United States Government Accountability Office

GAO Report to Congressional Committees

FINANCIAL MARKET 

REGULATION 

Agencies Engaged in 

Consolidated 

Supervision Can 

Strengthen 

Performance 

Measurement and 

Collaboration 

March 2007 

 

GAO-07-154 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 2007

FINANCIAL MARKET REGULATION

Agencies Engaged in Consolidated 

Supervision Can Strengthen Performance 

Measurement and Collaboration 

Highlights of GAO-07-154, a report to 

congressional committees 

As financial institutions 

increasingly operate globally and

diversify their businesses, entities

with an interest in financial 

stability cite the need for 

supervisors to oversee the safety

and soundness of these institutions

on a consolidated basis. Under the 

Comptroller General’s Authority, 

GAO reviewed the consolidated 

supervision programs at the 

Federal Reserve System (Federal

Reserve), Office of Thrift

Supervision (OTS), and Securities 

and Exchange Commission (SEC) 

to (1) describe policies and 

approaches that U.S. consolidated

supervisors use to oversee large 

and small holding companies; (2)

review the management of the 

consolidated supervision programs, 

including use of program objectives 

and performance measures; and (3)

evaluate how well consolidated

supervisors are collaborating with

other supervisors and each other in 

their activities. In conducting this 

study, GAO reviewed agency policy

documents and supervisory reports 

and interviewed agency and 

financial institution officials. 

What GAO Recommends

GAO recommends that the heads of 

the three agencies direct their 

staffs to develop a set of clear and 

consistent objectives and related 

performance measures specific to

consolidated supervision and 

collaborate more systematically 

with each other and with other

supervisors. The agencies 

generally agreed with these 

recommendations. 

The Federal Reserve, OTS, and SEC have responded to the dramatic changes 

in the financial services industry, and for many of the largest financial 

services firms, the agencies focus on the firms’ consolidated risks, controls, 

and capital. Reflecting in part differences in structure, traditional roles and 

responsibilities, and the length of time they have had to develop and refine 

their programs, the agencies employ somewhat differing policies and 

approaches for their consolidated supervision programs. 

Consolidated supervision becomes more important in the face of changes in 

the financial services industry, particularly with respect to the increased 

importance of enterprise risk management by large, complex financial 

services firms. Consolidated supervision provides a basis for the supervisors 

to oversee the risks of financial services firms on the same level that the 

firms manage those risks. GAO found that while all of these agencies were 

meeting international standards for effective oversight of large, 

internationally active conglomerates and have broad goals for supervision, 

they could more clearly articulate the specific objectives and performance 

measures for their evolving consolidated supervision programs. Both 

Federal Reserve and OTS, for example, focus on the safety and soundness of 

the depository institution but could take steps to better measure how 

consolidated supervision contributes to this in ways that differ from primary 

supervision of the depository institution. Such objectives and measures 

would help the agencies ensure consistent treatment of the firms that are 

subject to consolidated supervision. 

More effective collaboration can occur if agencies take a more systematic

approach to agreeing on roles and responsibilities and establishing 

compatible goals, policies, and procedures on how to use available 

resources as efficiently as possible. While the three agencies coordinate and 

exchange information, they could take a more systematic approach to 

collaboration with respect to their consolidated supervision programs. For 

instance, SEC and OTS have authority for some of the same firms with no 

effective mechanism to prevent duplication, assign accountability, or resolve 

potential conflicts. Similarly, while the Federal Reserve and other federal 

bank supervisory agencies have taken steps to share information and 

examination activities when the Federal Reserve is not the primary 

supervisor of the lead bank in a bank holding company, some duplication 

and lack of accountability remain. As a result, consolidated supervision of 

U.S. financial institutions is not as efficient and effective as it could be if 

agencies collaborated more systematically. GAO has noted in the past that it 

is difficult to collaborate within the fragmented U.S. regulatory system and 

has recommended that Congress modernize or consolidate the regulatory 

system. However, if the current system is maintained, it is increasingly 

important for agencies to collaborate to ensure effective and efficient 

consolidated supervision, consistent treatment of financial services firms, 

and clear accountability of the agencies for their supervisory activities. 

www.gao.gov/cgi-bin/getrpt?GAO-07-154.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J.

Hillman at (202) 512-8678 or 

hillmanr@gao.gov.
Contents 

Letter 1

Results in Brief 4

Background 7

Agencies Employ Differing Policies and Approaches to Provide 

Consolidated Supervision 16 

Improved Program Objectives and Performance Measures Could 

Enhance Agencies’ Consolidated Supervision Programs 30 

Systematic Collaboration Could Enhance Consolidated Supervision 

Programs 42

Conclusions 54

Recommendations for Executive Action 56 

Agency Comments and Our Evaluation 57 

Appendix I Objectives, Scope, and Methodology 62 

Appendix II Criteria for Consolidated Supervision Included in 

Basel Committee on Banking Supervision’s Core 

Principles 65 

Appendix III Comments from the Chairman of the Board of 

Governors of the Federal Reserve System 68 

Appendix IV Comments from the Director of the Office of 

Thrift Supervision 72 

Appendix V Comments from the Chairman of the Securities 

and Exchange Commission 75 

Appendix VI GAO Contact and Staff Acknowledgments 79 

Page i GAO-07-154 Financial Market Regulation
Related GAO Products 80

Tables 

Table 1: U.S. Primary Bank, Broker-Dealer, and Insurance 

Supervisors, 2005 10 

Table 2: Number and Type of Institutions That Consolidated 

Supervisors Oversee, 2005 12 

Table 3: Federal Reserve’s Supervisory Cycle for LCBOs 18 

Table 4: OTS’s Standard Core Framework 22 

Table 5: Thrift Holding Company Enterprises by Category, 

Complexity, Size, and Primary Business, as of December 

31, 2006 28 

Table 6: Key Elements of Collaboration 43 

Figure 

Figure 1: Supervisors for a Hypothetical Financial Holding 

Company 26

Abbreviations 

BaFin German Federal Financial Supervisory Authority 

 (Die Bundesanstalt für 

 Finanzdienstleistungsaufsicht) 

BCBS Basel Committee on Banking Supervision 

Board Federal Reserve Board of Governors 

CAMELS capital adequacy, asset quality, management ability, 

 earnings, liquidity, and sensitivity to market risk 

CIO Complex and International Organizations 

CORE capital, organization structure, relationship, and 

 earnings 

Page ii GAO-07-154 Financial Market Regulation
COSO Committee of Sponsoring Organizations of the 

 Treadway Commission 

CSE consolidated supervised entity 

District Bank Federal Reserve Bank in each of the 12 Federal 

 Reserve Districts 

EU European Union 

FCD Financial Conglomerates Directive 

FDIC Federal Deposit Insurance Corporation 

Federal Reserve Federal Reserve System 

FSA Financials Services Authority of the United 

 Kingdom 

GLBA Gramm-Leach-Bliley Act 

ILC industrial loan companies 

LCBO large complex banking organization

LTCM Long-Term Capital Management 

MOU memorandum of understanding 

NAIC National Association of Insurance Commissioners 

NERO Northeast Regional Office 

OCC Office of the Comptroller of the Currency 

OCIE Office of Compliance Inspections and Examinations 

OTS Office of Thrift Supervision 

SEC Securities and Exchange Commission 

SIBHC supervised investment bank holding company 

SRO self-regulatory organization 

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Page iii GAO-07-154 Financial Market Regulation
United States Government Accountability Office

Washington, DC 20548 

March 15, 2007 

Congressional Committees 

Increasingly, financial institutions headquartered in the United States, and 

their competitors, operate on a global basis, engage in a variety of 

businesses, and manage themselves from a consolidated perspective.

Partly in response to these changes, entities with an interest in financial

institutions have increasingly cited the need for supervisors to oversee the 

safety and soundness of these firms on a consolidated basis, mirroring the 

risk management practices of the firms. This increased focus is reflected 

in U.S. laws that provide holding company supervisors with authority to 

examine the financial and operating risks faced by holding companies and 

the controls for these risks on a consolidated basis. Similarly, the 

European Union’s (EU) Financial Conglomerates Directive, implemented 

in 2005, requires conglomerates to have a consolidated supervisor—either 

an EU supervisor or a home supervisor that has demonstrated it provides 

equivalent consolidated supervision—and focuses on the risks, controls, 

and capital levels of holding companies. 

In the United States, consolidated supervision generally is equated with 

holding company supervision at the top tier or ultimate holding company 

in a financial enterprise. Three federal agencies—the Federal Reserve 

System (Federal Reserve), the Office of Thrift Supervision (OTS), and the 

Securities and Exchange Commission (SEC)—engage in oversight of 

financial services holding companies on a consolidated basis:1

 the Federal 

Reserve oversees bank holding companies (including financial holding 

companies, which are bank holding companies qualified to engage in many 

nonbanking financial services), OTS oversees thrift holding companies, 

and SEC oversees consolidated supervised entities (CSE). Each of these 

agencies oversees large, complex financial institutions. 

In addition, the Federal Reserve and OTS provide consolidated 

supervision for the vast majority of U.S. financial institutions organized as 

 1

For enterprises engaged in commercial activities, consolidated supervision also may refer

to supervision of the enterprise consolidated at the highest level holding company engaged 

in financial activities. For foreign banking firms that operate in the United States without a 

U.S. holding company, consolidated supervision may refer to the oversight of all U.S. 

activities of the foreign firm. 

Page 1 GAO-07-154 Financial Market Regulation
holding companies that have remained relatively small, and are not 

complex. Under U.S. law, consolidated supervisors are to rely on primary 

bank and functional supervisors with respect to the supervision of 

regulated financial subsidiaries such as banks, broker-dealers, and 

insurers.2

 The Federal Deposit Insurance Corporation (FDIC) and the 

Office of the Comptroller of the Currency (OCC), for instance, are the 

primary federal supervisors for state-chartered banks that are not 

members of the Federal Reserve System and for national banks, 

respectively. SEC is the primary regulator of broker-dealers and state 

insurance supervisors of insurers. 

As is generally the case for supervisors dealing with the financial viability 

of the entities they oversee, holding company supervisors face the 

challenge of striking the appropriate balance between adequately 

assessing the risks and controls of financial services firms and placing 

undue regulatory burdens on those enterprises. At the consolidated level 

the effects of not having the right balance could be unacceptable losses to 

the depository insurance fund, systemic failures that could threaten 

financial stability, competitive disadvantages for U.S. firms as a whole or 

for a firm or group of firms relative to their U.S. competitors, or higher 

costs or lower returns for consumers of financial services products or the 

owners of those firms. 

In previous reports,3

 we have noted the challenges confronting the U.S. 

regulatory system: 

The present federal financial regulatory structure evolved largely as a 

result of periodic ad hoc responses to crises such as financial panics. 

In the last few decades, however, the financial services industry, 

especially as represented by the largest firms, has evolved, becoming 

more global, more concentrated, complex, and consolidated across 

 2

For the purposes of this report, functional supervisors also may include supervisors of

foreign subsidiaries, such as the United Kingdom’s Financial Services Authority, the 

German Federal Financial Supervisory Authority (Die Bundesanstalt für 

Finanzdienstleistungsaufsicht) called BaFin, the French Commission Bancaire, and the 

Japanese Financial Services Agency. 

3

See GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: Feb. 1, 2005); Financial Regulation: Industry Changes

Prompt Need to Reconsider U.S. Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 

6, 2004); and Industrial Loan Companies: Recent Asset Growth and Commercial Interest 

Highlight Differences in Regulatory Authority, GAO-05-621 (Washington, D.C.: Sept. 15,

2005). 

Page 2 GAO-07-154 Financial Market Regulation
sectors, and increasingly converging in terms of product offerings. 

Multiple specialized regulators bring critical skills to bear in their areas 

of expertise but have difficulty seeing the total risk exposure at large 

conglomerate firms or identifying and preemptively responding to 

risks that cross industry lines.4

In particular, we previously concluded that while the strength and vitality 

of the U.S. financial services industry demonstrates that the regulatory 

structure has not failed, there are questions whether that structure is 

appropriate in today’s environment, particularly with respect to large, 

complex firms managing their risks on a consolidated basis. We suggested 

that Congress consider several alternative structures, including 

consolidating some or all of the current regulatory agencies or having a 

single regulator oversee complex, internationally active firms. However, 

this report evaluates consolidated supervision under the existing 

regulatory structure and does not address proposals to consolidate federal 

financial regulation. 

In recognition of the increasing importance of consolidated supervision 

for the federal financial regulatory system raised in these earlier reports, 

we undertook a review of consolidated supervision in the United States 

under the Comptroller General’s Authority to initiate reviews. This report 

• describes the policies and approaches U.S. consolidated supervisors use to 

oversee large and small holding companies in the financial services 

industry; 

• reviews the supervisory agencies’ management of their consolidated 

supervision programs, including program objectives and performance 

measures; and 

• evaluates how well consolidated supervisors are collaborating with other 

supervisors and each other in their activities. 

To meet our objectives, we reviewed the structure, policies, and activities 

of the Federal Reserve, OTS, and SEC as they relate to these agencies’ 

consolidated supervision programs. We reviewed laws and regulations 

pertinent to each agency’s consolidated supervision, as well as agency

planning and performance documents, and regulatory planning and 

 4

GAO-05-325SP, 28. 

Page 3 GAO-07-154 Financial Market Regulation
examination reports and letters for a group of 14 large, complex firms 

selected because they had at least one of these characteristics: (1) major 

international operations, so that they were subject to the EU Financial 

Conglomerates Directive; (2) operations in several business lines; or (3) 

oversight by one or more consolidated supervisors. We also interviewed 

agency officials and examiners and officials from some of the selected 

group of firms to determine their view of the regulatory process. In 

addition, for the Federal Reserve and OTS, we reviewed examination 

materials related to the supervision of smaller, less complex institutions. 

To determine the adequacy of management practices at the agencies, we 

analyzed the goals for holding company supervision, the strategies 

agencies employ to achieve their goals, including collaboration, and how

agencies monitor their performance. We also reviewed officials’ and 

examiners’ statements and other examination materials to determine the 

degree to which consolidated supervision programs have effective internal 

control, key management practices that provide agencies with reasonable 

assurance that the programs are operating efficiently and effectively. This 

included an evaluation of how agencies coordinate their activities relative 

to the practices for effective collaboration that we have identified.5

 We 

conducted our work between November 2005 and February 2007 in 

accordance with generally accepted government auditing standards in 

Washington, D.C.; Boston; and locations where financial institutions we 

visited are headquartered. See appendix I for additional details on the 

objectives, scope, and methodology used in this report. 

In recent years, financial services firms have grown dramatically and

become more complex in terms of the products and services they offer; 

they increasingly operate on a global basis and often manage risks across 

the enterprise. The Federal Reserve, OTS, and SEC have all responded to 

the dramatic changes in the financial services industry, and now, for many 

of the largest, most complex financial services firms in the United States,

these agencies examine risks, controls, and capital levels on a 

consolidated basis. Given the differences in the institutions that the 

agencies supervise and other factors, their specific policies and 

procedures differ. The agencies divide responsibilities for developing and 

implementing policies across a number of agency components. The 

Federal Reserve and OTS generally set policy centrally and implement it 

Results in Brief 

 5

See GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain

Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005). 

Page 4 GAO-07-154 Financial Market Regulation
through District Banks or regional offices, respectively. At SEC, the 

Division of Market Regulation (Market Regulation) has primary 

responsibility for policy and for overseeing how firms manage risks, while 

SEC’s examination offices scrutinize more control-oriented activities. 

Almost all firms overseen by the Federal Reserve are engaged primarily in 

the business of banking and those overseen by SEC are engaged primarily 

in the securities business. In contrast, a substantial minority of the firms 

OTS oversees—especially the large, complex ones—have primary 

businesses other than those traditionally engaged in by thrifts, such as 

insurance, securities, or commercial activities. In addition, large firms tend 

to be overseen by multiple supervisors and in the case of firms overseen 

by the Federal Reserve, on a consolidated basis, OCC or FDIC is often the 

primary federal regulator of the lead insured depository subsidiary. 

Finally, for their smaller, less complex firms, the Federal Reserve and OTS 

use abbreviated examination programs. 

Consolidated supervision becomes more important in the face of changes 

in the industry, particularly with respect to the increased importance of 

enterprise risk management by large, complex financial services firms. 

Consolidated supervision provides a basis for the supervisors to oversee 

the risks of a financial services firm on the same level that the firm 

manages its risks. Each of the agencies has broad goals for its 

consolidated supervision programs. However, each could better ensure 

accountability, efficiency, and consistency by more clearly articulating the 

objectives of its consolidated supervision program, distinguishing these 

objectives from those for primary supervision, linking its activities to these 

objectives, and measuring the extent to which the activities achieve the 

objectives by developing and using performance measures that are 

specific to the program. In addition, agencies could achieve greater 

consistency by improving examiner guidance. We found that the Federal 

Reserve, OTS, and SEC were generally meeting criteria for comprehensive, 

consolidated supervision. However, particularly in rapidly changing 

environments such as the financial services industry, clearer objectives 

and performance measures are essential. The Federal Reserve and OTS 

identify an objective of consolidated supervision as protecting the safety

and soundness of depository institutions, but the agencies could take steps 

to better measure how consolidated supervision contributes to this 

objective in ways that are different from primary bank supervision. 

Similarly, SEC identifies protection of regulated subsidiaries as an 

objective but does not distinguish the contribution that consolidated 

supervision makes in addition to SEC’s oversight of regulated brokerdealers. SEC staff recently developed a draft document that is intended to 

provide objectives specific to its consolidated supervision program. 

Page 5 GAO-07-154 Financial Market Regulation
Without such specific objectives and related performance measures, the 

agencies are less able to ensure that their supervisory activities avoid 

duplication and treat holding companies in a consistent manner. 

