 For example, depending on the 

regulator, such practices might include more frequently rotating those in 

key decision-making roles, hiring additional staff, limiting its use of 

external contractors, hiring a more diverse workforce, and including at 

least two supervisory staff when conducting site visits of supervised firms.

Reduce risk from agency funding structure. Various steps can reduce 

the likelihood of capture due to agency funding structure.14 For example, 

 11See, for example, Baker, “Restraining Regulatory Capture.”

12See, for example, B. Quinn, “Governance of the Regulatory Decision Making Process,”

Financial Markets, Institutions & Instruments, vol. 17, no. 1 (2008) and Pagliari, Making 

Good Financial Regulation.

13See, for example, Pagliari, Making Good Financial Regulation, and F. Boehm, 

Regulatory Capture Revisited: Lessons from Economics of Corruption, Anti-Corruption 

Training & Consulting, and Research Center in Political Economy, Working Paper (CIEP, 

Universidad Externado de Colombia, July 2007).

14See, for example, N. Bagley, “Response: Agency Hygiene,” Texas Law Review, vol. 89, 

no. 1 (2010).

Strategies for Mitigating 

the Risk of Regulatory 

Capture
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 77 GAO-18-118 Large Bank Supervision

where a regulator is funded by appropriations, the risk of capture can be 

reduced by effective legislative oversight.

Reduce risk from revolving door. Several studies note that higher 

salaries and better career advancement opportunities for supervisors can 

help attract high-quality employees and increase their retention.15 Many 

articles also discuss a cooling-off period—barring certain employees from 

employment at or representation before their former agencies—to 

mitigate risks associated with staff movement through the revolving door, 

but there is some uncertainty about what this period should look like. One 

article argues for a cooling-off period scaled to seniority. Another article 

argues that the ban on working and communication should apply both 

when moving into and out of the regulated industry. Still another article 

argues that the cooling-off period should extend to 2 years because 

contacts may still be relevant after just 1 year, and that the ban should 

apply to lobbying activities as well. Others express reservations about a 

cooling-off period altogether, because it may limit career advancement of 

regulator staff, make it more difficult for a regulator to attract and retain 

high-quality staff, and it may not account for the differential in benefits to 

staff offered by a regulator and a firm.16

Counter cultural capture. Some studies indicate that hiring staff from 

diverse backgrounds, instituting contrarian roles in the decision-making 

process, incorporating incentive structures to help ensure that incentives 

are aligned with the public interest, providing training related to capture, 

and protecting whistleblowers can help to mitigate cultural capture.17

Some studies also indicated that a clear mandate, tone at the top from 

management, and statutory independence of the supervisory agency may 

also counter the risk of cultural capture.18

 15See, for example, Pagliari, Making Good Financial Regulation.

16See, for example, Lucca, Seru and Trebbi, The Revolving Door.

17See for example, Pagliari, Making Good Financial Regulation; Boehm, Regulatory 

Capture Revisited); Baker, “Restraining Regulatory Capture;” and Carpenter and Moss, 

Preventing Regulatory Capture.

18See for example, S. Hempling, “’Regulatory Capture’: Sources and Solutions,” Emory 

Corporate Governance and Accountability Review, vol. 1 (2014): 23, 25.
Appendix II: Literature on Regulatory Capture 

in Financial Banking Supervision

Page 78 GAO-18-118 Large Bank Supervision

Reduce asymmetries. Several studies indicate that facilitating increased 

engagement by other groups, such as consumer advocacy groups, to 

balance industry engagement, can help reduce asymmetries of 

influence.19 An agency also may reduce information asymmetry by 

increasing the amount of data it collects from the supervised firms.20

Reduce undue external pressure. According to some studies, several 

mitigation strategies exist to address the risk of capture posed by external 

pressures. For example, studies suggest that fixed term limits can reduce 

political pressure on regulatory agency directors.21 In addition, greater 

information sharing between Congress and the agency can improve 

transparency. 

 19See, Boehm, Regulatory Capture Revisited, and Baker, “Restraining Regulatory 

Capture.”

20See Boehm, Regulatory Capture Revisited.

