FINANCIAL 

REGULATORY 

REFORM

Financial Crisis 

Losses and Potential 

Impacts of the DoddFrank Act

Report to Congressional Requesters

January 2013

GAO-13-180

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-180, a report to 

congressional requesters

January 2013

FINANCIAL REGULATORY REFORM

Financial Crisis Losses and Potential Impacts of the 

Dodd-Frank Act 

Why GAO Did This Study

The 2007-2009 financial crisis

threatened the stability of the U.S. 

financial system and the health of the 

U.S. economy. To address regulatory 

gaps and other problems revealed by 

the crisis, Congress enacted the DoddFrank Act. Federal regulators will need 

to issue hundreds of rules to 

implement the act. Industry 

representatives, academics, and

others generally have supported the 

act’s goal of enhancing U.S. financial 

stability, but implementation of certain 

of the act’s provisions has led to much 

debate. These experts have expressed 

a wide range of views on the potential 

positive and negative effects that the 

act could have on the U.S. financial 

system and broader economy. 

GAO was asked to examine the (1) 

losses associated with the recent 

financial crisis; (2) benefits of the act

for the U.S. financial system and the 

broader economy; and (3) costs of the 

act’s reforms. GAO reviewed empirical 

and other studies on the impacts of 

financial crises and the Dodd-Frank 

reforms, as well as congressional 

testimonies, comment letters, and 

other public statements by federal 

regulators, industry representatives, 

and others. GAO obtained and 

analyzed data on agency resources 

devoted to the act’s implementation. 

GAO also obtained perspectives from 

regulators, academics, and 

representatives of industry and public 

interest groups through interviews and 

an expert roundtable held with the 

assistance of the National Academy of 

Sciences. GAO provided a draft of this 

report to the financial regulators for 

review and comment and received 

technical comments, which were 

incorporated as appropriate.

What GAO Found

The 2007-2009 financial crisis has been associated with large economic losses

and increased fiscal challenges. Studies estimating the losses of financial crises 

based on lost output (value of goods and services not produced) suggest losses 

associated with the recent crisis could range from a few trillion dollars to over $10 

trillion. Also associated with the crisis were large declines in employment, 

household wealth, and other economic indicators. Some studies suggest the 

crisis could have long-lasting effects: for example, high unemployment, if 

persistent, could lead to skill erosion and lower future earnings for those affected. 

Finally, since the crisis began, federal, state, and local governments have faced 

greater fiscal challenges, in part because of reduced tax revenues from lower 

economic activity and increased spending to mitigate the impact of the recession.

While the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (DoddFrank Act) reforms could enhance the stability of the U.S. financial system and 

provide other benefits, the extent to which such benefits materialize will depend 

on many factors whose effects are difficult to predict. According to some 

academics, industry representatives, and others, a number of the act’s provisions

could help reduce the probability or severity of a future crisis and thereby avoid 

or reduce the associated losses. These include subjecting large, complex 

financial institutions to enhanced prudential supervision, authorizing regulators to 

liquidate a financial firm whose failure could pose systemic risk, and regulating 

certain complex financial instruments. In contrast, some experts maintain these 

measures will not help reduce the probability or severity of a future crisis, while 

others note that their effectiveness will depend on how they are implemented by 

regulators, including through their rulemakings, and other factors, such as how 

financial firms respond to the new requirements. Quantifying the act’s potential 

benefits is difficult, but several studies have framed potential benefits of certain

reforms by estimating output losses that could be avoided if the reforms lowered

the probability of a future crisis. 

Federal agencies and the financial industry are expending resources to 

implement and comply with the Dodd-Frank Act. First, federal agencies are 

devoting resources to fulfill rulemaking and other new regulatory responsibilities 

created by the act. Many of these agencies do not receive any congressional 

appropriations, limiting federal budget impacts. Second, the act imposes 

compliance and other costs on financial institutions and restricts their business 

activities in ways that may affect the provision of financial products and services.

While regulators and others have collected some data on these costs, no 

comprehensive data exist. Some experts stated that many of the act’s reforms 

serve to impose costs on financial firms to reduce the risks they pose to the 

financial system. Third, in response to reforms, financial institutions may pass 

increased costs on to their customers. For example, banks could charge more for 

their loans or other services, which could reduce economic growth. Although 

certain costs, such as paperwork costs, can be quantified, other costs, such as 

the act’s impact on the economy, cannot be easily quantified. Studies have 

estimated the economic impact of certain of the act’s reforms, but their results 

vary widely and depend on key assumptions. Finally, some experts expressed 

concern about the act’s potential unintended consequences and their related 

costs, adding to the challenges of assessing the benefits and costs of the act. 

View GAO-13-180. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov.
Page i GAO-13-180 Financial Regulatory Reform

Letter 1 

Background 4

2007-2009 Financial Crisis Was Associated with Large Economic 

Losses and Increases in Government Debt 12

The Dodd-Frank Act May Enhance Financial Stability and Provide 

Other Benefits, with the Extent of the Benefits Depending on a 

Number of Factors 33

Significance of the Act’s Costs Is Not Fully Known 60

Agency Comments 79

Appendix I Objectives, Scope, and Methodology 80

Appendix II International Financial Reform Efforts 84

Appendix III Experts Participating in the GAO Roundtable on the Benefits 

and Costs of the Dodd-Frank Act 87

Appendix IV GAO Contact and Staff Acknowledgments 88

Bibliography 89

Related GAO Products 92

Tables

Table 1: Federal Prudential Regulators and Their Basic Functions 5

Table 2: Overview of Income and Losses for Selected Federal 

Government Interventions to Assist the Financial Sector 

during the 2007-2009 Financial Crisis 30

Table 3: Summary of 10 Federal Entities’ Reported Funding 

Resources Associated with Implementation of the DoddFrank Act, 2010 through 2013 61

Contents 
Page ii GAO-13-180 Financial Regulatory Reform

Table 4: Summary of 10 Federal Entities’ Reported New and 

Redirected Full-Time Equivalents Associated with 

Implementation of the Dodd-Frank Act, 2010 through 2013 62

Table 5: Selected Organizations Engaged in Coordination of 

International Financial Regulatory Reform Efforts 85

Figures

Figure 1: U.S. Real Gross Domestic Product in 2005 Dollars and 

Recession Periods, First Quarter 1947 through Third 

Quarter 2012 13

Figure 2: Examples Illustrating Sensitivity of Output Loss 

Estimates to Key Assumptions 15

Figure 3: National Unemployment Rate and Long-Term 

Unemployed as a Percentage of Labor Force, Seasonally 

Adjusted, and Recession Periods, 1948 through November 

2012 18

Figure 4: Home Prices and Recession Periods, January 1976 

through June 2011 21

Figure 5: Value of Home Equity and Aggregate Mortgage Debt and 

Recession Periods, 1945 through 2011 22

Figure 6: Aggregate Value of Corporate Equities Held in Retirement 

Funds, December 31, 2000, through December 31, 2011 23

Figure 7: Percentage of Loans in Default 90 Days or More or in 

Foreclosure and Recession Periods, March 1979 through 

September 2012 25

Figure 8: Overview of Clearing, Trading, and Reporting 

Requirements under Swaps Reforms 51

Abbreviations

AIG American International Group, Inc.