We have noted in the past that U.S. financial regulatory agencies cooperate

through a myriad of devices such as the President’s Working Group, the 

Federal Financial Institutions Examination Council, and Financial and

Banking Information Infrastructure Committee often at the direction of 

the President or Congress. In addition, to varying degrees, examiners and 

officials at the supervisory agencies share information on supervisory 

procedures and examination findings over the course of exams. However, 

the U.S. regulatory system could benefit from more systematic 

collaboration, both between consolidated and primary bank and functional 

supervisors in the oversight of the largest, most complex firms and among

the consolidated supervisors themselves. For many of the largest, most 

complex financial institutions, the consolidated supervisor is not the 

primary supervisor of holding company subsidiaries; other supervisors, 

such as bank supervisors, have this responsibility. The supervisory 

agencies, especially those involved in commercial bank supervision, do 

take steps to avoid duplication by sharing some information and 

examination activities. However, we found some evidence of duplication 

and lack of accountability when different agencies are responsible for 

consolidated and primary supervision, suggesting that opportunities 

remain for enhancing collaboration. For example, while the Federal 

Reserve and OCC have and generally follow procedures to resolve 

differences, one firm we visited had initially received conflicting 

information from the Federal Reserve, its consolidated supervisor, and 

OCC, its primary bank supervisor, regarding the firm’s business continuity 

plans. Also, SEC and OTS both have consolidated supervisory authority 

for some of the same firms, but with no effective mechanism to 

collaborate in order to prevent duplication, assign accountability, or 

resolve potential conflicts in the feedback given to firms. Moreover, while

these agencies all supervise large, complex, internationally active firms, 

they could better ensure consistency with more systematic collaboration 

to determine common goals, compatible strategies, and accountability. 

In this report, we make seven recommendations primarily related to 

improving certain management practices within and across the agencies 

engaged in consolidated supervision. We recommend that each agency 

better define objectives that are specific to its consolidated supervision 

program and develop performance measures that will help it measure the 

extent to which it is achieving these objectives. As noted above, SEC staff 

have developed draft objectives and performance measures for SEC’s 

Page 6 GAO-07-154 Financial Market Regulation
consolidated supervision program. With regard to the oversight of 

complex institutions where primary bank and functional supervisors 

oversee certain holding company subsidiaries, we recommend that those 

agencies engaged in consolidated supervision of the holding companies 

develop mechanisms for more systematic collaboration with the primary 

and functional supervisors responsible for the supervision of the 

subsidiaries. In a similar vein, we recommend that the three agencies 

engaged in consolidated supervision adopt mechanisms for more 

systematic collaboration among themselves, particularly when they share 

responsibility for the same firms. In both cases, more systematic 

collaboration would help to limit duplication, ensure that all regulatory 

areas are effectively covered, and ensure that resources are focused most 

effectively on the greatest risks across the regulatory system. In addition, 

we also make specific recommendations to each consolidated supervisor 

to help ensure that firms are treated consistently. The Chairman of the 

Board of Governors of the Federal Reserve System and the Director of the 

Office of Thrift Supervision provided written comments on a draft of this 

report; their comments are included in appendixes III and IV, respectively. 

The Chairman of the Securities and Exchange Commission provided 

written comments on a draft of this report and subsequently provided 

additional information detailing some of the actions he was taking in 

response to the report; these comments are included in appendix V. 

Officials from the three agencies generally agreed with the 

recommendations in this report and offered clarifying remarks. 

Modern financial services firms use a variety of holding company 

structures to manage risk inherent in their businesses. The United States 

regulatory system that consists of primary bank supervisors, functional 

supervisors, and consolidated supervisors oversees these firms in part to 

ensure that they do not take on excessive risk that could undermine the 

safety and soundness of the financial system. Primary bank supervisors 

oversee banks according to their charters, and functional supervisors—

primarily, SEC, self-regulatory organizations (SRO), and state insurance 

regulators—oversee entities engaged in the securities and insurance 

industries as appropriate. Consolidated supervisors oversee holding 

companies that contain subsidiaries that have primary bank or functional 

supervisors. They are chartered, registered, or licensed as banks, 

securities firms, commodity trading firms, and insurers. International 

bodies have provided some guidance for consolidated supervision. 

Background 

Page 7 GAO-07-154 Financial Market Regulation
Many modern financial firms are organized as holding companies that may 

have a variety of subsidiaries. In recent years, the financial services 

industry has become more global, consolidated within traditional sectors, 

formed conglomerates across sectors, and converged in terms of 

institutional roles and products. The holding company structure, which 

allows firms to expand geographically, move into other permissible 

product markets, and obtain greater financial flexibility and tax benefits, 

has facilitated these changes. Financial services holding companies now 

range in size and complexity from small enterprises that own only a single

bank and are being used for financial flexibility and tax purposes to large 

diversified businesses with hundreds of subsidiaries—including banks, 

broker-dealers, insurers, and commercial entities—that have centralized 

business functions that may be housed in the holding company. In 

addition, modern financial corporate structures often consist of several 

tiers of holding companies. 

To varying degrees, all financial institutions are exposed to a variety of 

risks that create the potential for financial loss associated with 

Modern Financial Services 

Firms Use Holding 

Company Structures to 

Manage Risk 

• failure of a borrower or counterparty to perform on an obligation—credit 

risk; 

• broad movements in financial prices—interest rates or stock prices—

market risk;

• failure to meet obligations because of inability to liquidate assets or obtain

funding—liquidity risk; 

• inadequate information systems, operational problems, and breaches in 

internal controls—operational risk; 

• negative publicity regarding an institution’s business practices and 

subsequent decline in customers, costly litigation, or revenue reductions—

reputation risk; 

• breaches of law or regulation that may result in heavy penalties or other 

costs—legal risk; 

• risks that an insurance underwriter takes in exchange for premiums—

insurance risk; and 

Page 8 GAO-07-154 Financial Market Regulation
• events not covered above, such as credit rating downgrades or factors 

beyond the control of the firm, such as major shocks in the firm’s 

markets—business/event risk. 

In addition, the industry as a whole is exposed to systemic risk, the risk 

that a disruption could cause widespread difficulties in the financial 

system as a whole. 

As firms have diversified, some holding companies have adopted 

enterprisewide risk management practices where they manage and control 

risks across the entire holding company rather than within subsidiaries. 

These firms have global risk managers who manage credit, market, 

liquidity, and other risks across the enterprise rather than within 

individual subsidiaries, such as securities, banking, or insurance 

businesses or subsidiaries in foreign countries. In addition, these firms 

generally provide services such as information technology on a firmwide 

basis and have firmwide compliance and internal audit functions. 

We have previously reported that most financial services firms are subject

to federal oversight designed to limit the risks these firms take on because

(1) consumers/investors do not have adequate information to impose 

market discipline on the institutions and (2) systemic linkages may make 

the financial system as a whole prone to instability.6

 In the United States, 

this oversight is provided by primary bank and functional supervisors as 

well as by consolidated supervisors. 

As table 1 illustrates, in the United States a variety of federal bank 

supervisors oversee banks that are subsidiaries of holding companies.7

State bank supervisors also participate in the oversight of banks with state 

charters. Similarly, securities supervisors that include SEC and SROs, such 

as the New York Stock Exchange and NASD, oversee broker-dealer 

subsidiaries and state insurance supervisors oversee insurance companies

and products. While each of the agencies has multiple goals, all are 

The U.S. Regulatory

System Includes Many 

Agencies

Primary Bank and Functional 

Supervisors Oversee Holding 

Company Subsidiaries 

 6

See GAO-05-61, pp. 30-31, for a fuller discussion. 

7

Banking institutions generally determine their regulator by choosing a particular kind of 

charter—commercial bank, thrift, credit union, or industrial loan company. These charters

may be obtained at the state or national level for all except industrial loan companies, 

which are chartered only at the state level. 

Page 9 GAO-07-154 Financial Market Regulation
involved in assessing the financial solvency of the institutions they 

regulate. 

Table 1: U.S. Primary Bank, Broker-Dealer, and Insurance Supervisors, 2005 

Regulatory body

Number of 

entities 

overseen Functions

Federal primary bank

supervisorsa

 

Federal Deposit Insurance 

Corporation 

5,245b Provides oversight of state-chartered banks that are not members of the Federal 

Reserve, state savings banks, and industrial loan corporations with federally insured

deposits. Also serves as the secondary regulator for all banks with federally insured

deposits. 

Federal Reserve 907cOversees state-chartered banks that are members of the Federal Reserve.

Office of the Comptroller of 

the Currency 

1,933dCharters and supervises banks with national charters. 

Office of Thrift Supervision 866eSupervises state-chartered savings associations that are federally insured and federally 

chartered thrifts. 

Broker-dealer supervisors 

Securities and Exchange 

Commission and selfregulatory organizations 

6,300f Oversee compliance of securities brokers and dealers with federal securities laws. Selfregulatory organizations play a major role in enforcing conduct of business and capital 

requirements. The Securities and Exchange Commission validates self-regulatory 

organizations’ rules and inspects and oversees their regulatory programs. 

Insurance supervisors

State insurance supervisors 8,794gInsurance firms are regulated primarily at the state level. The National Association of 

Insurance Commissioners aims to achieve some common minimum standards by 

encouraging consistency and cooperation among the various states as they individually 

regulate the insurance industry.h

Source: GAO analysis of agency data. 

a

Because credit unions are not subsidiaries of holding companies, they are not included here. 

b

Federal Deposit Insurance Corporation statistics, December 2005.

c

Federal Reserve, Annual Report 2005. 

d

Office of the Comptroller of the Currency, Annual Report Fiscal Year 2005. This number does not 

include the 51 federal branches of foreign banks in the United States that are also overseen by OCC.

e

Office of Thrift Supervision, Budget/Performance Plan Fiscal Year 2006. 

f

Securities and Exchange Commission. 

g

National Association of Insurance Commissioners, 2005 Insurance Department Resources Report. 

h

SEC regulates sales of discrete products, such as certain types of annuities considered to be 

securities. Also, banks engage in certain types of insurance activities, such as underwriting credit 

insurance and, under certain circumstances, acting as an insurance agent either directly or through a 

subsidiary. Although these activities are subject to OCC regulation, national banks can be subject to 

nondiscriminatory state laws applicable to certain insurance related activities. 

Page 10 GAO-07-154 Financial Market Regulation
All of the primary bank supervisors use the same framework to examine 

banks for safety and soundness and compliance with applicable laws and

regulations. Among other things, they examine whether 

• the bank has adequate capital on the basis of its size, composition of its 

assets and liabilities, and its credit and market risk profile; 

• the bank has an appropriate asset quality based on the credit risk of loans 

in its portfolio; 

• the bank’s earnings trend measures up to that of its peers; 

• the competence and integrity of the bank’s management and board of 

directors to manage the risks of the bank’s activities and their record of 

complying with banking regulations and other laws; 

• the bank has adequate liquidity based on its deposit volatility, credit 

conditions, loan commitments and other contingent claims on the bank’s 

assets and its perceived ability to raise funds on short notice at acceptable 

market rates; and 

• the bank adequately identifies and manages its exposures to changes in

interest rates and, as applicable, foreign exchange rates, commodity and 

equity prices. 

Primary bank examiners rate banks in each of the areas; these ratings are

usually referred to as CAMELS ratings (capital adequacy, asset quality,

management ability, earnings, liquidity, and, where appropriate, sensitivity 

to market risk). 

SROs oversee certain aspects of broker-dealer activity. SEC concurrently 

oversees these SROs and independently examines broker-dealers. SEC 

considers its enforcement authority crucial for its protection of investors. 

Under this authority, it brings actions against broker-dealers and other 

securities firms and professionals for infractions such as insider trading 

and providing false or misleading information about securities or the 

companies that issue them. However, to protect investors, SEC also 

requires broker-dealers to maintain a level of capital that should allow the 

broker-dealer to satisfy the claims of its customers, other broker-dealers, 

and creditors in the event of potential losses from proprietary trading or 

operational events. SEC and the SROs examine broker-dealers to 

determine if they are maintaining required capital and evaluate brokerdealers’ internal controls. 

Page 11 GAO-07-154 Financial Market Regulation
The central purpose of insurance regulation is to protect consumers by 

monitoring the solvency of insurers and their business practices. 

Insurance companies are supervised on a state-by-state basis, although 

states often follow general standards promulgated by the National 

Association of Insurance Commissioners (NAIC), a private voluntary 

association for insurance regulators. For example, insurance supervisors 

generally require insurance firms to prepare their quarterly and annual 

financial statements in a format unique to insurance known as statutory 

accounting principles that are maintained by NAIC. Insurance supervisors 

impose capital requirements on insurance companies to try to limit 

insurance company failures and ensure their long-run viability. In addition, 

all state insurance supervisors monitor insurers’ business practices and 

terms of insurance contracts in their states. 

In the United States, three agencies provide consolidated supervision—the 

Federal Reserve oversees bank holding companies, OTS oversees thrift 

holding companies, and SEC oversees certain CSEs on a consolidated 

basis. As table 2 shows, the number and type of institutions these agencies

oversee varies. 

Consolidated Supervisors 

Oversee Holding Companies 

Table 2: Number and Type of Institutions That Consolidated Supervisors Oversee, 2005 

Consolidated

supervisor 

Number of 

entities 

overseen Type of entity overseen

Federal Reserve 5,154 Bank holding companies, including small shell, medium-sized, and large complex firms—

the majority of which have banking as their primary business but many, especially larger 

firms, have securities or other nonbank subsidiaries. 

OTS 476 Savings and loan holding companies, including small, medium-sized, and large firms that 

may include substantial nonbanking subsidiaries focused on commercial activities, 

securities, or insurance. 

SEC 5 Large complex firms that focus primarily on securities and have chosen to be participants 

in the CSE program. 

Source: GAO analysis of agency data. 

As the table shows, SEC, under its CSE program, oversees only large 

complex firms. These include Bear Stearns & Co., Goldman Sachs & Co., 

Lehman Brothers Inc., Merrill Lynch & Co. Inc., and Morgan Stanley & Co., 

while the Federal Reserve and OTS oversee firms that vary significantly in

size and complexity. Among larger firms, the Federal Reserve oversees 

Bank of America Corporation, Citigroup, and JPMorgan Chase, and OTS 

oversees American International Group Inc., General Electric Company, 

General Motors Corporation, Merrill Lynch & Co. Inc., and Washington 

Mutual Inc. Most of the large bank holding companies that the Federal 

Page 12 GAO-07-154 Financial Market Regulation
Reserve oversees are primarily in the business of banking but to a lesser 

extent engage in securities or other nonbank activities as well. Many of the 

large firms OTS oversees are engaged in commercial businesses, as well as 

securities and insurance. The Federal Reserve and OTS also oversee the 

vast majority of U.S. financial institutions that have remained relatively 

small and are not complex. 

The Federal Reserve and OTS base their consolidated supervision 

programs on their long-standing authority to supervise holding companies,

while SEC has only recently become a consolidated supervisor. The 

Federal Reserve’s authority is set forth primarily in the Bank Holding 

Company Act of 1956, which contains the supervisory framework for 

holding companies that control commercial banks.8

 OTS’s consolidated 

supervisory authority is set forth in the Home Owners Loan Act of 1933, as 

amended, which provides for the supervision of holding companies that 

control institutions with thrift charters (other than bank holding 

companies).9

 SEC bases its authority on section 15(c)(3) of the Securities 

Exchange Act of 1934.10 Specifically, in 2004, SEC adopted the Alternative 

Net Capital Rule for CSEs based on its authority under that provision, 

which authorizes SEC to adopt rules and regulations regarding the 

financial responsibilities of broker-dealers that it finds necessary or 

appropriate in the public interest or for the protection of investors.11 Under 

the CSE rules, qualified broker-dealers can elect to be supervised by SEC 

on a consolidated basis. If the holding company of the broker-dealer also 

is a bank holding company, SEC defers to the Federal Reserve’s 

supervision of the holding company. At the same time that it issued the 

CSE rules, SEC promulgated final rules for the consolidated supervision of

supervised investment bank holding companies (SIBHC) pursuant to a 

provision in the Gramm-Leach-Bliley Act (GLBA).12 The GLBA provision 

established a supervisory framework for SIBHCs—qualified investment 

bank holding companies that do not control an insured depository 

institution—similar to the approach prescribed in the act for the 

 8

12 U.S.C. §§ 1841–1850, as amended. 

9

12 U.S.C. § 1467a, as amended. 

1015 U.S.C. § 78o(3)(c), see 69 Fed. Reg. at 34430. 

1169 Fed. Reg. at 34430 n. 10; Gramm-Leach-Bliley Act, Pub. L. No. 106-102 (1999). 

1269 Fed. Reg. 34472 (June 21, 2004). 

Page 13 GAO-07-154 Financial Market Regulation
supervision of bank and thrift holding companies.

13 As of this date, no firm 

has elected to be regulated under the SIBHC scheme. 

The Federal Reserve, SEC, and OTS vary in their missions in that the 

Federal Reserve and SEC have responsibilities outside of the supervision 

and regulation of financial institutions. The Federal Reserve is the central

bank of the United States, established by Congress in 1913 to provide the 

nation with a safer, more flexible, and more stable monetary and financial 

system. It is responsible for conducting the nation’s monetary policy; 

protecting the credit rights of consumers; playing a major role in operating

the nation’s payment system; and providing certain financial services to 

the U.S. government, the public, financial institutions, and foreign official 

institutions. The Federal Reserve consists of the Board of Governors 

(Board) and 12 Districts, each with a Federal Reserve Bank (District 

Bank). SEC is responsible for, among other things, overseeing the 

disclosure activities of publicly traded companies and the activities of 

stock markets. 

The three agencies engaged in consolidated supervision are financed 

differently. The Federal Reserve primarily is funded by income earned 

from U.S. government securities that it has acquired through open market 

operations; OTS primarily by assessments on the firms it supervises; and 

SEC by congressional appropriations. SEC collects fees on registrations, 

certain securities transactions, and other filings and reports. However, 

unlike the banking regulators, SEC deposits its collections in an SECdesignated account at the U.S. Treasury that is used by SEC’s 

congressional appropriators for, among other things, providing 

appropriations to SEC. 

International Bodies 

Provide Some Guidance 

for Consolidated 

Supervision 

International bodies in which U.S. supervisors participate have developed 

guidance for consolidated supervision of large, complex, internationally 

active financial firms or conglomerates.14 The Basel Committee on Banking 

Supervision (BCBS) does not have formal supervisory authority; rather, it

provides an international forum for regular cooperation on banking 

 13Pub. L. No. 106-102 § 231. 

14The definition of financial conglomerates used by the Joint Forum is “any group of

companies under common control whose exclusive or predominant activities consist of 

providing significant services in at least two different financial sectors (banking, securities, 

insurance).” The Joint Forum is described later in this report. 