21See, for example, Quinn, “Governance of the Regulatory Decision Making Process.”
Appendix III: Summary of Federal Reserve 

Investment and Borrowing Prohibitions for 

Examiners and Other Types of Employees

Page 79 GAO-18-118 Large Bank Supervision

Federal Reserve System (Federal Reserve) examiners and other 

supervisory employees are subject to federal statutory and regulatory 

restrictions, as well as various Federal Reserve policies, intended to 

prevent conflicts of interest or the appearance of conflicts of interest. In 

cases where an employee is permitted to hold a prohibited financial 

interest, the employee is generally recused (disqualified) from working on 

the particular matter regarding the financial institution with which the 

employee has a conflict.1 Table 2 summarizes the investment and 

borrowing prohibitions and situations requiring recusal for examiners, 

employees working on other supervisory matters, or rulemaking and other 

matters. Some of these prohibitions are required by federal statute and 

regulation; others are required by Federal Reserve policy.

Table 2: Federal Reserve Guide to Investment and Borrowing Prohibitions and Situations Requiring Recusal

Type of potentially conflicting 

interest 

Investment and 

borrowing 

prohibitions

Recusal requirements

Examinations of a 

bank or holding 

companies or affiliates

Other supervisory 

matters involving 

entity and all affiliatesa

Rulemaking/matters of 

general applicabilityb

Financial interests

Financial Interest of employee, 

spouse, dependent child, or 

related party:

• Stock, stock options, 

Employee stock 

ownership plans

• Debentures/bonds

May not own debt 

or equities issued 

by a depository 

institution.

Recusal required. Recusal required. Recusal required if the 

market value of 

investment exceeds:

$25,000 in any one 

such entity.

$50,000 in all affected 

entities.

Pensions None. Recusal not required. Recusal not required. Recusal not required.

Mutual funds May not hold an 

interest in a

financial services 

sector fund.d

Recusal required if 

examination focuses on 

bank whose stock is 

held by financial 

services sector fund and 

employee owns more 

than $50,000 of fund.

Recusal required if 

examination focuses on 

bank whose stock is 

held by financial 

services sector fund and 

employee owns more 

than $50,000 of fund.

Recusal not required.

Borrowingsc

Credit cards and debit cards None. Recusal not required. Recusal not required. Recusal not required.

 1

In certain limited circumstances, the Federal Reserve Board or Reserve Banks may issue 

waivers to examiners that permit them to carry out their examination work while having

such conflicts.

Appendix III: Summary of Federal Reserve 

Investment and Borrowing Prohibitions for 

Examiners and Other Types of Employees
Appendix III: Summary of Federal Reserve 

Investment and Borrowing Prohibitions for 

Examiners and Other Types of Employees

Page 80 GAO-18-118 Large Bank Supervision

Type of potentially conflicting 

interest 

Investment and 

borrowing 

prohibitions

Recusal requirements

Examinations of a 

bank or holding 

companies or affiliates

Other supervisory 

matters involving 

entity and all affiliatesa

Rulemaking/matters of 

general applicabilityb

Overdraft lines of credit Prohibited where 

the Federal 

Reserve is the 

primary supervisor.

Recusal required from 

entity that extended the 

credit. May examine any 

other affiliate.

Recusal not required. Recusal not required.

Mortgage loans and home 

equity lines secured by principal 

residence

None. Recusal required from 

legal entity that 

extended the credit only. 

May examine any other 

affiliate.

Recusal not required. Recusal not required.

Mortgage loans and home 

equity lines secured by property 

other than principal residence

May not obtain 

from an institution 

for which the 

Federal Reserve is 

the primary 

supervisor.

Recusal required from 

the legal entity that 

extended the credit and 

any of its affiliates.

Recusal not required. Recusal not required.

Auto loans and leases May not obtain 

from an institution 

for which the 

Federal Reserve is 

the primary 

supervisor.

Recusal required from 

legal entity that 

extended the credit and 

any of its affiliates.

Recusal not required. Recusal not required.

Student loans May not obtain 

from an institution 

for which the 

Federal Reserve is 

the primary 

supervisor.

Recusal required from 

legal entity that 

extended the credit and 

any of its affiliates.

Recusal not required. Recusal not required.

Margin accounts (Broker/dealer 

loans)

May obtain from 

functionally 

regulated security 

broker/dealer.

Recusal required from 

legal entity that 

extended the credit and 

any of its affiliates.

Recusal not required. Recusal not required.

Loans secured by life insurance 

policies

None. Recusal required from 

legal entity that 

extended the credit only. 

May examine any other 

affiliate.

Recusal not required. Recusal not required.