BCBS Basel Committee on Banking Supervision

BIS Bank for International Settlements

BLS Bureau of Labor Statistics

CBO Congressional Budget Office

CCP central counterparty

CDS credit default swaps
Page iii GAO-13-180 Financial Regulatory Reform

CFTC Commodity Futures Trading Commission

CFPB Bureau of Consumer Financial Protection

CPP Capital Purchase Program

CPSS Committee on Payment and Settlement Systems

DGP Debt Guarantee Program

FDIC Federal Deposit Insurance Corporation

FHFA Federal Housing Finance Agency

FHFB Federal Housing Finance Board

FRBNY Federal Reserve Bank of New York

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FTE full-time equivalent

GDP gross domestic product

GSE government-sponsored enterprise

HERA Housing and Economic Recovery Act of 2008

HUD Department of Housing and Urban Development

IAIS International Association of Insurance Supervisors

IMF International Monetary Fund

IOSCO International Organization of Securities 

 Commissions

MMMF money market mutual fund

NAS National Academy of Sciences

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

OFHEO Office of Federal Housing Enterprise Oversight

OLA orderly liquidation authority

OTC over-the-counter

OTS Office of Thrift Supervision

OFR Office of Financial Research

QM qualified mortgage

QRM qualified residential mortgage

SEC Securities and Exchange Commission

SEF swap execution facility

SCAP Supervisory Capital Assessment Program

S&L savings and loan

SIFI systemically important financial institutions

TAGP Transaction Account Guarantee Program

TLGP Temporary Liquidity Guarantee Program

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Page 1 GAO-13-180 Financial Regulatory Reform

United States Government Accountability Office

Washington, DC 20548

January 16, 2013

The Honorable Tim Johnson

Chairman

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Michael E. Capuano

Ranking Member

Subcommittee on Oversight and Investigations

Committee on Financial Services

House of Representatives

The 2007-2009 financial crisis threatened the stability of the U.S. financial 

system—composed of financial institutions, markets, and infrastructure—

and the health of the U.S. economy.1 At the peak of the crisis, the federal 

government introduced unprecedented support for financial markets, 

providing hundreds of billions of dollars of capital and over a trillion dollars 

of emergency loans to financial institutions. Many households suffered as 

a result of falling asset prices, tightening credit, and increasing 

unemployment. While many factors likely contributed to the crisis and the 

relative role of these factors is subject to debate, gaps and weaknesses in 

the supervision and regulation of the U.S. financial system generally 

played an important role.2 To address such shortcomings, Congress 

enacted the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (the Dodd-Frank Act).3 As summarized on the Senate Banking 

Committee’s website, the act seeks to (1) address risks to the stability of 

the U.S. financial system, in part through the creation of the Financial 

 

1

As discussed below, no universal or widely accepted definition of a financial crisis exists. 

Indeed, no clear consensus exists on when the recent financial crisis started or ended (if 

yet). In a number of speeches, officials from the Board of Governors of the Federal 

Reserve System and several academics have dated the crisis as starting in 2007 and 

ending in 2009. We are adopting that time frame, although others sometimes date the 

crisis as starting in 2008 and ending in 2009. 

2

As discussed in the background section of this report, other factors that are thought to 

have contributed to the crisis include financial innovations and economic conditions, 

characterized by accommodative monetary policies, ample liquidity and availability of 

credit, and low interest rates that spurred housing investment. 

3

Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

 
 

Page 2 GAO-13-180 Financial Regulatory Reform

Stability Oversight Council (FSOC), (2) end too-big-to-fail bailouts of 

large, complex financial institutions, (3) increase transparency and 

regulation for certain complex financial instruments, and (4) strengthen 

protections for consumers and investors.4

Federal financial regulators and other agencies are continuing to make 

progress in implementing the Dodd-Frank Act’s numerous provisions, 

which may require hundreds of rulemakings. While the financial services 

industry, academics, and others generally have supported the DoddFrank Act’s goal of enhancing the stability of the U.S. financial system, 

the act’s implementation has not been free of controversy or debate. For 

example, a consensus exists neither on the extent to which the act will 

help to reduce the likelihood and severity of future financial crises nor on 

the magnitude of the costs that the act, generally, and its regulations, 

specifically, will impose on U.S. financial institutions and the U.S. 

economy. The Dodd-Frank Act has not yet been fully implemented; thus, 

its impacts have not fully materialized. Nonetheless, analyses of the 

potential and actual impacts can help inform policymakers about the 

ongoing implementation of the act’s reforms.

As requested, the objectives of this report are to describe what is known 

about

• the losses and related economic impacts associated with the 2007-

2009 financial crisis;

• the benefits of the Dodd-Frank Act, particularly its key financial 

stability provisions, for the U.S. financial system and broader 

economy; and

• the costs associated with the act, particularly its key financial stability 

provisions.

To address our objectives, we reviewed and analyzed academic and 

other studies that assess the economic impacts of financial crises or 

financial regulatory reforms, including the Dodd-Frank Act. We reviewed 

the methodological approaches of selected studies and determined that 

they were sufficient for our purposes. However, the results should not 

 

4

U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Dodd-Frank Wall 

Street Reform: Conference Report Summary, accessed December 17, 2012,

http://banking.senate.gov/public/index.cfm?FuseAction=Issues.View&Issue_id=84d77b9fc7ab-6fe2-4640-9dd18189fb23. 
 