Page 14 GAO-07-154 Financial Market Regulation
supervisory matters, including the formulation of broad supervisory 

standards and guidelines. BCBS has recently revised its “Core Principles 

for Effective Banking Supervision,” which include countries’ requiring that 

banking groups be subject to consolidated supervision, although the 

definition of a banking group does not always include a top-tier holding 

company.15 These principles include a number of specific criteria that are 

presented in appendix II of this report. BCBS also has developed the Basel

Capital Standards, which have been adopted in various forms by specific 

countries; a revised set of standards, Basel II, is currently under 

consideration for adoption in the United States.16 These standards require 

that holding companies engaged in banking meet specific risk-based 

capital requirements. 

In addition, the Joint Forum, an international group of supervisors 

established in 1996 under the aegis of BCBS and equivalent bodies for 

securities and insurance regulators17 to consider issues related to the 

supervision of financial conglomerates, has issued supervisory guidance. 

The guidance focuses on risks and controls and specifically directs 

examiners to review the organizational structure, capital level, risk 

management, and control environment of conglomerates. 

The EU promulgated rules for consolidated supervision of certain firms 

operating in Europe that took effect in 2005. U.S.-headquartered firms with 

operations in EU countries are among those affected by these rules, 

which, therefore, has had implications for consolidated supervision in the 

United States. The Financial Conglomerates Directive (FCD) requires that 

all financial conglomerates operating in EU countries have a consolidated 

supervisor. Conglomerates not headquartered in the EU must have an 

equivalent consolidated supervisor in their home country that has been 

approved by a designated supervisor from an EU member state in which 

the company operates. That supervision focuses on capital adequacy, 

intragroup transactions, risk management, and internal controls. 

 15Basel Committee on Banking Supervision, Core Principles for Effective Banking 

Supervision (October 2006). 

16GAO has recently completed an assessment of the proposed U.S. regulation based on 

these revised capital standards. See GAO, Risk-Based Capital: Bank Regulators Need to 

Improve Transparency and Address Impediments to Finalizing the Proposed Basel II

Framework, GAO-07-253 (Washington, D.C.: Feb. 15, 2007). 

17The International Organization of Securities Commissions is composed of securities

regulators from 105 countries, and the International Association of Insurance Supervisors 

represents insurance supervisory authorities of some 180 jurisdictions. 

Page 15 GAO-07-154 Financial Market Regulation
The Federal Reserve, OTS, and SEC have all responded to the dramatic 

changes in the financial services industry, and now, for many of the 

largest, most complex financial services firms in the United States, these 

agencies examine risks, controls, and capital levels on a consolidated 

basis. Given the differences in their authorities and in the institutions that 

they supervise, as well as other factors, the agencies’ specific policies and 

procedures differ. Also, the agencies divide responsibilities for developing

and implementing policies across a number of agency components. The 

Federal Reserve and OTS generally set policy centrally and implement it 

through District Banks or regional offices, respectively. At SEC, Market 

Regulation has primary responsibility for policy and for overseeing how 

CSEs manage risks, while SEC’s examination offices scrutinize more 

control-oriented activities. The oversight of complex firms involves 

multiple regulators. Finally, for their smaller or less complex firms, the 

Federal Reserve and OTS use abbreviated examination programs. 

All of the agencies have responded to the dramatic changes in the financial 

services industry, including dramatic growth, increased complexity in 

terms of the products and services firms offer, more global operations, and 

greater use of enterprisewide risk management. Now, for many of the 

largest, most complex financial services firms in the United States, the 

agencies focus on the firms’ risks, controls, and capital levels on a 

consolidated basis. However, the agencies have developed and revised 

their programs over different time frames and used different frameworks. 

The Federal Reserve, beginning in the mid-1990s, has developed a 

systematic risk-focused approach for large, complex banking

organizations (LCBO); OTS began to move toward a more consistent, riskfocused approach for some large, complex firms in 2003; and SEC’s CSE 

program, implemented in 2004, is new and evolving. Both the Federal 

Reserve and OTS have approaches to supervision of smaller, less complex 

holding companies that reflect the risks of these institutions. 

In the mid-1990s, the Federal Reserve began to develop a systematic riskfocused approach for the supervision of LCBOs. The program focuses on 

those business activities posing the greatest risk to holding companies and 

managements’ processes for identifying, measuring, monitoring, and 

controlling those risks. According to the Federal Reserve, LCBOs have 

significant on- and off-balance sheet risk exposures, offer a broad range of

products and services at the domestic and international levels, are 

Agencies Employ 

Differing Policies and 

Approaches to 

Provide Consolidated 

Supervision 

All Agencies Examine 

Consolidated Risks, 

Controls, and Capital 

Levels of Their Largest, 

Most Complex Firms, but 

Specific Policies and 

Approaches Differ 

The Federal Reserve Has a 

Systematic Risk-Focused 

Approach for Large, Complex 

Banking Organizations 

Page 16 GAO-07-154 Financial Market Regulation
overseen by multiple supervisors in the United States and abroad, and 

participate extensively in large-value payment and settlement systems.18 As 

of December 31, 2005, there were 21 LCBOs that together controlled 62 

percent of all banking assets in the United States.

In issuing a revised rating system in 2004, the Federal Reserve 

acknowledged that the firms it oversees had become even more 

concentrated and complex. In addition, it noted that the growing depth 

and sophistication of financial markets in the United States and around the 

world have led to a wider range of activities being undertaken by banking

institutions.19 This new rating system has components for the bank holding 

company’s risk management, financial condition, and potential impact of 

the parent (and its nondepository subsidiaries) on the insured depository 

institution, as well as a composite rating of the holding company’s 

managerial and financial condition and potential risk to its depositories; 

the system also includes the supervisory ratings for the subsidiary 

depository institution. 

Generally policy changes for the consolidated supervision program are 

made by the Board and implemented by the 12 District Banks which are 

responsible for day-to-day examination activities of banks and bank 

holding companies. However, the distinction between policy setting and 

implementation blurs at the edges. Board staff may participate in exams 

and District Bank officials serve on committees that provide input for 

policy development and ensure that supervision is provided at some level 

of consistency across District Banks. 

The Federal Reserve requires that all bank holding companies with 

consolidated assets of $500 million or more meet risk-based capital 

requirements developed in accordance with the Basel Accord and has 

proposed, with the other bank supervisors, revised capital adequacy rules

to implement Basel II for the largest bank holding companies.

20 In addition,

 18See Federal Reserve, SR 99-15 (June 23, 1999). 

19See 69 Fed. Reg. 43996-44007 (July 23, 2004) (proposed rules); 69 Fed. Reg. 70444 (Dec. 6,

2004); see also, Federal Reserve, SR 04-18 (Dec. 6, 2004). 

20Bank holding companies with assets of less than $500 million also may be required to

comply with these consolidated capital requirements if they are engaged in significant 

nonbank or off-balance sheet activities or if they have a material amount of SEC-registered 

debt or securities outstanding. See 12 CFR Part 225, App. C.

Page 17 GAO-07-154 Financial Market Regulation
the Federal Reserve requires that all bank holding companies serve as a 

source of financial and managerial strength to their subsidiary banks.21

The Federal Reserve’s supervisory cycle for LCBOs generally begins with 

the development of a systematic risk-focused supervisory plan, follows 

with the implementation of that plan, and ends with a rating of the firm. 

The rating includes an assessment of holding companies’ risk management 

and controls; financial condition, including capital adequacy; and impact 

on insured depositories. The Federal Reserve noted that in addition to its 

other activities, it obtains financial information from LCBOs in a uniform 

format through a variety of periodic regulatory reports that other holding 

companies also provide. Table 3 provides detailed descriptions for each of

the steps. 

Table 3: Federal Reserve’s Supervisory Cycle for LCBOs 

Supervisory plan The planning process begins with an overview of the consolidated holding company that may include its

business strategy, organizational structure, and a summary of supervisory activity performed since the 

last review; proceeds through developing a critical risk assessment; and ends with a supervisory plan 

that determines the ongoing and targeted supervisory activities for the year. The risk assessment 

captures a preliminary analysis of firms’ consolidated risks, including credit, market, liquidity, 

operational, legal, and reputational risks that are inherent in firms’ activities and the controls firms use to 

manage those risks. Board staff will review key elements of the supervisory process. 

Supervisory activities For LCBOs, a lead examiner called a central point of contact and dedicated team members assigned as 

coordinators for specific risk categories provide continuous supervision, which consists of regular 

ongoing contact with the relevant firm managers. These teams, which include from 3 to 11 members, 

also review internal management reports. For limited scope examinations and targeted reviews, a core

team risk coordinator leads a team that includes specialists from the District Bank, and may have 

appropriate assistance from other District Banks or the Board. Targeted reviews can focus on particular 

nonbank subsidiaries of the holding company, such as consumer lending affiliates; one or more specific 

activities or business lines of the consolidated organizations and the risk management framework used

by the holding company to manage those risks on a consolidated basis, such as market risk 

management for structured products; or compliance with holding company policies and procedures, and 

with applicable statutes and regulations. 

Rating Once a year, examiners rate firms on their risk management and controls, financial condition, the impact

of the holding company and nondepository subsidiaries on insured depositories, and on a composite 

basis. The financial condition component rating includes an assessment of the quality of the holding 

company’s consolidated capital, asset quality, earnings, and liquidity. In evaluating capital adequacy, 

examiners are required to consider the risk inherent in an organization’s activities and the ability of 

capital to absorb unanticipated losses. In addition, capital is expected to provide a basis for growth and 

support the level and composition of the parent company and subsidiaries’ debt. 

Source: GAO.

For LCBOs, a management group, which consists of District Bank and 

Board officials, provides additional review of supervisory plans and 

 2112 CFR 225.4(a). 

Page 18 GAO-07-154 Financial Market Regulation
examination findings. Annually, the management group chooses three or 

four topics for horizontal exams—coordinated supervisory reviews of a 

specific activity, business line, or risk management practice conducted 

across a group of peer institutions. Horizontal reviews are designed to (1) 

identify the range of practices in use in the industry, (2) evaluate the safety 

and soundness of specific activities across business lines or across 

systemically important institutions, (3) provide better insight into the 

Federal Reserve’s understanding of how a firm’s operations compare with 

a range of industry practices, and (4) consider revisions to the formulation 

of supervisory policy. Horizontal examination topics have included stresstesting practices at the holding company level and the banks compliance 

with the privacy provision in GLBA.22 Staff from more than one District 

Bank likely participate in the review. In addition, because many of the 

large bank holding companies have national banks, nonmember banks, or 

nonbank operations overseen by another governmental agency, Federal 

Reserve guidance instructs staff, consistent with the requirements of 

GLBA, to leverage information and resources from OCC, FDIC, SEC, and 

other agencies, as applicable.23 After the examinations are completed, the

Federal Reserve informs firms generally on how they compare with their 

peers and may provide information on good practices as well. 

The Federal Reserve has a range of formal and informal actions it can take

to enforce its regulations for holding companies. The agency’s formal 

enforcement powers are explicitly set forth in federal law.24 Federal 

Reserve officials noted that the law provides explicit authority for any 

formal actions that may be warranted and incentives for firms to address 

concerns promptly or through less formal enforcement actions, such as 

corrective action resolutions adopted by the firm’s board of directors or 

memorandums of understanding (MOU) entered into with the relevant 

District Bank. According to Federal Reserve officials, in 2006 the Federal 

Reserve took six formal enforcement actions against holding companies. 

 22See GLBA Title V, Privacy. 

23See Federal Reserve, SR 00-13 (Aug. 15, 2000). 

24The Federal Reserve’s formal enforcement powers with respect to bank holding 

companies and their nonbank subsidiaries are set forth at 12 U.S.C. § 1818(b)(3). 

Page 19 GAO-07-154 Financial Market Regulation
In 2003, OTS revised its handbook for holding company supervision to 

reflect new guidance for its large, complex firms or conglomerates that it 

says relies on the international consensus (as evident in Joint Forum 

publications) of what constitutes appropriate consolidated oversight of 

conglomerates and also responds to the EU’s FCD.25 While the guidance is 

presented in OTS’s standard CORE—capital, organization, relationship, 

and earnings—format, it differs from OTS’s standard guidance in that it 

focuses on consolidated risks, internal controls, and capital adequacy 

rather than on a more narrow view of the holding company’s impact on 

subsidiary thrifts. As with the Federal Reserve, OTS headquarters officials 

generally set nationwide policies and programs and regional office staff 

conduct examinations. However, the Complex and International 

Organizations group (CIO), which was established in 2004 in OTS 

headquarters, both sets policy for holding company supervision of 

conglomerates and oversees examiners for three firms that must meet the 

FCD. CIO is developing a process that is similar in some respects to the 

Federal Reserve’s. First, on-site examination teams consisting of lead

examiners and others who focus on specific risk areas provide continuous 

supervision. Second, while examiners for firms in the CIO group we spoke 

with had not had a formal supervisory plan in past years, these examiners 

are now preparing plans that focus on the coming year and, unlike the 

Federal Reserve, take a longer 3-year prospective as well. A CIO official 

said that this planning framework allows them to examine high-risk areas 

on an annual basis while ensuring that lower risk areas are covered at 

least every 3 years. The plans we reviewed were less detailed than those of

the Federal Reserve; however, the official in charge of this program said 

that the group is looking to develop more systematic risk analyses and has 

reviewed those being used by the Federal Reserve and their counterparts 

in Europe. 

OTS Is Moving to a Broader, 

More Systematic Approach to 

Consolidated Risks for Some of 

Its Largest, Most Complex 

Firms 

Although OTS’s guidance for its large, complex firms provides explicit 

directions on determining capital adequacy, OTS does not have specific 

capital requirements for holding companies. Generally, OTS requires that 

firms hold a “prudential” level of capital on a consolidated basis to support 

the risk profile of the holding company. For its most complex firms, OTS 

requires a detailed capital calculation that includes an assessment of 

capital adequacy on a groupwide basis and identification of capital that 

might not be available to the holding company or its other subsidiaries 

because it is required to be held by a specific entity for regulatory 

 25This guidance was initially issued in OTS Regulatory Bulletins 35, 32-31 (Nov. 20, 2003). 

Page 20 GAO-07-154 Financial Market Regulation
purposes. The EU’s European Financial Conglomerates Committee’s 

guidance to EU country supervisors on the U.S. regulatory system noted 

OTS’s lack of capital standards;26 however, the United Kingdom’s Financial 

Services Authority (FSA) has designated OTS as an equivalent supervisor 

for the two firms it has reviewed, and in February 2007, the French 

supervisory body, Commission Bancaire, approved OTS as an equivalent 

supervisor for another complex conglomerate.27

As noted, only three firms currently are subject to the increasingly 

systematic, detailed analysis of risks being implemented through the CIO 

program. Regional staff oversee other large, complex conglomerate thrift 

holding companies and use OTS’s standard CORE framework, which 

focuses more directly on the risks to the thrift posed by its inclusion in the 

holding company structure rather than an assessment of the risk 

management strategy of the holding company (see table 4). We also found 

that OTS regional examination staff were expanding their risk analyses of

some large, complex holding companies, but they had not adopted the CIO 

program. 

 26European Union, General guidance from the European Financial Conglomerates 

Committee to EU Supervisors: the extent to which the supervisory regime in the United

States is likely to meet the objectives of supplementary supervision in Directive

2002/87/EC and General guidance from the Banking Advisory Committee to EU 

supervisors: the extent to which the supervisory regime in the United States is likely to 

meet the objectives of consolidated supervision in Chapter 3 of Directive 2000/12/EC 

(Brussels; July 6, 2004). 

27FSA has approved the Federal Reserve as providing equivalent holding company 

supervision for 5 financial holding companies, and BaFin, the German supervisory body

has approved the Federal Reserve as the consolidated supervisor of a sixth financial 

holding company. In addition, FSA has determined that SEC provides equivalent 

consolidated supervision for the five investment firms that have been approved as CSEs. 

Page 21 GAO-07-154 Financial Market Regulation
Table 4: OTS’s Standard Core Framework

Capital: Examiners focus on the extent to which the holding company depends on 

subsidiary thrifts to meet debt commitments and other expenses. The handbook for 

holding company supervision defines the risks holding companies may face but does not 

provide specifics for analyzing those risks. 

Organizational structure: Examiners review the structure of the thrift holding company, 

the ownership/control of the holding company, and its potential effect on the thrift. They 

also review the activities of the holding company and other affiliates to determine 

whether the company is doing anything illegal. 

Relationship: To determine if the thrift has the ability to “stand alone” in the event of the 

parent company’s financial collapse, examiners assess the degree of influence the 

holding company has over the thrift, whether the board of directors provides adequate 

oversight of the thrift, and the degree of managerial interdependence between the thrift 

and the holding company. 

Earnings: To determine the potential for the holding company to draw money or 

collateral from the thrift, examiners assess the current and prospective financial condition 

and the earnings and liquidity of the holding company. Examiners are also to assess 

whether the thrift would suffer operational or reputation risk if the holding company were 

to fail due to poor financial condition. 

Source: GAO.

Similar to the Federal Reserve, OTS has explicit authority to take 

enforcement actions against thrift holding companies that are in violation

of laws and regulations.28 According to OTS officials, in 2005 OTS took 

three formal enforcement actions against holding companies.29

In 2004, SEC adopted its CSE program partly in response to international

developments, including the need for some large U.S. securities firms to 

meet the FCD. However, SEC says that the program is a natural extension 

of activities that began as early as 1990 when, under the Market Reform 

Act, SEC was given supervisory responsibilities aimed at assessing the 

safety and soundness of securities activities at a consolidated or holding 

company level.30 Formally, SEC supervision under the CSE program 

consists of four components: a review of firms’ applications to be admitted 

to the program; a review of monthly, quarterly, and annual filings; monthly 

SEC’s CSE Program Is New and 

Evolving 

 28See 12 U.S.C. §§ 1467a(g), (i). 

29Our reporting of the numbers of formal enforcement actions by the Federal Reserve and

OTS does not imply an evaluation or comparison of the enforcement activities by these 

agencies. 

30Pub. L. No. 101-432 § 4(a), 15 U.S.C. § 78q(h) (providing for, among other things, SEC risk

assessment of holding company systems). 