Checking and savings accounts None. Recusal required from 

legal entity and any of 

its affiliates if deposit 

exceeds FDIC insured 

amounts.e

Recusal required from 

legal entity and any of its 

affiliates if deposit is in 

excess of FDIC insured 

amounts.

Recusal not required.
Appendix III: Summary of Federal Reserve 

Investment and Borrowing Prohibitions for 

Examiners and Other Types of Employees

Page 81 GAO-18-118 Large Bank Supervision

Type of potentially conflicting 

interest 

Investment and 

borrowing 

prohibitions

Recusal requirements

Examinations of a 

bank or holding 

companies or affiliates

Other supervisory 

matters involving 

entity and all affiliatesa

Rulemaking/matters of 

general applicabilityb

Business loans May not obtain 

from an institution 

for which the 

Federal Reserve is 

the primary 

supervisor.

Recusal required from 

legal entity that 

extended the credit and 

any of its affiliates.

Recusal required from 

legal entity that extended 

the credit and any of its 

affiliates.

Recusal not required.

Other situations

Employment of family member 

(spouse/parent/sibling/child)

Not applicable. Recusal required from 

legal entity and any of 

its affiliates.

Recusal required from 

legal entity and any of its 

affiliates

Recusal not required.

Prior employment Not applicable. Recusal required from 

legal entity and any of 

its affiliates for a 

minimum of 1 year.

Management may 

require longer recusal 

period from matters 

closely related to the 

employee’s prior 

responsibilities.

Recusal required from 

legal entity and any of its 

affiliates for a minimum of 

1 year.

Management may require 

longer recusal period from 

matters closely related to 

the employee’s prior 

responsibilities.

Recusal not required.

Source: Board of Governors of the Federal Reserve System. | GAO-18-118

a

A particular matter includes an application, audit, review (including report review), investigation, 

institution-specific analysis or surveillance, action, and enforcement, but does not include rulemaking 

or financial analysis broadly affecting financial institutions. A particular matter also includes credit 

review, collateral analysis, and lending decisions pertaining to the discount-window function.

b

The value of securities owned by the employee, his or her spouse and minor children must be 

aggregated.

c

The “borrowing prohibitions” apply to a loan obtained by examiners and by their spouses or 

dependent children, unless it is supported solely by their income or independent means. Examiners 

may not seek or accept any type of credit from an institution during an examination and for 3 months 

thereafter.

d

Financial services sector fund is a mutual fund that has a stated policy of concentrating in the 

financial services industry.

e

FDIC = Federal Deposit Insurance Corporation.
Appendix IV: Federal Reserve Bank 

Examination Staff with Active Conflicts of 

Interest, 2011–July 2016

Page 82 GAO-18-118 Large Bank Supervision

All Federal Reserve Banks (Reserve Bank) are responsible for 

implementing ethics policies and overseeing ethics procedures for their 

supervisory employees, including those who participate in the Large 

Institution Supervision Coordinating Committee (LISCC) program, which 

supervises the largest bank holding companies. The Reserve Banks store 

this information in a common electronic system.1 We analyzed conflict 

data for 469 LISCC program employees at the four Reserve Banks that 

participate in LISCC—the Reserve Banks of Boston, New York, 

Richmond, and San Francisco—by type of conflict from 2011 through July 

2016. On average, employees had approximately two active conflict types 

from 2011 through July 2016. The most common types of conflicting 

interest were mortgages or insurance plans; conflicts related to an 

employee or family member’s financial interests; and auto or student 

loans, business loans, or mortgages or lines of credit secured by 

nonprimary residences. To address such conflicts of interest, generally 

employees must divest such interests or be recused from matters 

affecting the firm in which they have the interests, depending on the 

policy requirements and ethics officials’ review.2

Table 3: Federal Reserve Examination Staff Working on Large Institution Supervision Coordinating Committee (LISCC) 

Examinations with Active Conflicts of Interest, 2011–July 2016

Type of interest Prohibition Recusal required from legal 

entity and any or all affiliates 

Number of active LISCC 

employees with at least 1 

conflict in this category 

with a LISCC firmd

Financial interestsa

Employee, employee’s spouse, or 

dependent child:

• ownership of stocks,

• stock options,

• pensions,

• 401(k) plans 

May not own assets from a 

financial institution; must 

divest any prohibited assets 

within 90 days of hiring.