Page 3 GAO-13-180 Financial Regulatory Reform

necessarily be considered as definitive, given the methodological or data 

limitations contained in the studies individually and collectively. To show 

changes in economic indicators following the start of the financial crisis, 

we obtained and analyzed data from the Bureau of Economic Analysis, 

Bureau of Labor Statistics, National Bureau of Economic Research, and 

other sources. We obtained and summarized data on the incremental 

budgetary costs associated with the act’s implementation for 10 federal 

entities: the Board of Governors of the Federal Reserve System (Federal 

Reserve); Commodity Futures Trading Commission (CFTC); Federal 

Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency 

(FHFA); Office of the Comptroller of the Currency (OCC); Securities and 

Exchange Commission (SEC); Department of the Treasury (Treasury);

Bureau of Consumer Financial Protection, commonly known as the 

Consumer Financial Protection Bureau (CFPB); FSOC; and the Office of 

Financial Research (OFR). For parts of our methodology that involved the 

analysis of computer-processed data, we assessed the reliability of these 

data and determined that they were sufficiently reliable for our purposes. 

Through interviews and an expert roundtable we held with the assistance 

of the National Academy of Sciences, we obtained perspectives from 

academics; current and former federal financial regulators; 

representatives of industry, public interest, and investor groups; and other 

experts on the potential benefits and costs of the act’s reforms. In 

addition, we reviewed relevant reports and public statements by these 

groups as well as Dodd-Frank Act rules and comment letters. Finally, we 

reviewed prior GAO work on the fiscal outlook for federal, state, and local 

governments and on financial regulatory reform. Appendix I contains 

additional information on our scope and methodology.

We conducted this performance audit from November 2011 to January 

2013 in accordance with generally accepted government auditing 

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

obtain sufficient, appropriate evidence to provide a reasonable basis for 

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

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
 

Page 4 GAO-13-180 Financial Regulatory Reform

The financial regulatory framework in the United States was built over 

more than a century, largely in response to crises and significant market 

developments. As a result, the regulatory system is complex and 

fragmented.5 While the Dodd-Frank Act has brought additional changes, 

including the creation of new regulatory entities and the consolidation of 

some regulatory responsibilities that had been shared by multiple 

agencies, the U.S. financial regulatory structure largely remains the 

same. It is a complex system of multiple federal and state regulators, as 

well as self-regulatory organizations, that operates largely along 

functional lines. The U.S. regulatory system is described as “functional” in 

that financial products or activities are generally regulated according to 

their function, no matter who offers the product or participates in the 

activity.

In the banking industry, the specific regulatory configuration depends on 

the type of charter the banking institution chooses. Depository institution 

charter types include

• commercial banks, which originally focused on the banking needs of 

businesses but over time have broadened their services;

• thrifts, which include savings banks, savings associations, and 

savings and loans and were originally created to serve the needs—

particularly the mortgage needs—of those not served by commercial 

banks; and

• credit unions, which are member-owned cooperatives run by memberelected boards with an historical emphasis on serving people of 

modest means.

These charters may be obtained at the state or federal level. State 

regulators charter institutions and participate in their oversight, but all 

institutions that have federal deposit insurance have a federal prudential 

regulator. The federal prudential regulators—which generally may issue 

regulations and take enforcement actions against industry participants 

 

5

For a more detailed discussion of the evolution of the U.S. financial regulatory framework 

before the enactment of the Dodd-Frank Act, see GAO, Financial Regulation: A 

Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. 

Financial Regulatory System, GAO-09-216 (Washington, D.C.: Jan. 8, 2009).

Background 

U.S. Financial Regulatory 

Framework

Banking Regulators 
 

Page 5 GAO-13-180 Financial Regulatory Reform

within their jurisdiction—are identified in table 1. The act eliminated the 

Office of Thrift Supervision (OTS) and transferred its regulatory 

responsibilities to OCC, the Federal Reserve, and FDIC.6 To achieve their 

safety and soundness goals, bank regulators establish capital 

requirements, conduct onsite examinations and off-site monitoring to 

assess a bank’s financial condition, and monitor compliance with banking 

laws. Regulators also issue regulations, take enforcement actions, and 

close banks they determine to be insolvent.

Table 1: Federal Prudential Regulators and Their Basic Functions

Agency Basic function

Office of the Comptroller of the Currency Charters and supervises national banks and federal thrifts.

Board of Governors of the Federal Reserve 

System 

Supervises state-chartered banks that opt to be members of the Federal Reserve 

System, bank holding companies, thrift holding companies and the nondepository 

institution subsidiaries of those institutions, and nonbank financial companies designated 

by the Financial Stability Oversight Council.

Federal Deposit Insurance Corporation Supervises FDIC-insured state-chartered banks that are not members of the Federal 

Reserve System, as well as federally insured state savings banks and thrifts; insures the 

deposits of all banks and thrifts that are approved for federal deposit insurance; and 

resolves all failed insured banks and thrifts and has been given the authority to resolve 

large bank holding companies and nonbank financial companies that are subject to 

supervision by the Board of Governors of the Federal Reserve System. 

National Credit Union Administration Charters and supervises federally chartered credit unions and insures savings in federal 

and most state-chartered credit unions.

Sources: OCC, Federal Reserve Board, FDIC, and NCUA.

Holding companies that own or control a bank or thrift are subject to 

supervision by the Federal Reserve. The Bank Holding Company Act of 

1956 and the Home Owners’ Loan Act set forth the regulatory frameworks 

for bank holding companies and savings and loan (S&L) holding 

companies, respectively.7 Before the Dodd-Frank Act, S&L holding 

companies had been subject to supervision by OTS and a different set of 

regulatory requirements from those of bank holding companies. The 

 

6

OTS chartered and supervised federally chartered savings institutions and savings and 

loan holding companies. Rule-making authority previously vested in OTS was transferred 

to OCC for savings associations and to the Federal Reserve for savings and loan holding 

companies. Other authorities were transferred to OCC, FDIC, and the Federal Reserve. 

12 U.S.C. § 5412.

7

Pub. L. No. 84-511, 70 Stat. 133 (1956) and Pub. L. No. 73-43, 48 Stat. 128 (1933). Bank 

holding companies are companies that own or control a bank, as defined in the Bank 

Holding Company Act. S&L holding companies are companies that own or control an S&L. 
 

Page 6 GAO-13-180 Financial Regulatory Reform

Dodd-Frank Act made the Federal Reserve the regulator of S&L holding 

companies and amended the Home Owners’ Loan Act and the Bank 

Holding Company Act to create certain similar requirements for both bank 

holding companies and S&L holding companies.8 The Dodd-Frank Act 

also grants new authorities to FSOC to designate nonbank financial 

companies for supervision by the Federal Reserve.