Page 22 GAO-07-154 Financial Market Regulation
meetings with senior management at the holding company; and an 

examination of books and records of the holding company, the brokerdealer, and material affiliates that are not subject to supervision by a 

principal regulator.31

Under the net capital rule establishing the CSE program, the Division of 

Market Regulation has responsibility for administering the program.32

Market Regulation recommends policy changes to SEC Commissioners 

and, through its Office of Prudential Supervision, performs continuous 

supervision of the five firms that have been designated as CSEs. Each firm 

is overseen by three analysts, and each of these analysts oversees at least 

two firms. This office includes a few additional specialists as well. 

Although the rule did not specify a role for the Office of Compliance 

Inspections and Examinations (OCIE), this office, with the assistance of 

the Northeast Regional Office (NERO), examines firms’ controls and 

capital calculations.33 Each of these offices has designated staff positions 

for the CSE program but also uses staff from SEC’s broker-dealer 

examination program. 

Market Regulation generally is responsible for overseeing the financial and 

operational condition of CSEs, including how they manage their risks, but 

does not provide written detailed guidance for examiners. During the 

reviews of the firms’ applications for admittance to the CSE program, staff 

reviewed market, credit, liquidity, operational, and legal and compliance 

risk management, as well as the internal audit function, and continue to do

so on an ongoing basis. The firms are to provide SEC with monthly, 

quarterly, and annual filings, such as consolidated financial statements and 

risk reports, substantially similar to those provided to the firm’s senior 

managers. Unlike the Federal Reserve and OTS that have their examiners 

continuously on site at some of their larger more complex firms, Market 

Regulation staff are not on site at the companies. However, Market 

Regulation staff meet at least monthly with senior risk managers and 

 31Under the SEC regulation, entities that have a principal regulator include certain 

functionally regulated affiliates of a holding company that are not registered as a broker or 

dealer, such as insured depository institutions, firms regulated by the Commodity Futures

Trading Commission or state insurance regulators, and certain foreign banks. See 69 Fed.

Reg. at 34431. 

3269 Fed. Reg. at 34450; see 17 C.F.R. §§ 200.19a, 200.30-3. 

33According to senior staff at OCIE, NERO staff report to SEC’s Division of Enforcement

and OCIE.

Page 23 GAO-07-154 Financial Market Regulation
financial controllers at the holding company level to review this material 

and share the written results of these meetings among themselves and 

with the SEC Commissioners. These reports show that meetings with the 

firms cover a variety of subjects, such as fluctuations in firmwide and 

asset-specific value-at-risk, changes to risk models, and the impact of 

recent trends and events such as Hurricane Katrina. Market Regulation 

staff also review activities across firms to ensure that firms are all held to

comparable standards and that staff understand industry trends. Market 

Regulation staff has conducted some horizontal reviews of activities such 

as hedge fund derivative products and event-driven lending that are similar 

in some ways to the Federal Reserve’s horizontal examinations. In 

addition, one staff member attends all monthly meetings that Market 

Regulation staff hold with the firms in a given month. That staff member 

identifies common themes and includes these in the monthly reports. 

OCIE generally is responsible for testing the control environments of the 

CSEs, focusing on compliance issues. OCIE and NERO staff followed 

detailed examination guidance when reviewing CSE applications but, 

unlike the Federal Reserve and OTS, this guidance is not publicly 

available. They reviewed firms’ compliance with the CSE rule, including 

whether unregulated material affiliates were in compliance with certain 

rules that had previously applied only to registered broker-dealers. OCIE 

and NERO staff continue to conduct exams of the holding companies, the 

registered broker-dealers, and unregulated material affiliates. During our 

review of the program, NERO completed the first examination of one of 

the CSEs, which included a review of the capital computations for the 

holding company and broker-dealer, the firm’s internal controls around 

managing certain risks, and internal audit. 

As a condition of CSE status, CSEs agree to compute a capital adequacy 

measure at the holding company in accordance with the new Basel II 

standards, and OCIE and NERO validated the firms’ calculations as part of 

their reviews of firms’ CSE applications. The U.S. bank supervisory 

agencies have proposed rules to implement Basel II standards for the 

largest, most complex banking organizations, and SEC officials said they 

will continue to monitor these developments and will adopt rules that are 

largely consistent with the banking agencies’ final rules implementing the 

Basel II standards.34 According to Market Regulation staff, CSEs’ use of the 

Basel II capital standards should allow for greater comparability between 

 34See 71 Fed. Reg. 55830 (Sept. 25, 2006) for the proposed rules.

Page 24 GAO-07-154 Financial Market Regulation
CSEs’ financial position and that of other securities firms and banking 

institutions. As part of their supervisory activities, Market Regulation staff 

review the models or other methodologies firms used to calculate capital 

allowances for certain types of risks. While the CSEs’ broker-dealers are 

also required to compute capital according to Basel standards, these 

broker-dealers are required to maintain certain capital measures above 

minimum levels.35 SEC staff also noted that CSEs are required to have 

sufficient liquidity so that capital would be available to any entity within 

the holding company if it were needed. 

Unlike the bank regulatory agencies, SEC does not have a range of 

enforcement actions that it can take for violations of the CSE regulations 

because participation in the CSE program is voluntary. That is, a violation

of the CSE regulations can disqualify a broker-dealer from the benefits of

CSE status without resulting in a violation of SEC regulations or laws that 

could lead to an enforcement action. SEC staff noted, however, that the 

prospect of not being qualified to operate as a CSE served as an effective

incentive for complying with CSE requirements. 

Supervision of Complex 

Firms Involves Multiple 

Regulators

Large firms generally contain a number of subsidiaries that are overseen

by primary bank and functional supervisors in the United States as well as 

by supervisors in other countries; however, in some cases, the holding 

company’s supervisor may also be the primary bank or functional 

supervisor for subsidiaries in these holding companies. Figure 1 illustrates 

this regulatory complexity for a hypothetical financial holding company. A 

hypothetical thrift holding company and CSE would differ in that it would 

not have national or state member bank subsidiaries and potentially could 

have commercial subsidiaries. GLBA instructed the Federal Reserve, SEC,

and OTS, in their roles as consolidated supervisors, to generally rely on 

primary bank and functional supervisors for information about regulated

subsidiaries of the holding company.36

 35Broker-dealers subject to CSE rules must maintain tentative net capital of $1 billion and 

minimum net capital of $500 million where tentative net capital is the net capital before

deductions for market or credit risk. These broker-dealers must notify SEC if tentative net

capital falls below $5 billion. 69 Fed. Reg. 34431.

36See Pub. L. No. 106-102 § 111. 

Page 25 GAO-07-154 Financial Market Regulation
Figure 1: Supervisors for a Hypothetical Financial Holding Company 

Life

insurance

company

(broker/

agent/

underwriter)

National

bank

Futures

commission

merchant

Broker/

dealer

Bank

holding

company

Special

financing

entity

National

thrift

State

thrift

Asset

management

company

Non-U.S.

investment

bank

Domestic

sales

offices

State

member

bank

State

nonmember

bank

National

bank

Financial

holding company

National

bank

Non-U.S.

commercial

bank

U.S.

securities

broker/

dealer/

underwriter

Commercial

paper

funding

corporation

Futures

commission

merchant

Non-U.S.

securities

broker/

dealer/

underwriter

Insurance

agencies

Federal Reserve

FDIC

Other

Non-U.S. regulator

OCC

OTS

SEC

SRO

State regulator

Unregulated

U.S. Federal regulators Other

Source: GAO.

While the Federal Reserve is the primary federal bank supervisor for the 

lead bank in some bank holding companies, OCC and FDIC are more often 

the primary bank supervisor for the lead banks in these holding 

companies. OCC, because of the growth in the national banking system 

over the past 10 years, is now most likely to be the supervisor of the lead 

banks that are owned by bank holding companies in the Federal Reserves’ 

LCBO program. In examining these banks, OCC uses a systematic, riskfocused process similar to that of the Federal Reserve. Specifically, OCC’s 

process begins with a risk analysis that drives the examination process 

Page 26 GAO-07-154 Financial Market Regulation
over the course of the examination cycle. According to OCC’s handbook, 

in assessing the bank’s condition examiners must consider not only risks 

in the bank’s own activities but also risks of activities engaged in by 

nonbanking subsidiaries and affiliates in the same holding company.37

FDIC is the primary federal supervisor of the lead bank in some larger 

bank holding companies and of most of the banks in smaller holding 

companies.38 In addition, as part of its deposit insurance role, FDIC 

officials told us that they have a continuous on-site presence at six of the 

largest LCBOs where OCC is the primary bank supervisor of the lead bank

and the Federal Reserve is the consolidated supervisor. Larger bank 

holding companies also include a number of other regulated subsidiaries, 

including broker-dealers and thrifts. 

Except when a thrift is in a bank holding company, OTS serves as the 

supervisor for both the thrift and the thrift holding company.39 While most 

of these firms are in the business of banking, as table 5 shows, OTS also 

oversees a number of complex holding companies that are primarily in 

businesses other than banking, and some of these are in regulated 

industries, especially insurance. In addition, a number of thrift holding 

companies contain industrial loan companies (ILC), state-chartered 

institutions overseen by FDIC, and some have broker-dealers as well.40

 37Under the National Bank Act, national banks are to provide OCC with periodic reports to

disclose fully the relations between the bank and any each of its affiliates, other than 

member banks, necessary for OCC to be informed of the effect of the relations upon the

bank. 12 U.S.C. § 161(c). Federal banking law also provides national bank examiners with 

authority to examine all of the affairs of national bank affiliates, other than member banks, 

as is necessary to disclose fully the relations between the bank and the affiliates and the

effect of such relations upon the affairs of the bank. 12 U.S.C. § 481. 

38FDIC examiners may examine the affairs of any affiliate of a depository institution as may

be necessary to disclose fully the relationship between the institution and any such affiliate 

and the effect of the relationship on the institution. 12 U.S.C. § 1820(b)(4); see also 12 

U.S.C. § 1831v(b). 

39Bank holding companies with thrift subsidiaries are not subject to regulation as a savings 

and loan holding company. See, e.g., 12 U.S.C. § 1467a(a)(1)(D)(ii), 1467a(t).

40For a discussion of FDIC’s supervision of ILCs, see GAO-05-621. 

Page 27 GAO-07-154 Financial Market Regulation
Table 5: Thrift Holding Company Enterprises by Category, Complexity, Size, and Primary Business, as of December 31, 2006

Primary business 

Holding companies: category, complexity, 

 and size Banking Insurance Securities

Other 

financial Commercial Total

Category I-low risk/noncomplex

Assets less that 1 billion 296 6 2 11 4 319

Assets between 1 billion and 5 billion 47 5 2 3 1 58

Assets greater than 5 billion 11 9 0 2 1 23

Category II-high risk/complex 

Assets less that 1 billion 12 1 0 5 1 19

Assets between 1 billion and 5 billion 9 3 2 5 1 20

Assets greater than 5 billion 7 12 5 5 4 33

Category III-conglomerate 

Assets less that 1 billion 0 0 0 0 0 0

Assets between 1 billion and 5 billion 0 0 0 0 0 0

Assets greater than 5 billion 0 1 2 0 1 4

Total 382 37 13 31 13 476

Source: OTS. 

Note: These data include 34 holding companies that own state savings banks where FDIC is the 

primary federal bank supervisor. 

OTS oversees a large number of firms where insurance is the primary 

business of the firm and thus shares some responsibilities with state 

insurance supervisors that have adopted their own holding company 

framework. In addition, OTS and FDIC share responsibilities when thrift 

holding companies include ILCs. Generally, OTS guidance refers to 

protecting thrifts in thrift holding companies rather than more broadly to

the protection of insured depositories. However, thrifts and ILCs in the 

same thrift holding company may face similar threats to their safety and 

soundness. 

As the consolidated supervisor of CSEs, SEC oversees large, complex 

entities that include insured depositories that have FDIC or OTS as their 

primary federal supervisor. Those CSEs that have thrifts are also 

supervised at the consolidated level by OTS. SEC’s consolidated 

supervisory activities focus on the financial and operational condition of 

the holding company and, in particular, activities conducted in

unregulated material affiliates that may pose risks to the group. SEC staff 

Page 28 GAO-07-154 Financial Market Regulation
noted that they generally rely on the primary bank supervisor with respect 

to examination of insured depositories.41

Federal Reserve and OTS 

Use Abbreviated Approach 

for Smaller or Less 

Complex Holding 

Companies 

In recent years, the Federal Reserve has limited the resources it uses to 

oversee the 4,325 small shell bank holding companies (i.e., companies that 

are noncomplex with assets of less than $1 billion) because it perceives 

that those entities pose few risks to the insured depositories they own.42

The Board has adopted a special supervisory program for these companies 

that includes off-site monitoring and relies heavily on primary federal 

supervisors’ bank examinations. For these companies, the Federal Reserve 

assigns only risk and composite ratings, which generally derive from 

primary bank supervisors’ examinations. Also, in addition to the primary 

bank supervisors’ examinations, Federal Reserve examiners review a set 

of computer surveillance screens that include the small shells’ financial 

information and performance, primarily to determine if the firms need 

more in-depth reviews. 

Federal Reserve staff told us that they spend a limited amount of time on 

small shell holding company inspections. For example, a Board official 

said they spend on average about 2 to 2.5 hours annually on each small 

shell bank holding company. According to Federal Reserve guidance, the 

only documentation required for small shell ratings where no material 

outstanding company or consolidated issues are otherwise indicated are 

bank examination reports and a copy of the letter transmitting the ratings

to the company. 

Similarly, OTS uses an abbreviated version of its CORE program for its 

low-risk and noncomplex or Category I firms, which make up 401 of the 

476 holding companies OTS oversees. Once examiners determine that the 

holding company is a shell, they are directed to the abbreviated program, 

which differs from the full CORE in that it requires less detailed 

 41Under the CSE regulations, banks are among the entities SEC considers to have a 

principal regulator. 69 Fed. Reg. at 34431.

42In determining whether a small holding company is noncomplex and eligible for this 

program, the Federal Reserve considers, among other things, the size and structure of the

holding company, the extent of intercompany transactions between insured depository 

subsidiaries and the holding company or nonbank affiliates, the nature and scale of any

nonbank activities, whether risk management processes are consolidated, and whether the 

holding company has material debt outstanding. See Federal Reserve SR 02-01(Jan. 9,

2002). 

Page 29 GAO-07-154 Financial Market Regulation
information in each of the four CORE areas. For example, the abbreviated 

CORE does not require that examiners calculate leverage and debt-tototal-asset ratios in the capital component of the examination, while these 

are required in the full CORE program. However, the handbook advises 

examiners to refer to the full CORE program for more detailed steps 

whenever they feel it is warranted. In addition, the handbook advises 

examiners to consider the specific issues that relate to certain holding 

company populations, such as those containing insurance firms. At one 

regional office, managers told us that examinations of shell holding 

companies take 5 to 10 days; however, because the holding company 

examination is conducted concurrently with the thrift examination, OTS 

cannot determine the exact number of hours spent reviewing the holding 

company. An OTS official noted that for shell holding companies, the 

difference in examiners’ activities between holding company and thrift 

examinations is largely a matter of perspective rather than a difference in 

what examiners review. 

In recent decades, the environment in which the financial services 

industry operates, and the industry itself, have undergone dramatic 

changes that include globalization, consolidation within traditional 

sectors, conglomeration across sectors, and convergence of institutional 

roles and products. The industry now is dominated by a relatively small 

number of large, complex, and diversified financial services firms, and 

these firms generally manage their risks on an enterprisewide or 

consolidated basis. Consolidated supervision provides the basis for 

supervisory oversight of this risk management, but managing consolidated

supervision programs in an efficient and effective manner presents 

challenges to the supervisory agencies. We found that the Federal Reserve, 

OTS, and SEC were providing supervision consistent with international 

standards for comprehensive, consolidated supervision for many of the 

largest, most complex financial services firms in the United States. While 

the agencies have articulated anticipated benefits or broad strategic goals

for their supervision programs in testimony and other documents, the 

objectives for their consolidated supervision programs are not always 

clearly defined or distinguished from the objectives for their primary 

supervision programs. Without more specific program objectives, 

activities linked to these objectives, and performance measures identified

to assess the extent to which these objectives are achieved, the agencies 

have a more difficult task of ensuring efficient and effective oversight. In

particular, with the financial services industry’s increased concentration 

and convergence in product offerings, paired with a regulatory structure 

that includes multiple agencies, it is more difficult to ensure that the 

Improved Program 

Objectives and 

Performance 

Measures Could 

Enhance Agencies’ 

Consolidated 

Supervision Programs

Page 30 GAO-07-154 Financial Market Regulation
agencies are providing oversight that is not duplicative and is consistent 

with that provided by primary, functional, or other consolidated 

supervisors. As a result, the agencies could better ensure that consolidated

supervision was being provided efficiently, with the minimal regulatory 

burden consistent with maintaining safety and soundness, by more clearly 

articulating the objectives of their consolidated supervision programs, 

developing and tracking performance measures that are specific to the 

programs, and improving supervisory guidance. 

Developments in the 

Financial Services Industry 

Have Affected the 

Environment Facing 

Financial Supervisors 

The environment in which the financial services industry operates, and the 

industry itself, have undergone dramatic changes.

43 Financial services 

firms have greater capacity and increased regulatory freedom to cross 

state and national borders, and technological advances have also lessened 

the importance of geography. Increasingly, the industry is dominated by a 

relatively small number of large, complex conglomerates that operate in 

more than one of the traditional sectors of the industry. These 

conglomerates generally manage their risks on an enterprisewide, or 

consolidated, basis. 

Generally, the greater ability of firms to diversify into new geographic and 

product markets would be expected to reduce risk, with new products and 

risk management strategies providing new tools to manage risk. Because 

of linkages between markets, products, and the way risks interact, 

however, the net result of the changes on an individual institution or the 

financial system cannot be definitively predicted.

Consolidated supervision provides a basis for the supervisory agencies to

oversee the way in which financial services firms manage risks and to do

so on the same basis that many firms’ manage their risk. While primary 

bank and functional supervisors retain responsibility for the supervision of 

regulated banks, broker-dealers, or other entities, the consolidated 

supervisor’s approach can encompass a broader, more comprehensive 

assessment of risks and risk management at the consolidated level. 

 43See GAO-05-61 for a further discussion of these developments. 