Yes 112

 1

Conflict-of-interest data for Federal Reserve Board of Governors staff who participate in 

the LISCC program and other nonsupervisory Federal Reserve System staff assigned to 

LISCC program examinations are collected and stored separately.

2

As noted previously in this report, approximately 62 employees received waivers 

between 2011 and 2015 (most due to conflicting financial interests) although the Reserve 

Banks granted only 10 waivers in 2014–2015, after the Federal Reserve amended its 

waiver policy to eliminate permanent waivers for conflicts of financial interests.

Appendix IV: Federal Reserve Bank 

Examination Staff with Active Conflicts of 

Interest, 2011–July 2016
Appendix IV: Federal Reserve Bank 

Examination Staff with Active Conflicts of 

Interest, 2011–July 2016

Page 83 GAO-18-118 Large Bank Supervision

Type of interest Prohibition Recusal required from legal 

entity and any or all affiliates 

Number of active LISCC 

employees with at least 1 

conflict in this category 

with a LISCC firmd

Borrowingb

Overdraft lines of credit May not obtain from an 

institution for which the 

Federal Reserve is the 

primary supervisor.

Yes - from legal entity that 

extended the credit only. May 

examine any other affiliate.

76

• Mortgage loans and home 

equity lines secured by 

principal residence or

• life insurance policies and 

loans secured by life 

insurance policies

None. Yes - from legal entity that 

extended the credit only. May 

examine any other affiliate.

214

• Auto loans and leases;

• business loans;

• student loans; or

• mortgage loans and home 

equity lines secured by 

property other than principal 

residence

May not obtain from an 

institution for which the 

Federal Reserve is the 

primary supervisor.

Yes. 95

Checking and savings accounts None. Yes - if deposit is in excess of 

Federal Deposit Insurance 

Corporation insured amounts.

11

Other situations

Employment of family member in a 

supervised institutionc Not applicable. Yes. 77

Prior employment Not applicable. Yes - for a minimum of 1 year.

Management may require longer 

recusal period foe matters 

closely related to the employee’s 

prior responsibilities.

33

Gifts May not accept gifts of any 

value.

Not applicable. 0

Secondary employment Must disclose and obtain 

approval

Not applicable. 0

Seeking Outside Employment Must disclose and obtain 

approval

Yes 0

Source: GAO analysis of Federal Reserve Bank data. | GAO-18-118

a

18 U.S.C. § 208.

b

The “borrowing prohibitions” apply to a loan obtained by examiners and by their spouses or 

dependent children, unless it is supported solely by their income or independent means. Examiners 

may not seek or accept any type of credit from an institution they are examining and for 3 months 

after the examination has ended.

c

This may include family members outside of immediate family (e.g. uncle, brother-in-law).
Appendix IV: Federal Reserve Bank 

Examination Staff with Active Conflicts of 

Interest, 2011–July 2016

Page 84 GAO-18-118 Large Bank Supervision

d

We analyzed 469 examiners employed on LISCC examinations between 2011–July 2016. Of these, 

346 had active types of conflicts. On average, employees had approximately 2 conflict types over the 

2011–July 2016 period of our analysis. This column summarizes individual employees by category of 

conflicting interest. Because an employee may have had more than one conflict over the period of our 

analysis, the total number of conflicts is greater than the number of employees whose data we 

analyzed.
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 85 GAO-18-118 Large Bank Supervision

Appendix V: Comments from the Board of 

Governors of the Federal Reserve System
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 86 GAO-18-118 Large Bank Supervision
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 87 GAO-18-118 Large Bank Supervision
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 88 GAO-18-118 Large Bank Supervision
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 89 GAO-18-118 Large Bank Supervision
Appendix V: Comments from the Board of 

Governors of the Federal Reserve System

Page 90 GAO-18-118 Large Bank Supervision
Appendix VI: GAO Contact and 

Acknowledgments

Page 91 GAO-18-118 Large Bank Supervision

Lawrance L. Evans, Jr. (202) 512-8678, evansL@gao.gov

In addition to the contact named above, John Forrester (Assistant 

Director), Akiko Ohnuma (Analyst in Charge), Jordan Anderson, Bethany 

Benitez, Abby Brown, Rudy Chatlos, Rachel DeMarcus, Catherine Gelb, 

Farrah Graham, John Karikari, Jim Lager, Marc Molino, Roberto Pinero, 

Jennifer Schwartz, and Melia Ungson made key contributions to this 

report.

Appendix VI: GAO Contact and 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100576)
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