The securities and futures markets are regulated under a combination of 

self-regulation (subject to oversight by the appropriate federal regulator) 

and direct oversight by SEC and CFTC, respectively.9 SEC regulates the 

securities markets, including participants such as securities exchanges, 

broker-dealers, investment companies, and investment advisers. SEC’s 

mission is to protect investors; maintain fair, orderly, and efficient 

markets; and facilitate capital formation. In the securities industry, certain 

self-regulatory organizations—including the securities exchanges and the 

Financial Industry Regulatory Authority—have responsibility for 

overseeing the securities markets and their members; establishing the 

standards under which their members conduct business; monitoring 

business conduct; and bringing disciplinary actions against members for 

violating applicable federal statutes, SEC’s rules, and their own rules.

CFTC is the primary regulator of futures markets, including futures 

exchanges and intermediaries, such as futures commission merchants.10

CFTC’s mission is to protect market users and the public from fraud, 

manipulation, abusive practices, and systemic risk related to derivatives 

that are subject to the Commodity Exchange Act, and to foster open, 

competitive, and financially sound futures markets. Like SEC, CFTC 

oversees the registration of intermediaries and relies on self-regulatory 

 

8

For a more detailed discussion of the regulatory framework for bank holding companies 

and S&L holding companies, see GAO, Bank Holding Company Act: Characteristics and 

Regulation of Exempt Institutions and the Implications of Removing the Exemptions, 

GAO-12-160 (Washington, D.C.: Jan. 19, 2012). 

9

Certain securities activities also are overseen by state government entities. 

10Futures commission merchants are individuals, associations, partnerships, corporations, 

and trusts that solicit or accept orders for the purchase or sale of any commodity for future 

delivery on or subject to the rules of any exchange and that accept payment from or 

extend credit to those whose orders are accepted. Firms and individuals who trade futures 

with the public or give advice about futures trading must be registered with the National 

Futures Association, the industrywide self-regulatory organization for the U.S. futures 

industry. 

Securities and Futures 

Regulators 
 

Page 7 GAO-13-180 Financial Regulatory Reform

organizations, including the futures exchanges and the National Futures 

Association, to establish and enforce rules governing member behavior.

In addition, Title VII of the Dodd-Frank Act expands regulatory 

responsibilities for CFTC and SEC by establishing a new regulatory 

framework for swaps. The act authorizes CFTC to regulate “swaps” and 

SEC to regulate “security-based swaps” with the goals of reducing risk,

increasing transparency, and promoting market integrity in the financial 

system.11

The Dodd-Frank Act established CFPB as an independent bureau within 

the Federal Reserve System and provided it with rule-making, 

enforcement, supervisory, and other powers over many consumer 

financial products and services and many of the entities that sell them.12

Certain consumer financial protection functions from seven existing 

federal agencies were transferred to CFPB.13 Consumer financial 

products and services over which CFPB has primary authority include 

deposit taking, mortgages, credit cards and other extensions of credit, 

loan servicing, debt collection, and others. CFPB is authorized to 

supervise certain nonbank financial companies and large banks and 

credit unions with over $10 billion in assets and their affiliates for 

consumer protection purposes. CFPB does not have authority over most 

insurance activities or most activities conducted by firms regulated by 

SEC or CFTC.

The Housing and Economic Recovery Act of 2008 (HERA) created FHFA 

to oversee the government-sponsored enterprises (GSE): Fannie Mae, 

Freddie Mac, and the Federal Home Loan Banks.14 Fannie Mae and 

Freddie Mac were created by Congress as private, federally chartered 

 

11A swap is a type of derivative that involves an ongoing exchange of one or more assets, 

liabilities, or payments for a specified period. Financial and nonfinancial firms use swaps 

and other over-the-counter derivatives to hedge risk, or speculate, or for other purposes. 

Swaps include interest rate swaps, commodity-based swaps, and broad-based credit 

default swaps. Security-based swaps include single-name and narrow-based credit default 

swaps and equity-based swaps. For the purposes of this report, we use “swaps” to refer to 

both “swaps” and “security-based swaps.” 

1212 U.S.C. §§ 5481–5603. 

13These agencies included the Federal Reserve, FDIC, the Federal Trade Commission, 

the Department of Housing and Urban Development, the National Credit Union 

Administration, OCC, and OTS.

14Pub. L. No. 110-289, 122 Stat. 2654 (2008). 

Consumer Financial Protection

Bureau 

Federal Housing Finance 

Agency 
 

Page 8 GAO-13-180 Financial Regulatory Reform

companies to provide, among other things, liquidity to home mortgage 

markets by purchasing mortgage loans, thus enabling lenders to make 

additional loans. The system of 12 Federal Home Loan Banks provides 

funding to support housing finance and economic development. Until 

enactment of HERA, Fannie Mae and Freddie Mac had been overseen 

since 1992 by the Office of Federal Housing Enterprise Oversight 

(OFHEO), an agency within the Department of Housing and Urban 

Development (HUD), and the Federal Home Loan Banks were subject to 

supervision by the Federal Housing Finance Board (FHFB), an 

independent regulatory agency.15 In July 2008, HERA created FHFA to 

establish more effective and more consistent oversight of the three 

housing GSEs.16 Given their precarious financial condition, Fannie Mae 

and Freddie Mac were placed in conservatorship in September 2008, with 

FHFA serving as the conservator under powers provided in HERA.

While insurance activities are primarily regulated at the state level, the 

Dodd-Frank Act created the Federal Insurance Office within Treasury to 

monitor issues related to regulation of the insurance industry.17 The 

Federal Insurance Office is not a regulator or supervisor, and its 

responsibilities include identifying issues or gaps in the regulation of 

insurers that could contribute to a systemic crisis in the insurance industry 

or the U.S. financial system.

The Dodd-Frank Act established FSOC to identify risks to the financial 

stability of the United States, promote market discipline, and respond to 

emerging threats to the stability of the U.S. financial system. The DoddFrank Act also established OFR within Treasury to serve FSOC and its 

member agencies by improving the quality, transparency, and 

accessibility of financial data and information; conducting and sponsoring 

 

15OFHEO regulated Fannie Mae and Freddie Mac on matters of safety and soundness, 

while HUD regulated their mission-related activities. FHFB served as the safety and 

soundness and mission regulator of the Federal Home Loan Banks. 