Page 31 GAO-07-154 Financial Market Regulation
The international consensus on standards or “best practices” for 

supervising conglomerates that include banks includes the review of risks 

and controls at the consolidated level, capital requirements at the 

consolidated level, and the authority to take enforcement actions against 

the holding company. As described above, we found that the Federal 

Reserve generally met these standards for its LCBO firms. OTS meets 

these standards for those firms overseen by CIO. For other firms that 

might be considered conglomerates, OTS does a more limited review of 

the risk posed to insured thrifts by activities outside the thrift and does not 

require that holding companies meet specific capital standards. Officials at 

both the Federal Reserve and OTS emphasized that the agencies’ authority 

to examine, obtain reports from, establish capital requirements for, and 

take enforcement actions against the holding company was separate from

the authority that primary bank supervisors have. 

Agencies Are Providing 

Comprehensive 

Consolidated Supervision 

for Many Conglomerates 

with Depository 

Institutions 

A full assessment of SEC’s CSE program is difficult given the newness of 

the program; however, it appears that for the CSE firms dominated by

broker-dealers, SEC is monitoring risks and controls on a consolidated 

basis and requires that CSEs meet risk-based capital standards at the 

holding company level. However, with regard to SEC’s ability to take 

enforcement actions at the holding company level. SEC staff 

acknowledged that SEC does not have the same ability, under the CSE 

program, to take enforcement actions as the Federal Reserve or OTS. 

Nonetheless, they noted that the potential removal of a firm’s exemption 

from the net capital rule and notification of EU regulators that a firm was 

no longer operating under the CSE program would serve as effective 

deterrents. SEC is also authorized to impose additional supervisory 

conditions or increase certain multiplication factors used by the CSE in its 

capital computation. 

Page 32 GAO-07-154 Financial Market Regulation
Management literature on internal controls, enterprisewide risk 

management, and government accountability suggest that to achieve 

accountability and efficiency requires that agencies clearly state program 

objectives, link their activities to those objectives, and measure 

performance relative to those objectives.44 This literature also recognizes 

the increased importance of these management activities in the face of 

substantial change in the external environment or in the face of the 

adoption of new “products” internally. When applied to the consolidated 

supervision programs at the Federal Reserve, OTS, and SEC, clearly 

defined objectives of consolidated supervision programs, agency activities 

of these programs linked to those objectives, and performance measures 

to determine how well the programs are operating are the management 

approaches that would contribute to the desired accountability and 

efficiency for the programs. 

Clear Program Objectives 

and Performance 

Measures Are Essential for 

Ensuring Accountability 

and Efficiency 

The importance of these management activities is heightened because all 

three agencies face substantial changes in the external environment, 

including rapid growth in the financial sector, greater consolidation of 

firms leading to larger, more complex firms, and greater linkages among 

financial sectors and markets. In addition, the Federal Reserve and OTS 

have made substantial changes in their consolidated supervisory 

programs—particularly with the CIO program at OTS—and SEC has 

adopted a program that for the first time has staff providing formal 

prudential oversight at the consolidated level. Adopting sound 

management and control activities will help ensure that agencies are 

accountable for exercising the authority for their consolidated supervision 

programs and achieving the objectives of consolidated supervision, in 

ways that are effective and efficient. As a result, the regulatory burden 

would be as low as possible, consistent with maintaining safety and 

soundness of financial institutions and markets. 

 44See GAO, Internal Control: Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999); and Internal Control Standards: 

Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: 

August 2001). These standards reflect updates in private sector internal control guidance, 

including the issuance of Internal Control—Integrated Framework by the Committee of 

Sponsoring Organizations of the Treadway Commission (COSO). Also see COSO,

Enterprise Risk Management—Integrated Framework (September 2004). For the

importance of objectives and performance measures in determining accountability and 

efficiency, see, for example, GAO, Results-Oriented Government: GPRA Has Established a

Solid Foundation for Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10,

2004). 

Page 33 GAO-07-154 Financial Market Regulation
The agencies face challenges in devising performance measures for 

consolidated supervision, including rapid changes in the industry. U.S. 

financial institutions and their competitors increasingly operate worldwide 

and engage in a number of businesses. Consequently, the global financial

system is highly integrated and ensuring financial stability is even more 

important than in the past. Developing sound measures in such an 

environment can be difficult, and it is a challenge for agencies to 

distinguish how much of their work contributes to financial stability, in 

contrast to other goals such as protecting insured depositories. Further, 

these objectives are concepts that are not easy to measure. Development 

and use of appropriate performance measures, however, are critical to 

efficiently managing the risks that the agencies have in their consolidated

supervision programs. 

Goals and Performance 

Measures Address 

Supervision Broadly,

Rather Than Consolidated 

Supervisory Programs 

Specifically 

Generally we found that the three agencies stated goals for all of their 

supervision programs broadly or that specific objectives for consolidated 

supervision were the same as those for their primary supervision 

programs. As a result, the contributions consolidated supervision 

programs make to the safety and soundness of financial institutions and 

markets could not be assessed separately from other agency programs. 

Clearer objectives specific to the consolidated supervision programs 

would facilitate linking program activities to those objectives and the 

authority that the agencies have to conduct consolidated supervision. In 

addition, clear program objectives would facilitate the development of 

specific performance measures to measure the contribution of these 

programs to those objectives as well as broader agency goals.

Agencies’ strategic and performance plans sometimes contain objectives 

for important programs. In its strategic plan, the Federal Reserve identifies 

objectives for all of its supervision programs: promoting a safe, sound, 

competitive, and accessible banking system and stable financial markets. 

However, the only discussion specific to consolidated supervision in the

Federal Reserve’s strategic plan relates to how the program complements 

its central bank functions by providing the Federal Reserve with important 

knowledge, expertise, relationships, and authority. 

Federal Reserve 

In other statements, Federal Reserve officials have identified a number of 

potential benefits of consolidated supervision that reflect the changed 

environment. The then-Chairman of the Federal Reserve Board testified 

before Congress in 1997 that the knowledge of the financial strength and 

risk inherent in a consolidated holding company can be critical to 

protecting an insured subsidiary bank and resolving problems once they 

Page 34 GAO-07-154 Financial Market Regulation
arise.45 In 2006, he noted further that consolidated supervision provides a 

number of benefits, including protection for insured banks within holding 

companies, protection for the federal safety net

46 that supports those 

banks, aiding the detection and prevention of financial crises, and, thus, 

mitigating the potential for systemic risk in the financial system.47 In 

congressional testimony delivered in 2006, a Board official noted that the

goals of consolidated supervision are to understand the financial and

managerial strengths and risks within the consolidated organization as a 

whole and to give the Federal Reserve the ability to address significant 

deficiencies before they pose a danger to the organization’s insured banks 

and the federal safety net. An official at the New York District Bank 

identified the goals of consolidated supervision as protecting the safety 

and soundness of depository institutions in the holding company, 

promoting the health of the holding company itself, and mitigating 

systemic risk. 

In its Bank Holding Company Supervision Manual, the Federal Reserve 

says that the inspection process is intended to increase the flow of 

information to the Federal Reserve System concerning the soundness of 

financial and bank holding companies. The manual goes on to explain how

the purpose of bank holding company supervision has evolved since the 

passage of the Bank Holding Company Act in 1956, whose primary 

objective was to ensure that bank holding companies did not become 

engaged in nonfinancial activities. According to the manual, an inspection

is to be conducted to 

1. inform the Board of the nature of the operations and financial 

condition of each bank holding company and its subsidiaries, 

including—

 45Statement of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve 

System before the Committee on Banking and Financial Services, U.S. House of 

Representatives (May 22, 1997). Statement of Alan Greenspan, Chairman, Board of 

Governors of the Federal Reserve System before the Subcommittee on Finance and 

Hazardous Materials of the Committee on Commerce, U.S. House of Representative (July 

17, 1997). 

46The federal safety net includes the federal deposit insurance fund, the payments system, 

and the Federal Reserve’s discount window.

47Letter from Alan Greenspan, Chairman, Board of Governors of the Federal Reserve 

System to the Honorable James A. Leach, U.S. House of Representatives (Jan. 20, 2006). 

Page 35 GAO-07-154 Financial Market Regulation
a. the financial and operational risks within the holding company 

system that may pose a threat to the safety and soundness of any 

depository institution subsidiary of such bank holding company, 

and 

b. the systems for monitoring and controlling such financial and 

operational risks; and 

2. monitor compliance by any entity with the provisions of the Bank 

Holding Company Act or any other federal law that the Board has 

specific jurisdiction to enforce against the entity, and to monitor 

compliance with any provisions of federal law governing transactions 

and relationships between any depository institution subsidiary of a 

bank holding company and its affiliates. 

The Federal Reserve also noted that the objectives of consolidated 

supervision are discussed in its supervisory guidance on the Framework 

for Financial Holding Company supervision introduced after GLBA.48 In 

the guidance, the Federal Reserve says that the objective of overseeing 

financial holding companies (particularly those engaged in a broad range 

of financial activities) is to evaluate, on a consolidated or groupwide basis, 

the significant risks that exist in a diversified holding company in order to

assess how these risks might affect the safety and soundness of depository 

institution subsidiaries. 

The Federal Reserve has also developed a quality management program to 

evaluate its supervision programs overall. Board officials told us that each

of the District Banks has established a quality management department 

that include quality planning, control, and improvement. As part of its 

quality management program, the Board evaluates and reports on District

Banks’ supervision function in its operations reviews across the major 

supervision and support functions. According to a Board document, each

review assesses how well the Reserve Bank carries out its supervisory 

responsibilities, focusing not only on the effectiveness and efficiency of 

individual functional areas but also on how well the Officer in Charge of 

Supervision organizes and allocates departmental resources, and 

facilitates integration among those resources. However, in the three 

operations review reports we reviewed, the performance of consolidated 

 48See Federal Reserve, SR 00-13 (Aug. 15, 2000). 

Page 36 GAO-07-154 Financial Market Regulation
supervisory activities was not assessed independently from the 

performance of other supervisory activities. 

Not clearly establishing specific objectives for the consolidated 

supervision, however, potentially lessens the Federal Reserve’s ability to 

ensure that its consolidated supervision program provides comprehensive 

and consistent oversight with minimal regulatory burden. The Federal 

Reserve has authority for holding company supervision distinct from that 

for supervision of the insured depository itself. Specific objectives and 

performance measures would enhance the Federal Reserve’s ability to 

ensure its accountability and the efficiency of its consolidated supervisory 

activities. 

OTS consistently identifies the protection of insured depositories as the 

objective of consolidated supervision. However, like the Federal Reserve,

OTS generally does not distinguish between the objectives for holding 

company supervision and those for primary thrift supervision. In addition, 

OTS’s activities often vary significantly across firms, depending in part on

the risk and complexity of the firms. While the varying activities largely 

reflect the differences among the institutions, a clear link between these 

activities and the objectives of its consolidated supervision program would 

enhance OTS’s ability to provide effective and consistent oversight with 

minimal regulatory burden. 

OTS 

OTS identifies several strategic goals in its strategic plan, placing 

particular emphasis on achieving a safe and sound thrift industry, and its 

Holding Companies Handbook identifies protection of insured thrifts as 

an objective of holding company supervision; however, these documents 

distinguish the objectives of the holding company supervision program 

from those of primary thrift supervision in only one area. The strategic 

plan says that one objective of OTS’s cross-border discussions is to receive

additional equivalency determinations under EU directives, including the 

FCD, and its handbook focuses on international standards in its discussion

of changes in its conglomerate oversight. In its strategic plan, OTS has five

performance measures for supervision, including the percentage of thrifts 

that are well-capitalized and the percentage of safety and soundness 

examinations started as scheduled, but these largely relate directly to 

OTS’s authority as a primary bank supervisor rather than as a holding 

company supervisor. 

Because OTS is almost always both the lead bank supervisor and the 

holding company supervisor for the holding companies it supervises, 

accountability for its supervision of thrift institutions is clear. However, 

Page 37 GAO-07-154 Financial Market Regulation
for those thrift holding companies whose primary business activities are 

not banking, accountability for parts of the institution may still not be 

clear. Further, whether an agency is providing consistent and efficient 

oversight with minimal regulatory burden for all firms is still at issue. For 

firms overseen by CIO, OTS devotes substantial resources to the oversight

of risk and controls consolidated at the highest financial holding company 

level, and assesses capital at that level. However, for some other firms that 

had some similar characteristics to the CIO-supervised conglomerates, 

OTS uses relatively fewer resources in the oversight of these firms at the 

holding company level. For these firms, consistent with its standard CORE 

program, OTS looks to see that the holding company is not relying on the 

thrift to pay off debt or expenses and then limits its oversight to that part 

of the firm that might directly place the thrift at risk. 

Similarly, SEC identifies a number of objectives and performance 

measures for the agency in its strategic plan, annual performance reports, 

and annual budget documents. However, none of these is specific to the 

consolidated supervision program. Instead, these documents provide goals 

and performance measures for other areas such as enforcement. Enforcing 

compliance with federal securities laws is one of SEC’s strategic goals, and 

it measures performance in that area by reporting the number of 

enforcement cases successfully resolved in its 2005 Performance and 

Accountability Report. The only mention of the new CSE program in these 

documents is a listing as a “milestone” for Market Regulation in SEC’s 2004 

Performance and Accountability Report. SEC 2006 and 2007 budget 

requests note that OCIE will examine CSEs under the strategic goal of 

enforcing compliance with federal securities laws. The 2006 budget 

request also includes the need to modify and interpret the rules for CSEs 

to maintain consistency with the Basel Standards, in light of amendments 

to the Basel Capital Accord, to meet the goal of sustaining an effective and 

flexible regulatory environment. 

SEC 

On the Web site created by Market Regulation in June 2006, SEC says that 

the aim of the CSE program is to reduce the likelihood that weakness in 

the holding company or an unregulated affiliate endangers a regulated 

entity or the broader financial system. In addition, SEC officials have said

that the purpose of the program was to provide consolidated oversight for 

firms required to meet the EU’s FCD. However, CSE oversight activities 

are not always linked to these aims and the extent to which these activities 

contribute to the aims is not measured. 

Page 38 GAO-07-154 Financial Market Regulation
SEC officials have told us they have developed a draft that would establish 

program objectives, link activities to these objectives, and establish 

criteria for assessing the performance of the CSE program. 

Agencies Have 

Opportunities to Better 

Ensure Effective and 

Consistent Supervision, 

with Minimal Regulatory 

Burden 

Because the U.S. regulatory structure assigns responsibility for financial 

supervision to multiple agencies, and a single firm may be subject to 

consolidated and primary or functional supervision by different agencies, 

not having objectives and performance measures for consolidated 

supervision programs increases the difficulty of ensuring effective,

efficient, and consistent supervision with minimal regulatory burden and 

ensuring that each agency is appropriately accountable for its activities.49

The potential for duplication was demonstrated in three financial holding

companies where we discussed Federal Reserve oversight with Federal 

Reserve and OCC examiners and with bank officials. Based on our 

interviews with OCC examiners, we noted some duplication in Federal 

Reserve and OCC activities, despite efforts to coordinate supervision by 

the two agencies. In particular, since these institutions manage some risks 

on an enterprisewide basis, OCC needed to assess consolidated risk 

management or other activities outside the national bank to assess the 

banks’ risks. Some OCC officials said that the consolidated supervisor 

structure created by GLBA was primarily designed for bank holding 

companies with insurance subsidiaries, but this structure is not prevalent.

The primary value of consolidated supervision, they said, is to prevent 

gaps in supervision, but the benefit for firms that hold primarily bank 

assets is unclear. Federal Reserve officials, on the other hand, noted that 

because OCC is a bank supervisor, and not a consolidated supervisor, it 

does not have the same authority as the Federal Reserve to conduct 

examinations of, obtain reports from, establish capital requirements for, or 

take enforcement action against a bank holding company or its nonbank 

subsidiaries. With more clearly articulated objectives for consolidated 

supervision that distinguish this authority from the primary supervisor’s 

authority, linking consolidated supervisory activities to those goals and 

measuring performance would clarify accountability and facilitate greater

reliance by each agency on the other’s work, lessening regulatory burden.

 49We have previously identified these features as characteristics of effective bank 

supervision. GAO, Bank Oversight: Fundamental Principles for Modernizing the U.S.

Structure, GAO/T-GGD-96-117 (Washington, D.C.: May 2, 1996); and Bank Oversight 

Structure: U.S. and Foreign Experience May Offer Lessons for Modernizing U.S.

Structure, GAO/GGD-97-23 (Washington, D.C.: Nov. 20, 1996). 

Page 39 GAO-07-154 Financial Market Regulation
According to officials of the Federal Reserve Board, it takes a number of 

actions to ensure that the large banking organizations they oversee are 

treated similarly in its consolidated supervision program. These include a 

review of LCBO supervisory plans and other elements of the supervisory 

process as well as some centralized staffing. However, we found that 

because of the autonomy of the District banks and the lack of detailed

guidance, the four District Banks in our study differed in the ways they 

identified examination or supervisory findings, prioritized them, and 

communicated these findings to firm management. 

For example, the Federal Reserve Bank of Atlanta more clearly defines 

different types of findings, provides criteria to examiners for determining 

and prioritizing findings, and uses this framework to communicate 

findings to firm management. At some other District Banks we visited, 

examiners did not provide us with explicit criteria for determining and 

prioritizing findings. As a result, it is more difficult to ensure that bank 

holding companies operating in different Federal Reserve districts are 

subject to consistent oversight and receive consistent supervisory 

feedback and guidance. To mitigate this potential for inconsistency, as we 

noted above, for large, complex institutions, committees such as the LCBO 

management group review supervisory findings. In addition, a Board 

official said that the Federal Reserve was considering implementing 

Atlanta’s framework across the system. Without objectives and 

performance measures specific to the consolidated supervision program, 

however, the Federal Reserve is less able to gauge the value of the Federal

Reserve Bank of Atlanta’s more specific guidance to its examination staff.

In part, because OTS oversees a diverse set of firms and has been changing 

some of its consolidated supervisory activities, consistency is a difficult 

challenge. An OTS official told us that OTS created the CIO in its 

headquarters to promote more systematic and consistent supervision for 

certain holding companies. In addition, OTS has issued guidance to help 

standardize policies and procedures related to providing continuous 

supervision. However, the criteria are not clear for determining whether a 

firm is overseen by CIO with continuous comprehensive consolidated 

supervision or remains in the regional group where it receives more 

limited oversight under the CORE program. In a speech in November 2006, 

OTS’s Director identified seven internationally active conglomerates OTS 

oversees at the holding company level.50 Of these, three are overseen by 

 50OTS, Remarks of John M. Reich, Director, Special Seminar on International Banking and

Finance (Tokyo, Japan; Nov. 15, 2006). 