16With respect to Fannie Mae and Freddie Mac, the law gave FHFA such new regulatory 

authorities as the power to regulate the retained mortgage portfolios, to set more stringent 

capital standards, and to place a failing entity in receivership. In addition, the law provides 

FHFA with funding outside the annual appropriations process. The law also combined the 

regulatory authorities for all the housing GSEs that were previously distributed among 

OFHEO, FHFB, and HUD. 

1731 U.S.C. § 313. 

Federal Insurance Office 

Financial Stability Oversight 

Council and Office of Financial 

Research 
 

Page 9 GAO-13-180 Financial Regulatory Reform

research related to financial stability; and promoting best practices in risk 

management.18

FSOC’s membership consists of the Secretary of the Treasury, who 

chairs the council, and the heads of CFPB, CFTC, FDIC, the Federal 

Reserve, FHFA, the National Credit Union Administration, OCC, SEC, the 

directors of OFR and the Federal Insurance Office, representatives from

state-level financial regulators, and an independent member with 

insurance experience.

There is no universally accepted definition of a financial crisis. Some 

academic studies identify three major types of financial crises: banking 

crises, public debt crises, and currency crises.19 The most recent financial 

crisis in the United States is widely considered to have been a banking 

crisis. While researchers have defined banking crises in different ways, 

their definitions generally focus on indicators of severe stress on the 

financial system, such as runs on financial institutions or large-scale 

government assistance to the financial sector. The large increases in 

public debt that tend to follow the onset of a banking crisis can make a 

country more susceptible to a public debt crisis.

Studies reviewing historical banking crises in the United States and other 

countries found that such crises were associated with large losses in 

output (the value of goods and services produced in the economy) and 

employment that can persist for years. A disruption to the financial system 

can have a ripple effect through the economy, harming the broader 

economy through several channels. For example, some studies identify 

ways that strains in the financial system can negatively impact the cost 

 

1812 U.S.C. §§ 5321–5333. For additional information on FSOC and OFR, see GAO, 

Financial Stability: New Council and Research Office Should Strengthen the 

Accountability and Transparency of Their Decisions, GAO-12-886 (Washington, D.C.: 

Sept. 11, 2012). 

19Public debt crises can occur when rising levels of government debt lead investors to 

lose confidence in the ability of a country to repay its debts, causing the country’s 

borrowing costs to surge and forcing large cuts to public spending. Currency crises can 

occur when there is a speculative attack on the foreign exchange value of a currency, 

causing a sharp depreciation in the currency or forcing authorities to defend the value of 

the currency by selling foreign exchange reserves and raising domestic interest rates.

Financial Crises
 

Page 10 GAO-13-180 Financial Regulatory Reform

and availability of credit and, in turn, reduce total output.20 During the 

recent crisis, certain securitization markets collapsed and households and 

businesses faced tightened credit conditions. Higher funding costs for 

firms in the form of higher interest rates and lower equity prices can 

contribute to declines in investment. Furthermore, as asset prices fall, 

declines in the wealth and confidence of consumers, businesses, and 

investors also can contribute to output declines. Historically, governments 

have provided substantial assistance to financial institutions during 

banking crises to avert more severe disruptions to the key functions 

performed by the financial system.

The causes of the 2007-2009 crisis are complex and remain subject to 

debate and ongoing research. According to many researchers, around 

mid-2007, losses in the mortgage market triggered a reassessment of 

financial risk in other debt instruments and sparked the financial crisis.

Uncertainty about the financial condition and solvency of financial entities 

resulted in a liquidity and credit crunch that made the financing on which 

many businesses and individuals depend increasingly difficult to obtain.21

By late summer of 2008, the ramifications of the financial crisis ranged 

from the failure of financial institutions to increased losses of individual 

savings and corporate investments.

Academics and others have identified a number of factors that may have 

helped set the stage for problems in the mortgage market and the 

broader financial system. These factors, in no particular order, include

• financial innovation in the form of asset securitization, which reduced 

mortgage originators’ incentives to be prudent in underwriting loans 

and made it difficult to understand the size and distribution of loss 

exposures throughout the system;

• imprudent business and risk management decisions based on the 

expectation of continued housing price appreciation;

 

20See, for example, Basel Committee on Banking Supervision, The Transmission 

Channels between the Financial and Real Sectors: A Critical Survey of the Literature. 

Working paper No. 18 (Basel, Switzerland: February 2011).

21During the crisis, market liquidity and funding liquidity declined in certain markets. To 

function efficiently, the securities markets need market liquidity, generally defined as the 

ability to buy and sell a particular asset without significantly affecting its price. In contrast 

to market liquidity, which is an asset-specific characteristic, funding liquidity generally 

refers to the availability of funds in the market that firms can borrow to meet their 

obligations.
 

Page 11 GAO-13-180 Financial Regulatory Reform

• faulty assumptions in the models used by credit rating agencies to 

rate mortgage-related securities;

• gaps and weaknesses in regulatory oversight, which allowed financial 

institutions to take excessive risks by exploiting loopholes in capital 

rules and funding themselves increasingly with short-term liabilities;

• government policies to increase homeownership, including the role of 

Fannie Mae and Freddie Mac in supporting lending to higher-risk 

borrowers; and

• economic conditions, characterized by accommodative monetary 

policies, ample liquidity and availability of credit, and low interest rates 

that spurred housing investment.

The United States periodically has experienced banking crises of varying 

severity. The financial crisis that began in 2007 was the most severe 

banking crisis experienced by the United States since the 1930s. While 

this most recent financial crisis may have had some new elements—such 

as the role of asset securitization in spreading risks across the financial 

system—studies have found that it followed patterns common to past 

crises in the United States and other countries. For example, experts 

have noted that the recent crisis, like many past crises, was preceded by 

an asset price boom that was accompanied by an excessive buildup in 

leverage.22 Another common pattern between the recent and past crises 

has been the buildup of risks and leverage in unregulated or less 

regulated financial institutions. While academic studies have used 

different criteria to identify and date banking crises, studies we reviewed 

identify the following episodes as U.S. banking crises since the Civil War:

the banking panics of 1873, 1893, 1907, and the 1930s; the Savings and 

Loan Crisis that began in the1980s; and the 2007-2009 crisis. The studies 

do not consider the stock market crash of 1987 or the bursting of the 

technology bubble during 2000-2001 to be banking crises, because 

neither placed severe strains on the financial system that threatened the 

economy.