Page 40 GAO-07-154 Financial Market Regulation
CIO, one receives oversight under the standard CORE program, and two 

others are overseen regionally but are receiving greater scrutiny than in 

the past. The three firms receiving comprehensive consolidated oversight

by CIO are the firms that have designated OTS as their consolidated 

supervisor for meeting the EU equivalency requirements, while three of 

the others have opted to become CSEs. 

While the small size of SEC’s CSE program limits opportunities for treating 

firms differently, the lack of more complete written guidance and the 

decision to keep guidance confidential limit the ability of industry 

participants, analysts, and policymakers to determine whether firms are 

being treated consistently. In addition, Market Regulation staff said that 

more complete written guidance would reduce the risks of inconsistency 

should staff turnover occur. We also found that SEC’s lack of program 

objectives, performance measures, and written public guidance led to

firms’ receiving inconsistent feedback from SEC’s divisions and offices. 

According to the CSEs and application examinations we reviewed, OCIE 

conducted highly detailed audits that resulted in many findings related to

the firms’ documentation of compliance with rules and requirements, 

while Market Regulation looked broadly at the risk management of the 

firm. OCIE shared its findings with the firms, but Market Regulation 

determined that many of them did not meet its criteria for materiality and

did not include them in its summary memorandums to the SEC 

Commissioners recommending approval of the applications. However, 

either a full or summary OCIE examination report was included as an 

appendix to these memorandums. Market Regulation staff said they drew 

on their own knowledge in deciding which findings were material and 

explained that a finding is material when the issue threatens the viability 

of the holding company. Further, Market Regulation staff told us that 

because they rely on managements’ openness in their ongoing reviews of 

CSE’s risk management, they do not always share supervisory results with 

OCIE staff. Market Regulation and OCIE staff stated that they are working 

on an agreement to facilitate communication between the offices. 

Finally, even if each agency provided consistent treatment and feedback to

firms, there would be no assurance that consistent consolidated 

supervision would be provided across the agencies. We have noted before

that, over time, firms in different sectors increasingly face similar risks 

and compete to meet similar customer needs.51 Thus, competitive 

 51GAO-05-61. 

Page 41 GAO-07-154 Financial Market Regulation
imbalances could be created by different regulatory regimes, including 

holding company supervision, both here and abroad. 

Providing consistent efficient, effective oversight of individual financial

institutions has become more difficult as institutions increasingly manage 

their more complex operations on an enterprisewide basis, often under the 

oversight of multiple federal financial supervisors. And providing efficient 

and effective oversight across the financial sector has become more 

challenging as institutions in different sectors and countries increasingly 

take on similar risks that may pose issues for a broad swath of the 

developed world’s financial institutions in a crisis. 

The industry’s increased concentration and convergence in product 

offerings, paired with a regulatory structure with multiple agencies, means 

that different large financial services firms, offering similar products, may 

be subject to supervision by different agencies. This leads to risks that the 

agencies may provide inconsistent supervision and regulation not 

warranted by differences in the regulated institutions. Supervisors in 

different agencies engaged in the oversight of a single institution take 

some steps to share information, avoid duplication, and jointly conduct

some examination activities. However, these agencies did not consistently 

and systematically collaborate in these efforts, thus limiting the efficiency

and effectiveness of consolidated supervision. For the three agencies 

engaged in consolidated supervision, changes in the firms they oversee 

have led to the firms facing similar risks and competing with each other 

across industry segments. As a result, it is essential for consolidated 

supervisors to systematically collaborate so that competitive imbalances 

are not created. 

In a system that is characterized by multiple supervisory agencies 

providing supervision for a single holding company and its subsidiaries as 

well as several agencies providing consolidated supervision for firms that 

provide similar services, collaboration among the supervisory agencies is 

essential for ensuring that the supervision is effective, efficient, and 

consistent. 

Systematic 

Collaboration Could 

Enhance 

Consolidated 

Supervision Programs

Systematic Collaboration 

Is Essential for Multiple 

Agencies Sharing Common 

Responsibilities 

Through a review of government programs and the literature on effective 

collaboration, we have identified some key collaborative elements, which 

Page 42 GAO-07-154 Financial Market Regulation
are listed in table 6.52 These elements stress the need to ensure, to the 

extent possible, that the agencies are working toward a common goal, that 

they minimize resources expended by leveraging resources and 

establishing compatible policies and procedures, and that they establish 

accountability for various aspects of these programs and for their efforts 

to collaborate. 

Table 6: Key Elements of Collaboration

Key elements of collaboration Description

Define and articulate a common outcome Agency staff must commit and devote resources to working across agency lines to define 

and articulate the common outcome they are seeking to achieve. 

Establish mutually reinforcing or joint 

strategies 

Agencies need to align the partner agencies’ activities, core processes, and resources to 

accomplish the common outcome. 

Identify and address needs by leveraging 

resources 

Agencies should identify and leverage the human, information technology, physical, and 

financial resources needed to initiate or sustain their collaborative effort. 

Agree on roles and responsibilities Agencies should define and agree on their respective roles and responsibilities, including 

how to organize their joint and individual efforts. 

Establish compatible policies, procedures, 

and other means to operate across agency 

boundaries 

Agencies need to address the compatibility of standards, policies, procedures, and data 

systems that will be used, as well as cultural differences. 

Develop mechanisms to monitor, evaluate, 

and report on results 

Agencies should create the means to monitor and evaluate their efforts to enable them to

identify areas for improvement. 

Reinforce accountability for collaborative 

efforts through agency plans and reports 

Agencies should ensure that goals are consistent and program efforts are mutually 

reinforcing. Accountability for collaboration is reinforced through public reporting of 

agency results.

Reinforce individual accountability for 

collaborative efforts through performance 

management systems 

As a first step in reinforcing individual accountability for collaborative efforts, agencies 

set expectations for collaboration within and across organizational boundaries in staff 

performance plans. 

Source: GAO.

We have noted in our previous work that running throughout these 

elements are a number of factors, including leadership, trust, and 

organizational culture, that are necessary for a collaborative working 

relationship. We have also noted that agencies may encounter a range of 

barriers when they attempt to collaborate, including missions that are not 

mutually reinforcing, or may conflict, and agencies’ concerns about 

protecting jurisdiction over missions and control over resources. 

 52GAO-06-15. 

Page 43 GAO-07-154 Financial Market Regulation
As we have noted in the past, the U.S. financial regulatory agencies meet in

a number of venues to improve coordination.53 These venues include the

President’s Working Group, the Federal Financial Institutions 

Examination Council, and the Financial and Banking Information 

Infrastructure Committee. In addition, the agencies told us they have 

frequent informal contact with each other. These contacts address several 

of the key elements of collaboration identified above, but opportunities 

remain to enhance collaboration in response to the changes in the 

financial services industry. These opportunities exist both for agencies 

that could collaborate in oversight of individual firms where agencies 

share supervisory responsibility as well as for collaboration among the 

consolidated supervisors to ensure consistent approaches to common 

risks. 

In the Oversight of 

Individual Firms, 

Supervisors from Different 

Agencies Take Steps to 

Work Together but Could 

Collaborate More 

Systematically 

Enterprisewide risk management in large financial firms has complicated

the task of regulating them, since agency jurisdiction is defined by legal 

entities. When an agency oversees both the ultimate holding company and 

its major bank or broker-dealer subsidiary, examination activities tend to 

be well-integrated. When consolidated and primary bank or functional 

supervisors of a firm’s major subsidiaries are from different agencies, they 

take some actions to work together and share information. However, we 

found instances of duplication and regulatory gaps that could be 

minimized through more systematic collaboration. 

Large, complex firms are increasingly managing themselves on an 

enterprisewide basis, further blurring the distinctions between regulated

subsidiaries and their holding companies. Many of the banking and 

securities firms included in our review were managing by business lines 

that cut across legal entities, especially those institutions engaged 

primarily in banking or securities. At least three of the companies in our 

review primarily engaged in banking were simplifying their corporate 

structures, either by reducing the number of bank charters or bringing 

activities that had been outside an insured depository into the depository 

or its subsidiaries. Some of these entities had been unregulated by a 

primary federal bank or functional supervisor and thus had been the 

primary responsibility of the holding company supervisor or were 

regulated by a primary bank supervisor different from the supervisor 

overseeing the lead bank. Finally, we found that several firms that are 

Moving to Enterprisewide 

Management and Other 

Organizational Changes 

Increases the Potential for 

Several Agencies to Share 

Responsibilities 

 53GAO-05-61. 

Page 44 GAO-07-154 Financial Market Regulation
CSEs, thrift holding companies, or both were conducting extensive 

banking operations out of a structure that includes an ILC and a thrift and 

that these entities, which are overseen by different primary bank 

supervisors, might not be receiving similar oversight from a holding 

company perspective. 

As a result of changes in corporate structures and management practices, 

there are increasing opportunities for collaboration among supervisors 

with safety and soundness objectives at the subsidiary level and holding 

company supervisors. For example, primary bank and functional 

supervisors involved in safety and soundness supervision need to review 

the organizational structure of the holding company and have to evaluate

increasingly centralized risk management activities and the controls 

around those activities as they may apply to the regulated subsidiary, but 

the consolidated supervisor is responsible for understanding the 

organizational structure and monitoring risks and controls at the holding 

across the entire organization. 

When the large enterprises we reviewed had the same agency overseeing

their ultimate holding company and its lead bank (or its broker-dealer, in 

the case of CSEs), supervisory activities tended to be well-integrated. For 

the financial holding company that was dominated by a state member 

bank and the thrift holding company dominated by a federal thrift 

institution, we found that the oversight of the dominant financial 

subsidiary and the ultimate holding company were conducted jointly with 

the same examination team, a single planning document, and the same 

timeline. In the case of the CSEs dominated by a broker-dealer, SEC 

supervises both the holding company and the broker-dealer; NERO 

completed targeted examinations of one firm in 2006 on an integrated 

basis. 

The relationship between the consolidated supervisor and other agencies

that serve as primary or functional supervisors for subsidiaries is governed 

by law, which does provide for some information exchange among the 

agencies. Under the regulatory structure established by GLBA, the Federal 

Reserve and OTS are to rely on the primary supervisors of bank 

subsidiaries in holding companies (the appropriate federal and state 

supervisory authorities) and the appropriate supervisors of nonbank 

subsidiaries that either are functionally regulated or are determined by the 

consolidated regulator to be comprehensively supervised by a federal or 

Page 45 GAO-07-154 Financial Market Regulation
state authority.54 Consistent with this scheme, GLBA limits the 

circumstances under which the Federal Reserve Board and OTS may 

exercise their examination and monitoring authorities with respect to 

functionally regulated subsidiaries and depository institutions that are not 

subject to primary supervision by the Board or OTS. GLBA also provides 

that the consolidated supervisor is to rely on reports that holding 

companies and their subsidiaries are required to submit to other 

regulators and on examination reports made by functional regulators, 

unless circumstances described in the act exist.55 Among other things, 

GLBA specifically directs the Federal Reserve and OTS, to the fullest 

extent possible, to use the reports of examinations of depository 

institutions made by the appropriate federal and state depository 

institution supervisory authority. Also, consolidated supervisors are 

directed to rely, to the extent possible, on the reports of examination 

made of a broker-dealer, investment adviser, or insurance company by 

their functional regulators and defer to the functional regulators’ 

examinations of these entities. GLBA also provides for the sharing of 

information between federal consolidated supervisors and bank 

supervisors on the one hand and state insurance regulators on the other 

hand. The act authorizes these regulators to share information pertaining 

to the entities they supervise within a holding company. For example, with 

respect to the holding company, the act authorizes the Board to share 

information regarding the financial condition, risk management policies, 

and operations of the holding company and any transaction or relationship 

between an insurance company and any affiliated depository institution.56

The consolidated supervisor also may provide the insurance regulator any 

other information necessary or appropriate to permit the state insurance 

regulator to administer and enforce applicable state insurance laws. 

Consistent with GLBA, consolidated supervisors have negotiated MOUs or 

other formal information sharing agreements with functional supervisors 

and were reviewing reports from them. The supervisors had also entered 

into MOUs with relevant foreign supervisors. For example, OTS had 

negotiated MOUs with 48 state insurance departments, 7 foreign 

supervisors, and with the EU. Similarly, the Federal Reserve has a number 

of MOUs with regulators. One provides for SEC to share information 

 54Pub. L. No. 106-102 § 111, 12 U.S.C. 1844(c), as amended. 

55Id. 

56Pub. L. No. 106-102 § 307(b), 15 U.S.C. § 6716(b). 

Page 46 GAO-07-154 Financial Market Regulation
concerning broker-dealer examinations for broker-dealers owned by 

financial holding companies. Most MOUs include agreements to share 

information on an informal basis. For example, the Federal Reserve and

SEC have a “pilot program” that allows the Federal Reserve to share 

information on a particular holding company with SEC staff on an ongoing 

basis. Examination information from the functional supervisors was being 

provided to the consolidated supervisor, and to some extent, the 

consolidated supervisor was relying on that information in planning and 

reporting. 

Supervisors do communicate when developing holding company 

supervisory programs. For example, staff at SEC, especially in OCIE, 

noted that they communicated regularly with the supervisory management 

at the Federal Reserve Bank of New York when setting up their CSE 

program. In addition, the agencies gave us examples of when they 

communicated with regard to specific issues, and the Federal Reserve and

SEC have taken opportunities to learn from the firms under each other’s 

jurisdiction. SEC said the Federal Reserve had asked to meet with some of

CSEs regarding peer valuation, and SEC had facilitated such meetings. 

Following the enactment of GLBA, OCC and the Federal Reserve agreed 

on how they would coordinate in the supervision of LCBOs. While some 

duplication remains, we found examples of that agreement being 

implemented. For example, OCC and the Federal Reserve share 

supervisory planning documents for LCBOs when OCC is the primary 

bank supervisor for the lead bank in the bank holding company. As a 

result, the Federal Reserve is able to factor OCC’s planned work into its 

supervisory plan process. 

In addition, we found that OCC and Federal Reserve examiners at some 

institutions shared information informally over the course of the 

examination cycle, allowing them to conduct joint or shared target 

examination activities that might not have been part of the original plan. 

OCC examiners told us they are now also receiving information about the 

Federal Reserve’s horizontal reviews in a timelier manner and can thus 

make better decisions about the extent to which they want to participate 

in those reviews. Federal Reserve officials said that when OCC has 

conducted examination activities related to horizontal reviews, they rely 

on OCC’s information. OCC and Federal Reserve examiners also told us 

that when they disagree on examination findings, they attempt to work out 

those disagreements before presenting conflicting information to 

management. Finally, OCC and Federal Reserve examiners jointly attend

meetings with management and the Boards of Directors of the financial

Page 47 GAO-07-154 Financial Market Regulation
institutions where they have primary and consolidated supervisory 

responsibilities. They invite other relevant bank examiners to attend some 

of these meetings as well. Finally, the Federal Reserve provides OCC and 

FDIC full online access to its supervisory database, which contains 

examination reports and other supervisory information for bank holding 

companies. 

The supervision of one firm, headquartered abroad but with significant 

U.S. operations, including substantial securities activities, is an example of 

coordination between the Federal Reserve, the holding company 

supervisor for the firm’s U.S. operations, two foreign supervisory agencies

involved in the oversight of the ultimate holding company, and operations 

in their countries, and the SEC, which is the functional supervisor of firm’s 

most important U.S. operations. The Federal Reserve meets with 

supervisors from the other countries formally twice a year to coordinate 

activities. A representative of the firm said the three agencies meet jointly 

with representatives of the firm prior to developing a supervisory plan. 

The lead examiner at the Federal Reserve said that including 

representatives from other governments on examination teams makes it 

easier to access information across international borders. While SEC is not 

included in these meetings, the Federal Reserve and SEC agreed to a “pilot 

program” for the Federal Reserve to regularly share holding company 

information with OCIE staff that oversee the firm’s U.S. broker-dealers and 

investment advisers. 

Collectively, these efforts to coordinate do address several of the key

elements of collaboration identified in table 6, above. In particular, the 

agreements among the supervisors provide a basis for joint strategies, for 

agreements on roles and responsibilities, and for operating across agency 

boundaries. Joint examination activities between the Federal Reserve and

OCC, for instance, address these elements and are a way to leverage 

resources. Similarly, coordination between SEC offices and the Federal

Reserve promote efforts to learn from each other despite agency 

boundaries.

Opportunities remain for the agencies to collaborate more systematically,

however, and thus enhance their ability to provide effective and consistent 

oversight when they share responsibility for a holding company and its 

subsidiaries. More consistent collaboration between OCC as the lead bank

examiner and the Federal Reserve as the holding company supervisor, for 

instance, would allow the agencies to take advantage of opportunities to 

supervise some large, complex, banking organizations as effectively and 

efficiently as possible. Conducting some examinations and meetings on a 

Page 48 GAO-07-154 Financial Market Regulation
joint basis—the solution adopted by the Federal Reserve and OCC—is a 

positive step but does not ensure that the agencies develop consistent 

mechanisms to evaluate the results of joint examinations or to judge the 

extent to which such examinations or other approaches lessen

duplication, promote consistency, or otherwise enable more efficient 

supervision. 

In addition, we found that coordination between these agencies did not 

always run smoothly. OCC examiners at some of the institutions we 

reviewed and officials at headquarters told us that they see some 

coordination issues, especially with regard to the horizontal examinations

the Federal Reserve conducts across some systemically important 

institutions. OCC examiners at one LCBO said that some cases could lead

to the Federal Reserve and OCC providing inconsistent feedback to the

firm. They also noted that when the Federal Reserve collects information 

for these examinations, they do not always rely on OCC for that 

information when OCC is the primary bank examiner of the lead bank. 

Finally, while OCC and the Federal Reserve follow the procedures they 

have laid out for resolving differences, the potential still exists for the two 

to give conflicting information to management. We found one firm that 

had initially received conflicting information from the Federal Reserve, its 

consolidated supervisor, and OCC, its primary bank supervisor, about 

sufficient business continuity provisions. 

While the holding company supervisor for thrift holding companies (OTS) 

or CSEs (SEC) is often the supervisor of the dominant regulated 

subsidiary, opportunities to reduce regulatory burden and improve 

accountability through better collaboration continue to exist. While an 

OTS official told us that one of the main responsibilities of a holding 

company supervisor is to improve efficiency by serving as a source of 

information about the holding company to the functional supervisors, this 

opportunity to leverage information is not fully utilized. FDIC examiners, 

for instance, could collect information on the organizational structure of 

the holding company from OTS, but obtained this information from bank 

officials when examining an ILC that was part of a thrift holding company. 

In other instances, OTS and the Federal Reserve have taken some steps to 

work collaboratively with other supervisors in supervising a particular 

firm, but the results are incomplete. A decision by the United Kingdom’s 

Financial Services Authority to include the German and French regulators

in a meeting with OTS led OTS to call a November 2005 meeting that 

included a broader range of supervisors. OTS officials said they invited 

insurance, FDIC, and SEC supervisors in the United States. Officials at the

Page 49 GAO-07-154 Financial Market Regulation
company told us, however, that FDIC did not attend the 2005 meeting 

because the meeting had been arranged hastily. OTS held a similar meeting 

in November 2006, and FDIC staff attended this meeting; SEC, however, 

did not attend and senior staff at Market Regulation and OCIE told us they 

were unaware that SEC had been invited. Similarly, as noted above, the 

Federal Reserve has sometimes engaged in integrated examination 

activities with foreign supervisors, but these did not consistently include 

other relevant U.S. supervisors. 

The agencies did not always have consistent approaches to minimizing 

regulatory burden and improving accountability through collaboration. 

For example, as noted above, the Federal Reserve mitigates challenges 

posed by its decentralized structure by creating processes such as 

reviewing the plans and findings of LCBOs and centralizing the staffing 

systems. However, these processes may make collaboration more difficult. 

An OCC official told us that the complex review process at the Federal

Reserve sometimes kept OCC from providing formal results to

management on a timelier basis when the two agencies conducted joint 

examinations. Further, the planning cycles are not always consistent 

across the agencies. While OCC and the Federal Reserve considered each 

others’ schedules or examination plans when developing their plans for 

bank holding companies where OCC is the lead bank supervisor, not all 

agencies do so. For example, at the institutions included in our study, 

there was little or no indication that FDIC had coordinated the 

examinations of ILCs with relevant holding company supervisors. Finally, 

bank regulators noted another barrier to full collaboration—that the board 

of the bank is legally liable for the safety and soundness of the bank 

regardless of the status of the holding company. FDIC officials specifically

noted that the interests of the bank’s management, including its legal 

responsibilities, and those of the holding company might diverge when one 

or the other is in danger of failing. Similarly, at that time the interests of 

the holding company supervisor and the primary and secondary bank 

supervisor57 might diverge as well. Federal Reserve officials noted, 

however, that risks would be lessened to the extent that the objectives of 

the consolidated supervisor and the primary bank supervisor are the same 

(e.g., to preserve the safety and soundness of insured depository 

institutions) and the consolidated supervisor takes action to prevent the 

 57FDIC in its role as the overseer of the deposit insurance fund serves as the secondary 

bank supervisor. 

Page 50 GAO-07-154 Financial Market Regulation
holding company from taking actions that are deleterious to its insured 

depository institutions. 

Collaboration between the banking agencies and SEC is hindered by 

cultural differences and concerns about sharing information. Bank 

supervisory officials noted that they were sometimes concerned about 

sharing information with SEC because of their compliance, as opposed to 

prudential supervision, culture. One official said the Federal Reserve does 

not want to be perceived as a fact finder for the SEC when it comes to 

consolidated financial information. If they were perceived in that way, he

said, management at financial holding companies may be less willing to 

share certain types of confidential information with their holding company 

supervisors. SEC and Federal Reserve officials noted that SEC may not 

have the same formal legal safeguards as bank supervisors have with 

regard to the confidentiality of the information. The impediments to 

sharing information at SEC are evident internally as well where, as 

discussed above, Market Regulation has not always shared firm risk 

management information with OCIE. 

Oversight of complex organizations that are primarily insurance 

companies pose special collaborative challenges. As noted above, GLBA 

directed consolidated supervisors to take certain actions to promote the 

exchange of information between consolidated supervisors and relevant

state insurance supervisors, and we found that MOUs had been negotiated 

and some communication was taking place. The states have also taken 

some actions to oversee insurance companies on a group basis. According 

to NAIC, most states have adopted a version of the NAIC model laws 

concerning holding company supervision, and NAIC has developed a

framework for holding company supervision. Within that framework, 

which promotes the assessment of risks and controls at the holding 

company level, lead state supervisors conduct the examination. These 

examiners are advised to identify and communicate with the relevant 

functional supervisors for the holding company. The framework also 

recommends that insurance examiners notify the Federal Reserve if the

institution is a financial holding company. However, only one major 

insurer is a financial holding company, while a significant minority of the 

large, complex thrift holding companies have significant insurance 

operations, but the guidance does not recommend that examiners contact 

OTS as a holding company supervisor. NAIC officials said that while they 

participated in the EU evaluation process of the U.S. consolidated 

supervisory framework, they do not believe that insurance supervisors 

have been involved in the equivalency determinations for the specific 

companies. 

Page 51 GAO-07-154 Financial Market Regulation
As a result of consolidated supervisors and those of the regulated entities 

in these complex holding companies not consistently adopting practices 

associated with systematic collaboration, U.S. supervisory agencies may

be missing opportunities to better ensure effective, efficient supervision of

individual financial services firms. The agencies also have not developed 

methods to evaluate the joint efforts that they do have under way, thus 

hindering their efforts to avoid duplication. Further, since they have not 

consistently established compatible policies and supervisory approaches, 

the agencies have missed opportunities to make sure they are treating 

firms consistently. 

Greater Collaboration 

among the Three 

Consolidated Supervisors 

Could Improve 

Supervisory Efforts 

While the three consolidated supervisors have some mechanisms in place 

to share information and supervisory approaches, opportunities remain for 

them to collaborate more systematically to promote greater consistency, 

particularly in oversight of large, complex firms. While these firms’ 

product offerings generally are similar, ensuring regulatory consistency 

remains an ongoing challenge. 

In particular, the OTS and SEC have overlapping responsibilities at some 

CSEs that own or control thrifts. Further, the agencies do not consistently 

work in a collaborative manner to identify the potential for defining and

articulating a common goal, such as identifying regulatory best practices 

for consolidated supervision or identifying emerging risks that would 

confront all financial services firms. 

Three of the five securities firms that have obtained CSE status are also 

thrift holding companies. As a result, these firms have two consolidated 

supervisors and no mechanism has been developed to limit the potential

for duplicative activities and conflicting findings or to assess 

accountability for various supervisory activities. In the preamble to the 

final CSE rule, SEC acknowledged the potential for duplication and 

conflict for some firms.58 The rule reduces this potential by, among other 

things, providing that SEC will rely on the Federal Reserve’s consolidated 

supervision of financial holding companies and on consolidated 

supervision by other holding company supervisors under circumstances 

the SEC determines to be appropriate.

59

Duplicative Effect of 

Overlapping Jurisdiction 

between OTS and SEC Remains 

Unresolved 

 5869 Fed. Reg. at 34431. 

5917 C.F.R. § 240.15c3-1(c)(13)(ii). 

Page 52 GAO-07-154 Financial Market Regulation
Currently, SEC has not determined that consolidated supervision of thrift 

holding companies by OTS satisfies SEC’s supervisory concerns with 

respect to CSEs that are thrift holding companies.

60 SEC says that where 

both it and OTS are the consolidated supervisors, the firms are primarily 

securities firms with small thrift subsidiaries. In addition, SEC examiners 

told us that the major risks for these firms are outside the thrift and other 

banking subsidiaries and that OTS had not been examining these activities. 

When thrifts are included in bank holding companies, the law dictates that

at the holding company level, the Federal Reserve is solely responsible for 

holding company supervision. However, no such mechanism exists for 

firms that are thrift holding companies who have opted to become CSEs, 

and OTS, which notes the growing importance of the thrift in two of the 

three institutions, has not chosen to defer to SEC’s consolidated 

supervision. SEC and OTS officials recognize this issue but have not yet 

met to resolve it. 

Supervisors in all three agencies have recognized the importance of 

allocating scarce resources to the areas of greatest risk and have adopted 

some risk-based supervisory policies and procedures. However, the 

agencies have not consistently adopted mechanisms to look at risk 

collaboratively, recognizing that financial risks are not neatly aligned with 

agency jurisdiction. The extent to which these risks cut across regulatory 

boundaries was highlighted in our work on Long-Term Capital 

Management (LTCM), a large hedge fund.61 Federal financial regulators did 

not identify the extent of weaknesses in banks’ and securities and futures 

firms’ risk management practices until after LTCM’s near collapse. Until 

LTCM’s near collapse, they said they believed that creditors and 

counterparties were appropriately constraining hedge funds’ leverage and 

risk taking. However, examinations done after LTCM’s near collapse 

revealed weaknesses in credit risk management by banking and securities

firms that allowed LTCM to become too large and leveraged. The existing

regulatory approach, which focuses on the condition of individual 

institutions, did not sufficiently consider systemic threats that can arise 

from nonregulated entities, such as LTCM. Similarly, information 

periodically received from LTCM and its creditors and counterparties did 

Agencies Face Broader Risks 

That Could Be Better Managed 

through Effective Collaboration 

 60In the preamble to the CSE regulation, SEC referred to savings and loan holding 

companies as entities whose consolidated supervisory scheme remains subject to this

determination. 69 Fed. Reg. at 34432 n. 25. 

61GAO, Long-Term Capital Management: Regulators Need to Focus Greater Attention on

Systemic Risk, GAO/GGD-00-3 (Washington, D.C.: Oct. 29, 1999). 

Page 53 GAO-07-154 Financial Market Regulation
not reveal the potential threat posed by LTCM. However, the agencies did

not have a strategy to collaboratively identify and resolve problems such 

as this, delaying identification of shared issues and work toward their 

resolution. 

In addition, there are limited mechanisms to allow agencies to share and 

leverage resources when one agency has unique capabilities or lacks 

specialized resources. To some extent, agencies share expertise and 

resources when they jointly conduct examinations or when they meet 

periodically to share information. However, no mechanism exists for 

sharing expertise in other situations. This is important for OTS, which is 

characterized by a disparity between the size of the agency and the diverse 

firms it oversees. While OTS recognizes its need for staff with specialized

skills to oversee some of these firms, the small number of firms in some 

categories, combined with the small overall size of the agency, limits its 

ability to have any depth in those skill areas. For example, while OTS 

oversees a number of holding companies that are primarily in the 

insurance business, it has only one specialist in this area. At the same time, 

the Federal Reserve has a number of insurance specialists but oversees 

only one firm that is primarily in the insurance business. However, there is 

no systematic process for sharing insurance expertise between the two 

agencies.62

As financial institutions have grown, become more complex and 

internationally active, and adopted enterprisewide risk management 

practices, consolidated supervision has become more important. For 

certain large complex firms, U.S. supervisors have or are adopting some of 

the “best practices” associated with consolidated supervision, as 

evidenced in part by the determination of equivalence by EU supervisors. 

However, U.S. supervisors could perform consolidated supervision more 

efficiently and effectively by adopting management practices in the areas 

of performance management and collaboration. These practices are 

particularly important in helping to ensure consistent treatment of 

financial services holding companies and in clearly defining accountability 

Conclusions 

 62According to the Federal Reserve, as of September 2006, 20 domestic and 13 foreign

banking organizations supervised by the Federal Reserve were conducting insurance 

underwriting activities under the Financial Holding Company authority of GLBA. As of the 

same date, 201 domestic and 12 foreign bank holding companies supervised by the Federal 

Reserve were engaged in insurance agency activities under the Financial Holding Company 

authority of GLBA. 

Page 54 GAO-07-154 Financial Market Regulation
for providing consolidated supervision. Consistent rules, consistently 

applied, and clear accountability are important because of the 

decentralized internal structures the agencies use to develop and 

implement policies related to consolidated supervision and the generally 

fragmented structure of the U.S. regulatory system. 

The first step in any effectively managed organization is to have wellarticulated objectives, strategies, and performance measures. While these 

agencies have developed and largely implemented policies or strategies for 

consolidated supervision, these strategies could be improved through the 

development of more well-articulated, specific objectives and measurable 

outcomes. Defining specific, measurable objectives for the consolidated 

supervision programs is an inherently difficult task for financial services 

supervisors but is a key component of assessing how consolidated 

supervision adds to the functional supervision of banks, thrifts, brokerdealers, and insurers. Better-articulated objectives will also help to ensure

that supervisors treat firms equitably and that firms receive consistent 

feedback. SEC has developed a draft statement of objectives and 

performance measures for the CSE program intended to facilitate that 

assessment. If approved, this would be particularly important because 

differences in orientation and policies and communication weaknesses 

among different organizational components of SEC exacerbate the 

difficulty of taking on the new responsibilities inherent in the CSE 

program. Without formal guidance that delineates the responsibilities and 

identifies strategies and performance measures for the divisions and 

offices, resources will not be used as effectively as they might be. 

Another key facet of effectively managed organizations or systems is the 

degree to which the various components collaborate and integrate their 

processes. While the agencies do exchange information, they have 

opportunities to improve collaboration. We have noted in the past that it is 

difficult to collaborate within the fragmented U.S. regulatory system and 

have recommended that Congress modernize or consolidate the regulatory 

system. However, under the current system, the agencies have 

opportunities to collaborate systematically and thus ensure that 

institutions operating under the oversight of multiple financial supervisors 

receive consistent guidance and face minimal supervisory burden. The 

agencies have taken some steps, particularly in the case of some specific

holding companies, to work more collaboratively and thus ensure 

consistent supervisory treatment. These steps include joint supervisory 

meetings, including foreign supervisors, to develop common examination 

approaches.

Page 55 GAO-07-154 Financial Market Regulation
Recommendations for 

Executive Action 

We are recommending that the Federal Reserve, Office of Thrift 

Supervision, and Securities and Exchange Commission take the following 

seven actions, as appropriate: 

To better assess their agencies’ achievements as consolidated supervisors, 

the Chairman of the Federal Reserve System’s Board of Governors, the 

Director of the Office of Thrift Supervision, and the Chairman of the 

Securities and Exchange Commission should direct their staffs to develop

program objectives and performance measures that are specific to their 

consolidated supervision programs. 

To ensure they are promoting consistency with primary bank and 

functional supervisors and are avoiding duplicating the efforts of these 

supervisors, the Chairman of the Federal Reserve System’s Board of 

Governors, the Director of the Office of Thrift Supervision, and the 

Chairman of the Securities and Exchange Commission should also direct 

their staffs to identify additional ways to more effectively collaborate with 

primary bank and functional supervisors. Some of the ways they might 

consider accomplishing this include 

• ensuring common understanding of how the respective roles and 

responsibilities of primary bank and functional supervisors and of 

consolidated supervisors are being applied and defined in decisions 

regarding the examination and supervision of institutions; and 

• developing appropriate mechanisms to monitor, evaluate, and report 

jointly on results. 

To take advantage of the opportunities to promote better accountability 

and limit the potential for duplication and regulatory gaps, the Chairman 

of the Federal Reserve System’s Board of Governors, the Director of the 

Office of Thrift Supervision, and the Chairman of the Securities and 

Exchange Commission should foster more systematic collaboration 

among their agencies to promote supervisory consistency, particularly for 

firms that provide similar services. In particular, the Chairman of the 

Securities and Exchange Commission and the Director of the Office of 

Thrift Supervision should jointly clarify accountability for the supervision 

of the consolidated supervised entities that are also thrift holding 

companies and work to reduce the potential for duplication.

To address certain practices that are specific to an agency, we recommend 

the following: 

Page 56 GAO-07-154 Financial Market Regulation
• the Chairman of the Securities and Exchange Commission direct SEC staff 

to develop and publicly release explicit written guidance for supervision of 

Consolidated Supervised Entities. This guidance should clarify the 

responsibilities and activities of the Office of Compliance Inspections and 

Examinations and the Division of Market Regulation’s responsibilities for 

administering the Consolidated Supervised Entity program. 

• the Director of the Office of Thrift Supervision direct OTS staff to revise 

the CORE supervisory framework to focus more explicitly and 

transparently on risk management and controls so that it more effectively 

captures evolving standards for consolidated supervision and is more 

consistent with activities of other supervisory agencies and facilitates 

consistent treatment of OTS’s diverse population of holding companies. 

• The Chairman of the Federal Reserve direct Federal Reserve Board and 

District Bank staff to look for ways to further reduce operational 

differences in bank supervision among the District Banks, such as 

developing additional guidance related to developing and communicating 

examination findings. 

We requested comments on a draft of this report from the Federal 

Reserve, OTS, and SEC. We received written comments from the 

Chairman of the Board of Governors of the Federal Reserve System, the 

Director of the Office of Thrift Supervision, and the Chairman of the 

Securities and Exchange Commission. Their letters are summarized below 

and reprinted in appendixes III, IV, and V, respectively. 

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

noted that the Federal Reserve’s program for consolidated supervision 

continues to evolve in light of changes in the structure, activities, risks, 

and risk management techniques of the banking industry. He concurred 

with the importance of clear and consistent objectives for each

supervisory program and accurate performance measures, as well as noted 

that the Federal Reserve has already charged its management committees, 

comprised of Board and Reserve Bank officials, to further define and 

implement more specific objectives and performance measures for each of 

its supervision business lines. He also agreed that it was appropriate for 

the Federal Reserve to consider whether additional opportunities exist to 

promote effective collaboration among the Federal financial supervisory 

agencies and that the Federal Reserve would continue to work to ensure 

that the agencies share information and avoid duplication of supervisory 

effort. 

Agency Comments 

and Our Evaluation 

Page 57 GAO-07-154 Financial Market Regulation
The Director of the Office of Thrift Supervision agreed with our 

characterization of how OTS’s consolidated supervision program, 

especially for large, complex firms operating on a global basis, has evolved 

in recent years. OTS wrote that initiatives for these firms (that are 

described in the report) will ensure that it implements the principles of 

accountability and supervisory collaboration recommended in the report.