 

22Leverage traditionally has referred to the use of debt, instead of equity, to fund an asset 

and been measured by the ratio of total assets to equity on the balance sheet. Leverage 

also can be used to increase an exposure to a financial asset without using debt, such as 

by using derivatives. In that regard, leverage can be defined broadly as the ratio between 

some measure of risk exposure and capital that can be used to absorb unexpected losses 

from the exposure.
 

Page 12 GAO-13-180 Financial Regulatory Reform

Several studies measure the overall economic costs associated with past 

financial crises based on the decline in economic output (the value of 

goods and services produced in the economy) relative to some 

benchmark, such as the long-term trend in output. While using a variety of 

methods to quantify these output losses, the studies generally have found 

the losses from past financial crises to be very large. Some of these 

studies also analyze changes in unemployment, household wealth, and 

other economic indicators to show the effects of the crises at a more 

granular level. In addition, some studies use measures of fiscal costs—

such as increases in government debt—to analyze the losses associated 

with financial crises. In the following section, we review what is known 

about the losses associated with the recent financial crisis based on 

these measures.

The 2007-2009 financial crisis, like past financial crises, was associated 

with not only a steep decline in output but also the most severe economic 

downturn since the Great Depression of the 1930s (see fig. 1). According 

to a study, in the aftermath of past U.S. and foreign financial crises, 

output falls (from peak to trough) an average of over 9 percent and the 

associated recession lasts about 2 years on average.23 The length and 

severity of this economic downturn was roughly consistent with the 

experience of past financial crises. The U.S. economy entered a 

recession in December 2007, a few months after the start of the financial 

crisis.24 Between December 2007 and the end of the recession in June 

2009, U.S. real gross domestic product (GDP) fell from $13.3 trillion to 

$12.7 trillion (in 2005 dollars), or by nearly 5 percent. As shown in figure 

1, real GDP did not regain its pre-recession level until the third quarter of 

2011.

 

23Carmen M. Reinhart and Kenneth S. Rogoff, The Aftermath of Financial Crises, National 

Bureau of Economic Research, Working Paper 14656 (Cambridge, MA: January 2009).

24Recessions mark a distinct phase of the overall business cycle, beginning with a 

business cycle “peak” and ending with a business cycle “trough.” Between trough and 

peak the economy is in an expansion. The National Bureau of Economic Research 

identifies dates for national recessions, which can vary in overall duration and magnitude. 

The National Bureau of Economic Research is a private, nonprofit, nonpartisan research 

organization dedicated to promoting a greater understanding of how the economy works.

2007-2009 Financial 

Crisis Was Associated 

with Large Economic 

Losses and Increases 

in Government Debt

Studies Generally Find 

That the Recent Crisis Was 

Associated with Large 

Losses in Economic 

Output, but Estimates of 

Such Losses Vary and 

Depend on Several 

Assumptions 
 

Page 13 GAO-13-180 Financial Regulatory Reform

Figure 1: U.S. Real Gross Domestic Product in 2005 Dollars and Recession Periods, First Quarter 1947 through Third Quarter 

2012

Although the decline in the U.S. economy’s real GDP during the 

recession may reflect some of the losses associated with the 2007-2009 

financial crisis, the decline does not capture the cumulative losses from 

the crisis. To quantify the overall losses associated with past financial 

crises, researchers have estimated output losses as the cumulative 

shortfall between actual GDP and estimates of what GDP would have 

been if the crisis had not occurred. Measuring the shortfall in GDP in the 

aftermath of a crisis requires making a number of assumptions, and the 

measurement will vary depending on what assumptions are used. Figure 

2 provides two examples to show how estimates of output losses vary 

depending on the assumptions used. The output shortfall is shown in the 

shaded areas of the two examples, with the output shortfall larger in 

example 2 than in example 1. Important assumptions include the 

following:

• Start date of the crisis: The first assumption involves selecting the 

date when the crisis began. The start date is shown as the vertical line 
 

Page 14 GAO-13-180 Financial Regulatory Reform

in examples 1 and 2 and is assumed to be the same. However, 

researchers have used different assumptions to select the start date 

of the 2007-2009 financial crisis.25

• The path real GDP would have followed if the crisis had not 

occurred: The second assumption involves estimating the 

counterfactual for the path of GDP—that is, the path that real GDP 

would have followed in the absence of a crisis.26 This counterfactual is 

not observable. Studies have used different assumptions to estimate 

this path and one approach is to assume that this path would follow a 

precrisis trend in real GDP growth. For example, one study estimated 

trend output paths based on average GDP growth for the three years 

and ten years before the crisis. In figure 2, example 1 assumes a 

much lower (or less steep) trend rate of GDP growth than example 2.

Assuming a higher growth trend results in a larger estimate of output 

losses. 

• Projections of actual GDP: The third assumption involves 

determining when GDP regained or will regain its estimated precrisis 

trend path. With respect to the recent crisis, some studies find that 

real GDP remains below the estimated precrisis trend. Researchers 

reach different conclusions about when or whether GDP will regain its 

long-term trend from before the crisis. Assumptions about the path of 

actual GDP and how it compares to the potential trend path can 

reflect different views on whether the output losses from the crisis are 

temporary or permanent. In contrast to example 1, where the 

economy regains its precrisis growth rate and level of output, example 

2 assumes the economy regains its precrisis rate of output growth but 

remains permanently below the level of output projected by 

extrapolating the precrisis growth trend. As a result, output losses in 

example 2 extend farther into the future and are considerably larger 

 

25Many researchers identify August 2007 as the start of the recent financial crisis, when 

strains appeared in interbank lending markets, but others date the start of the crisis to late 

2008, when strains in credit markets intensified and led to the failure or near failure of a 

number of large financial institutions.

26Cecchetti et al. measure output losses by comparing postcrisis levels of GDP with the 

level of GDP at the onset of the crisis. However, this measure does not account for any 

growth in GDP that would have been expected to occur in the absence of a crisis. See 

Stephen G. Cecchetti, Marion Kohler, and Christian Upper, Financial Crises and 

Economic activity, National Bureau of Economic Research, Working Paper 15379 

(Cambridge, MA: September 2009). 
 

Page 15 GAO-13-180 Financial Regulatory Reform

than in example 1. Some studies describe reasons why financial 

crises could be associated with permanent output losses. For 

example, sharp declines in investment during and following the crisis 

could result in lower capital accumulation in the long-term. In addition, 

persistent high unemployment could substantially erode the skills of 

many U.S. workers and reduce the productive capacity of the U.S. 

economy.

Figure 2: Examples Illustrating Sensitivity of Output Loss Estimates to Key 

Assumptions

Note: Example 2 assumes a higher trend rate of GDP growth than Example 1, resulting in a higher 

estimate of output losses (shown as the region shaded in grey). In example 1, GDP catches up with 

its precrisis path, while in example 2 GDP remains on a permanently lower path, albeit one with the 

same growth rate as that prevailing before the crisis.

Research suggests that U.S. output losses associated with the 2007-

2009 financial crisis could range from several trillion to over $10 trillion. In 

January 2012, the Congressional Budget Office (CBO) estimated that the 

cumulative difference between actual GDP and estimated potential GDP 
 

Page 16 GAO-13-180 Financial Regulatory Reform

following the crisis would amount to $5.7 trillion by 2018.27 CBO defined 

potential output as the output level that corresponds to a high rate of use 

of labor and capital. CBO reported that recessions following financial 

crises, like the most recent crisis, tend to reduce not only output below 

what it otherwise would have been but also the economy’s potential to 

produce output, even after all resources are productively employed. In its 

estimate, CBO assumed that GDP would recover to its potential level by 

2018, noting that it does not attempt to predict business cycle fluctuations 

so far into the future. Other studies have reported a wide range of 

estimates for the output losses associated with past financial crises, with 

some suggesting that output losses from the recent crisis could persist 

beyond 2018 or be permanent. In an August 2010 study, a working group 

of the Basel Committee on Banking Supervision reviewed the literature 

estimating output losses.28 According to the Basel Committee working 

group’s review, studies calculating long-term output losses relative to a 

benchmark (such as an estimated trend in the level of GDP) estimated 

much larger losses than studies calculating output losses over a shorter 

time period. In a June 2012 working paper, International Monetary Fund 

(IMF) economists estimated the cumulative percentage difference 

between actual and trend real GDP for the 4 years following the start of 

individual banking crises in many countries.29 They found a median output 

loss of 23 percent of trend-level GDP for a historical set of banking crises 

and a loss of 31 percent for the 2007-2009 U.S. banking crisis. Other 

researchers who assume more persistent or permanent output losses 

 

27CBO calculated this cumulative difference as the sum of the shortfall in output 

(compared to potential output) for each year that such a shortfall has occurred since the 

crisis began and the sum of projected shortfalls in the future—specifically, between its 

2012 estimate date and 2018, when it projected that output would regain its potential level.

See CBO, The Budget and Economic Outlook: Fiscal Years 2012 to 2022, (Washington, 

D.C.: January 2012).

28Basel Committee on Banking Supervision, An Assessment of the Long-Term Economic 

Impact of Stronger Capital and Liquidity Requirements, (Basel, Switzerland: August 2010).

The Basel Committee on Banking Supervision (Basel Committee) seeks to improve the 

quality of banking supervision worldwide, in part by developing broad supervisory 

standards. The Basel Committee consists of central bank and regulatory officials from 

Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, 

India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, 

Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United 

Kingdom, and the United States. The Basel Committee’s supervisory standards are also 

often adopted by nonmember countries.

29Luc Laevan and Fabian Valencia, Systemic Banking Crises Database: An Update, IMF 

Working Paper, 12/163 (Washington, D.C.: June 2012).
 

Page 17 GAO-13-180 Financial Regulatory Reform

from past financial crises estimate much larger output losses from these 

crises, potentially in excess of 100 percent of precrisis GDP.30 While such 

findings were based on crisis events before 2007, if losses from the 2007-

2009 crisis were to reach similar levels, the present value of cumulative 

output losses could exceed $13 trillion.

Studies that estimate output losses can be useful in showing the rough 

magnitude of the overall costs associated with the 2007-2009 financial 

crisis, but their results have limitations. Importantly, real GDP is an 

imperfect proxy of overall social welfare. As discussed below, real GDP 

measures do not reveal the distributional impacts of the crisis, and the 

costs associated with a financial crisis can fall disproportionately on 

certain populations. In addition, it is difficult to separate out the economic 

costs attributable to the crisis from the costs attributable to other factors, 

such as federal government policy decisions before, during, and after the 

crisis. 

While studies often use output losses to measure the overall costs 

associated with financial crises, many researchers also discuss trends in 

unemployment, household wealth, and other economic indicators, such 

as the number of foreclosures, to provide a more granular picture of the 

effects of financial crises. As with trends in output losses, it is not possible 

to determine how much of the changes in these measures can be 

attributed to the financial crisis rather than to other factors. For example, 

analyzing the peak-to-trough changes in certain measures, such as home 

prices, can overstate the impacts associated with the crisis, as valuations 

before the crisis may have been inflated and unsustainable. The effects of 

the financial crisis have been wide-ranging, and we are not attempting to 

provide a comprehensive review of all components of the economic harm.

Rather, the following highlights some of the most common types of 

measures used by academics and other researchers.

As shown in figure 3, the unemployment rate rose substantially following 

the onset of the financial crisis and then declined, but it remains above 

the historical average as of November 2012. The monthly unemployment 

rate peaked at around 10 percent in October 2009 and remained above 8 

 

30See, for example, John H. Boyd, Sungkyu Kwak, and Bruce Smith, “The Real Output 

Losses Associated with Modern Banking Crises,” Journal of Money, Credit and Banking, 

vol. 37, no. 6 (Dec. 2005), pp. 977-999. 

2007-2009 Crisis Was Also 

Associated with Large 

Declines in Employment, 

Household Wealth, and 

Other Economic Indicators

Unemployment
 

Page 18 GAO-13-180 Financial Regulatory Reform

percent for over 3 years, making this the longest stretch of unemployment 

above 8 percent in the United States since the Great Depression.31 The 

monthly long-term unemployment rate—measured as the share of the 

unemployed who have been looking for work for more than 27 weeks—

increased above 40 percent in December 2009 and remained above 40 

percent as of November 2012.