With regard to consolidated supervision of other firms OTS wrote that it 

implements its holding company authority in a broader and deeper manner 

than indicated in our draft report. In response to our recommendation that 

OTS’s CORE framework more explicitly focus on risk management, the 

Director reiterated that the CORE approach is explicitly designed to 

understand, analyze and evaluate the firm’s risk appetite and its approach 

to risk management, however, he said that OTS is considering substantive 

revisions to the framework to further sharpen this focus on risk. We agree 

that revisions to sharpen the focus on the CORE framework are 

appropriate. We also agree that OTS’s holding company authority is broad 

and deep and that OTS has sought to understand the risk management 

approaches of the holding companies it supervises, but we continue to 

believe that OTS should focus more explicitly and transparently on risk 

management and controls to ensure it provides consistent treatment of its 

holding companies. 

The Director also wrote that the report correctly points out that OTS and

SEC conduct consolidated supervision activities in some of the same 

firms. Further, he wrote that the report cites views of SEC staff that are 

incorrect, specifically that the firms in question have small thrifts and that 

the major risks for these firms are outside the thrift and other banking 

subsidiaries. The Director wrote that the regulated thrift institutions are 

sizeable and significant in at least two of these firms with assets of more 

than $14 billion and $19 billion in 2006 and that reviews thoroughly 

evaluate holding companies and their risks on a consolidated basis. 

Our report discussed the overlapping responsibilities of OTS and SEC with

regard to several CSEs that, because of their ownership of thrifts, are also 

thrift holding companies. We did not offer a judgment as to which agency 

should appropriately have the primary responsibility, but we did 

recommend that the Director and the Chairman of the Securities and 

Exchange Commission clarify accountability for such supervisory 

responsibility. The Director of OTS said that he intends to meet with the 

Chairman of SEC to discuss this issue. 

In response to our recommendation that the agencies identify additional 

ways to collaborate, the Director wrote that the differences between the 

Page 58 GAO-07-154 Financial Market Regulation
holding companies overseen by the Federal Reserve and OTS would make 

it difficult to achieve perfect consistency but that OTS would continue to 

seek ways to align its process with best regulatory practice. In response to 

our recommendation that the agencies foster more systematic 

collaboration, he wrote that OTS remains committed to an open and 

inclusive approach and is willing to work with relevant supervisors to 

ensure there are not gaps in the review of firms subject to consolidated 

supervision. Finally, responding to our recommendation for program 

objectives and performance measures that are specific to consolidated 

supervision, the Director agreed that clear objectives and performance 

measures greatly assist in evaluating the success of any supervisory 

program, and that the agency will continue to assess ways to ensure the 

program is focused, disciplined, and equal to the task of holding company 

supervision. 

The Chairman of the Securities and Exchange Commission wrote that SEC 

recognized that the establishment of a prudential consolidated supervision 

program for investment bank holding companies represents a significant 

expansion of the Commission’s activities and responsibilities. The 

Chairman further wrote that SEC had built a prudential regime that is 

generally consistent with the oversight that is provided to bank holding 

companies but that SEC also takes into account the different risk profiles 

and business mixes that distinguish investment bank holding companies 

from bank holding companies. In response to our recommendation 

regarding coordination within SEC, the Chairman, with the unanimous 

support of his fellow Commissioners, subsequently wrote that he is 

transferring the responsibilities for on-site testing of CSE holding company 

controls to the Division of Market Regulation so that the expertise related 

to the prudential supervision of securities firms will be concentrated there. 

In addition, the Chairman wrote that he will allocate additional positions 

to the Division of Market Regulation to carry out its increased

responsibilities, and he has directed staff there to provide greater 

transparency with regard to the aims and methods of the program by 

posting additional information about its components on SEC’s Web site.

We also received separate technical comments on the draft report from 

the staffs of the Federal Reserve and SEC, as well as from FDIC and OCC; 

we have incorporated their comments into the report, as appropriate. 

Page 59 GAO-07-154 Financial Market Regulation
We are sending copies of this report to other interested congressional 

committees and to the Chairman of the Board of Governors of the Federal

Reserve System, the Director of the Office of Thrift Supervision, and the 

Chairman of the Securities and Exchange Commission. We will also make 

copies available to others upon request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. Key contributors are acknowledged in appendix VI. 

Richard J. Hillman 

Managing Director, Financial Markets and 

Community Investment 

Page 60 GAO-07-154 Financial Market Regulation
List of Committees 

The Honorable Christopher Dodd 

Chairman 

The Honorable Richard Shelby 

Ranking Member 

Committee on Banking, Housing and Urban Affairs 

United States Senate 

The Honorable Joseph I. Lieberman 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

The Honorable Henry A. Waxman 

Chairman 

The Honorable Tom Davis 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

Page 61 GAO-07-154 Financial Market Regulation
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

Our objectives were to (1) describe the policies and approaches U.S. 

consolidated supervisors use to oversee large and small holding 

companies in the financial services industry; (2) review the supervisory 

agencies’ management of its consolidated supervision program, including

program objectives and performance measures; and (3) evaluate how well 

consolidated supervisors are collaborating with other supervisors and 

each other. We conducted our work between November 2005 and 

February 2007 in accordance with generally accepted government auditing 

standards in Washington, D.C.; Boston; and other locations where 

financial institutions are headquartered. 

To meet our objectives and to better understand how the three 

consolidated supervisors—the Federal Reserve System (Federal Reserve), 

Office of Thrift Supervision (OTS), and Securities and Exchange 

Commission (SEC)—operate their consolidated supervision programs for 

large, complex, firms, we selected a number of large firms that were 

supervised by each of the three agencies on a consolidated basis. These 

firms had at least one of the following characteristics: (1) major 

international operations so that they were subject to the European Union’s 

Financial Conglomerates Directive or were headquartered abroad, (2) a 

variety of businesses (i.e., insurance, banking, and securities) that were 

subject to significant supervision by primary bank and functional 

supervisors or unregulated subsidiaries, and (3) one or more consolidated 

supervisors. Before finalizing our selection of firms, we held discussions 

with the three agencies to obtain their views on the firms we had selected.

1

From this selection process, we chose a total of 14 firms, 6 U.S. bank 

holding companies, 1 foreign bank with substantial U.S. operations, 4 thrift 

holding companies that did not have another consolidated supervisor, and 

3 consolidated supervised entities (CSE) that were also thrift holding 

companies. We interviewed officials from some of the selected firms to 

obtain their views on the benefits and the costs of consolidated 

supervision. 

Specifically, to describe the policies and approaches used by U.S. 

consolidated supervisors—Federal Reserve, OTS, and SEC—we reviewed 

the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act, the 

Home Owners Loan Act of 1933, and SEC’s Alternative Net Capital Rule 

for CSEs. We also reviewed the Federal Reserve Board’s Bank Holding

 1

At the suggestion of one of the supervisory agencies, we included a foreign-headquartered 

holding company in our selected firms. 

Page 62 GAO-07-154 Financial Market Regulation
Appendix I: Objectives, Scope, and 

Methodology 

Company Supervision Manual and some of the Board’s Division of 

Banking Supervision and Regulation Letters on large, complex banking 

organizations; SEC’s regulations establishing the CSE program and 

examination modules specific to that program; and OTS’s Holding 

Companies Handbook and Examination Handbook for thrifts. In 

addition, we reviewed recent Federal Reserve supervisory plans and some 

reports of targeted reviews. For the three SEC-supervised firms, we 

reviewed their applications to become CSEs and ongoing supervisory 

materials, such as monthly risk reports and cross-firm reviews, as well as 

the results of one CSE examination completed during our review. Because 

these firms were also thrift holding companies, we reviewed OTS holding 

company examination reports for them. For the other OTS-supervised 

firms, we reviewed holding company and thrift examination reports and 

supervisory planning documents when these were available. In addition to

the 14 large firms, we reviewed a few supervisory documents for smaller 

holding companies supervised by the Federal Reserve and OTS. 

To review the supervisory agencies’ management of its consolidated 

supervision program, we reviewed recent strategic and performance plans

from the three agencies. Where relevant, we also reviewed agency 

testimonies and budget documents. In addition, we reviewed agency 

guidance specific to consolidated supervision to determine whether 

program objectives and performance measures were included. We 

interviewed officials at the three agencies and examiners who were 

responsible for the supervision of the selected firms on what they 

considered the goals or benefits of consolidated supervision to be. In 

addition, we collected information on the operations review program that 

the Federal Reserve developed for its supervision programs. 

To evaluate how well consolidated supervisors are collaborating with 

other supervisors and each other, we identified practices for effective 

collaboration from our previous work on collaboration. We also 

interviewed officials from the three agencies on their efforts to collaborate 

with each other and with primary bank and functional supervisors 

overseeing subsidiaries in the holding companies they oversee. In addition, 

we reviewed examination reports of some of the subsidiaries owned by 

the 14 holding companies we selected. These included examination 

reports from the Federal Deposit Insurance Corporation, Office of the 

Comptroller of the Currency, and the New York Stock Exchange. We also 

interviewed officials and examiners involved in the oversight of the 

primary banks or functional entities within some of the 14 firms. 

Page 63 GAO-07-154 Financial Market Regulation
Appendix I: Objectives, Scope, and 

Methodology 

To gain an international perspective on consolidated supervision and a 

better understanding of the European Union’s Financial Conglomerates 

directive, we spoke to supervisors in two other countries and reviewed 

documents from a variety of international sources. Specifically, we spoke 

with Canada’s Office of the Superintendent of Financial Institutions and 

the United Kingdom’s Financial Services Authority. We also reviewed 

documents from these supervisory bodies as well as other international 

sources, including the Basel Committee on Banking Supervision, the Joint

Forum, and the European Union. 

Page 64 GAO-07-154 Financial Market Regulation
Appendix II: Criteria for Consolidated 

Supervision Included in Basel Committee on Appendix II: Criteria for Consolidated Banking Supervision’s Core Principles 

Supervision Included in Basel Committee on 

Banking Supervision’s Core Principles 

The following is excerpted from the Basel Committee on Banking 

Supervision’s “Core Principles Methodology,” available at 

http://www.bis.org/publ/bcbs130.pdf. 

Principle 24: Consolidated supervision 

An essential element of banking supervision is that supervisors supervise 

the banking group on a consolidated basis, adequately monitoring and, as 

appropriate, applying prudential norms to all aspects of the business 

conducted by the group worldwide. 

Essential criteria 

1. The supervisor is familiar with the overall structure of banking groups 

and has an understanding of the activities of all material parts of these 

groups, domestic and cross-border. 

2. The supervisor has the power to review the overall activities of a 

banking group, both domestic and cross-border. The supervisor has 

the power to supervise the foreign activities of banks incorporated 

within its jurisdiction. 

3. The supervisor has a supervisory framework that evaluates the risks 

that non-banking activities conducted by a bank or banking group may 

pose to the bank or banking group. 

4. The supervisor has the power to impose prudential standards on a 

consolidated basis for the banking group. The supervisor uses its 

power to establish prudential standards on a consolidated basis to 

cover such areas as capital adequacy, large exposures, exposures to 

related parties and lending limits. The supervisor collects consolidated 

financial information for each banking group. 

5. The supervisor has arrangements with other relevant supervisors, 

domestic and cross-border, to receive information on the financial 

condition and adequacy of risk management and controls of the 

different entities of the banking group. 

6. The supervisor has the power to limit the range of activities the 

consolidated group may conduct and the locations in which activities 

can be conducted; the supervisor uses this power to determine that the 

activities are properly supervised and that the safety and soundness of 

the bank are not compromised. 

Page 65 GAO-07-154 Financial Market Regulation
Appendix II: Criteria for Consolidated 

Supervision Included in Basel Committee on 

Banking Supervision’s Core Principles 

7. The supervisor determines that management is maintaining proper 

oversight of the bank’s foreign operations, including branches, joint 

ventures and subsidiaries. The supervisor also determines that banks’ 

policies and processes ensure that the local management of any crossborder operations has the necessary expertise to manage those 

operations in a safe and sound manner and in compliance with 

supervisory and regulatory requirements. 

8. The supervisor determines that oversight of a bank’s foreign 

operations by management (of the parent bank or head office and, 

where relevant, the holding company) includes: (i) information 

reporting on its foreign operations that is adequate in scope and 

frequency to manage their overall risk profile and is periodically

verified; (ii) assessing in an appropriate manner compliance with 

internal controls; and (iii) ensuring effective local oversight of foreign 

operations. 

For the purposes of consolidated risk management and supervision, 

there should be no hindrance in host countries for the parent bank to 

have access to all the material information from their foreign branches 

and subsidiaries. Transmission of such information is on the 

understanding that the parent bank itself undertakes to maintain the 

confidentiality of the data submitted and to make them available only 

to the parent supervisory authority.

9. The home supervisor has the power to require the closing of foreign 

offices, or to impose limitations on their activities, if: 

it determines that oversight by the bank and/or supervision by the host 

supervisor is not adequate relative to the risks the office presents; 

and/or 

it cannot gain access to the information required for the exercise of 

supervision on a consolidated basis.

10. The supervisor confirms that oversight of a bank’s foreign operations 

by management (of the parent bank or head office and, where relevant, 

the holding company) is particularly close when the foreign activities 

have a higher risk profile or when the operations are conducted in 

jurisdictions or under supervisory regimes differing fundamentally 

from those of the bank’s home country. 

Page 66 GAO-07-154 Financial Market Regulation
Appendix II: Criteria for Consolidated 

Supervision Included in Basel Committee on 

Banking Supervision’s Core Principles 

Additional criteria 

1. For those countries that allow corporate ownership of banking 

companies: 

the supervisor has the power to review the activities of parent

companies and of companies affiliated with the parent companies, and 

uses the power in practice to determine the safety and soundness of 

the bank; and 

the supervisor has the power to establish and enforce fit and proper 

standards for owners and senior management of parent companies. 

2. The home supervisor assesses the quality of supervision conducted in 

the countries in which its banks have material operations. 

3. The supervisor arranges to visit the foreign locations periodically, the 

frequency being determined by the size and risk profile of the foreign 

operation. The supervisor meets the host supervisors during these 

visits. The supervisor has a policy for assessing whether it needs to 

conduct on-site examinations of a bank’s foreign operations, or require 

additional reporting, and has the power and resources to take those 

steps as and when appropriate. 

Page 67 GAO-07-154 Financial Market Regulation
Appendix III: Comments from the Chairman 

of the Board of Governors of the Federal Appendix III: Comments from the Chairman Reserve System 

of the Board of Governors of the Federal 

Reserve System 

Page 68 GAO-07-154 Financial Market Regulation
Appendix III: Comments from the Chairman 

of the Board of Governors of the Federal 

Reserve System 

Page 69 GAO-07-154 Financial Market Regulation
Appendix III: Comments from the Chairman 

of the Board of Governors of the Federal 

Reserve System 

Page 70 GAO-07-154 Financial Market Regulation
Appendix III: Comments from the Chairman 

of the Board of Governors of the Federal 

Reserve System 

Page 71 GAO-07-154 Financial Market Regulation
Appendix IV: Comments from the Director of Appendix IV the Office of Thrift Supervision : Comments from the Director of 

the Office of Thrift Supervision 

Page 72 GAO-07-154 Financial Market Regulation
Appendix IV: Comments from the Director of 

the Office of Thrift Supervision 

Page 73 GAO-07-154 Financial Market Regulation
Appendix IV: Comments from the Director of 

the Office of Thrift Supervision 

Page 74 GAO-07-154 Financial Market Regulation
Appendix V: Comments from the Chairman of Appendix V the Securities and Exchange Commission : Comments from the Chairman of 

the Securities and Exchange Commission 

Page 75 GAO-07-154 Financial Market Regulation
Appendix V: Comments from the Chairman of

the Securities and Exchange Commission

Page 76 GAO-07-154 Financial Market Regulation
Appendix V: Comments from the Chairman of

the Securities and Exchange Commission

Page 77 GAO-07-154 Financial Market Regulation
Appendix V: Comments from the Chairman of

the Securities and Exchange Commission

Page 78 GAO-07-154 Financial Market Regulation
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 79 GAO-07-154

Appendix VI: GAO Contact and Staff 

Acknowledgments 

Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov

In addition to the contact named above, James McDermott, Assistant 

Director; Jason Barnosky; Nancy S. Barry; Lucia DeMaio; Nancy Eibeck; 

Marc W. Molino; Paul Thompson; and Barbara Roesmann also made key 

contributions to this report. 

GAO Contact 

Staff 

Acknowledgments 

Financial Market Regulation
Related GAO Products 

Page 80 GAO-07-154

Related GAO Products 

Risk-Based Capital: Bank Regulators Need to Improve Transparency and 

Address Impediments to Finalizing the Proposed Basel II Framework.

GAO-07-253. Washington, D.C.: Feb. 15, 2007. 

Industrial Loan Corporations: Recent Asset Growth and Commercial 

Interest Highlight Differences in Regulatory Authority. GAO-06-961T. 

Washington, D.C.: July 12, 2006. 

Results-Oriented Government: Practices That Can Help Enhance and 

Sustain Collaboration among Federal Agencies. GAO-06-15. Washington,

D.C.: October 21, 2005. 

Industrial Loan Corporations: Recent Asset Growth and Commercial 

Interest Highlight Differences in Regulatory Authority. GAO-05-621. 

Washington, D.C.: September 15, 2005. 

21st Century Challenges: Reexamining the Base of the Federal 

Government. GAO-05-325SP. Washington, D.C.: February 1, 2005. 

Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. 

Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004. 

Internal Control Management and Evaluation Tool. GAO-01-1008G. 

Washington, D.C.: August 1, 2001. 

Managing for Results: Barriers to Interagency Coordination. GAO/GGD00-106. Washington, D.C.: March 29, 2000. 

Responses to Questions Concerning Long-Term Capital Management 

and Related Events. GAO/GGD-00-67R. Washington, D.C.: February 23, 

2000. 

Risk-Focused Bank Examinations: Regulators of Large Banking 

Organizations Face Challenges. GAO/GGD-00-48. Washington, D.C.: 

January 24, 2000. 

Standards for Internal Control in the Federal Government. GAO/AIMD00-21.3.1. Washington, D.C.: November 1, 1999. 

Long-Term Capital Management: Regulators Need to Focus Greater 

Attention on Systemic Risk. GAO/GGD-00-3. Washington, D.C.: October 

29, 1999.

(250258) Financial Market Regulation
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