Figure 3: National Unemployment Rate and Long-Term Unemployed as a Percentage of Labor Force, Seasonally Adjusted, 

and Recession Periods, 1948 through November 2012

Persistent, high unemployment has a range of negative consequences for 

individuals and the economy. First, displaced workers—those who 

 

31Persons considered to be marginally attached to the labor force and persons who were 

employed part time for economic reasons are not counted as unemployed persons in the 

Bureau of Labor Statistics’ (BLS) calculation of the unemployment rate. BLS considers 

workers who want work and are available for work but who did not actively seek work in 

the past month as marginally attached to the labor force. BLS defines persons employed 

part time for economic reasons as those who want and are available for full-time work but 

have had to settle for a part-time schedule. As of November 2012, total unemployed 

persons plus these two groups—marginally attached persons and persons working parttime for economic reasons—represented 14.4 percent of the labor force plus those 

marginally attached to the labor force. 
 

Page 19 GAO-13-180 Financial Regulatory Reform

permanently lose their jobs through no fault of their own—often suffer an 

initial decline in earnings and also can suffer longer-term losses in 

earnings.32 For example, one study found that workers displaced during 

the 1982 recession earned 20 percent less, on average, than their 

nondisplaced peers 15 to 20 years later.33 Reasons that unemployment 

can reduce future employment and earnings prospects for individuals 

include the stigma that some employers attach to long-term 

unemployment and the skill erosion that can occur as individuals lose 

familiarity with technical aspects of their occupation. Second, research 

suggests that the unemployed tend to be physically and psychologically 

worse off than their employed counterparts. For example, a review of 104 

empirical studies assessing the impact of unemployment found that 

people who lost their job were more likely than other workers to report 

having stress-related health conditions, such as depression, stroke, heart 

disease, or heart attacks.34 Third, some studies find negative outcomes 

for health, earnings, and educational opportunities for the children of the 

unemployed. Fourth, periods of high unemployment can impact the 

lifetime earnings of people entering the workforce for the first time. For 

example, one study found that young people who graduate in a severe 

recession have lower lifetime earnings, on average, than those who 

graduate in normal economic conditions.35 In prior work, we reported that 

long-term unemployment can have particularly serious consequences for 

older Americans (age 55 and over) as their job loss threatens not only 

their immediate financial security but also their ability to support 

 

32Changes in workers’ earnings provide a rough proxy for changes in their knowledge and 

skills obtained through education and experience—or what is referred to as their “human 

capital.” The decline in earnings for some workers following the crisis could in part reflect 

other factors, such as their inability to continue working in an industry or occupation where 

employment has fallen as a result of changes in markets or technologies. 

33Till von Wachter, Jae Song, and Joyce Manchester, “Long-term Earnings Losses Due to 

Mass Layoffs During the 1982 Recession: An Analysis Using U.S. Administrative Data 

from 1974 to 2004” (paper presented at the Institute for the Study of Labor / Centre for 

Economic Policy Research, 11th Symposium in Labour Economics in Buch, Ammersee, 

Sept. 17-19, 2009).

34McKee-Ryan et al., “Psychological and Physical Well-Being During Unemployment: A 

Meta-Analytic Study,” Journal of Applied Psychology, vol. 90, no. 1 (January 2005), 53-76. 

35Lisa B. Kahn, “The Long-Term Labor Market Consequences of Graduating from College 

in a Bad Economy,” Labour Economics, vol. 17, no. 2 (Apr. 2010), 303-316. 
 

Page 20 GAO-13-180 Financial Regulatory Reform

themselves during retirement.36 Persistent high unemployment can also 

increase budgetary pressures on federal, state, and local governments as 

expenditures on social welfare programs increase and individuals with 

reduced earnings pay less in taxes.

According to the Federal Reserve’s Survey of Consumer Finances, 

median household net worth fell by $49,100 per family, or by nearly 39 

percent, between 2007 and 2010. The survey found that this decline 

appeared to be driven most strongly by a broad collapse in home prices.

Another major component of net worth that declined was the value of 

household financial assets, such as stocks and mutual funds. Economists 

we spoke with noted that precrisis asset prices may have reflected 

unsustainably high (or “bubble”) valuations and it may not be appropriate 

to consider the full amount of the overall decline in net worth as a loss 

associated with the crisis. Nevertheless, dramatic declines in net worth, 

combined with an uncertain economic outlook and reduced job security, 

can cause consumers to reduce spending. Reduced consumption, all else 

equal, further reduces aggregate demand and real GDP.

As we reported in June 2012, decreases in home prices played a central 

role in the crisis and home prices continue to be well below their peak 

nationwide.37 According to CoreLogic’s Home Price Index, home prices 

across the country fell nearly 29 percent between their peak in April 2006 

and the end of the recession in June 2009 (see fig. 4).38 This decline 

followed a 10-year period of significant home price growth, with the index 

more than doubling between April 1996 and 2006. Since 2009, home 

prices have fluctuated.

 

36GAO, Unemployed Older Workers: Many Experience Challenges Regaining 

Employment and Face Reduced Retirement Security, GAO-12-445 (Washington, D.C.:

Apr. 25, 2012).

37GAO, Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts 

with Additional Data Collection and Analysis, GAO-12-296 (Washington, D.C.: June 28, 

2012).

38The CoreLogic Index, like other house price indexes, measures house price changes in 

a geographic area based on sales of the same properties at different points in time. The 

use of repeat transactions on the same homes helps to control for differences in the 

quality of the houses in the data. The CoreLogic index is based on all usable transactions 

from CoreLogic’s public record, servicing, and securities databases of single family 

attached and detached homes with all types of financing, including prime and nonprime 

loans. 

Household Wealth and Asset 

Prices 
 

Page 21 GAO-13-180 Financial Regulatory Reform

Figure 4: Home Prices and Recession Periods, January 1976 through June 2011

Similarly, we also reported that homeowners have lost substantial equity 

in their homes, because home values have declined faster than home 

mortgage debt.39 As shown in figure 5, households collectively lost about 

$9.1 trillion (in constant 2011 dollars) in national home equity between 

2005 and 2011, in part because of the decline in home prices.40 Figure 5 

also shows that between 2006 and 2007, the steep decline in home 

values left homeowners collectively holding home mortgage debt in 

excess of the equity in their homes. This is the first time that aggregate 

home mortgage debt exceeded home equity since the data were kept in 

1945. As of December 2011, national home equity was approximately 

$3.7 trillion less than total home mortgage debt.

 

39See GAO-12-296. 

40National home equity is the difference between aggregate home value and aggregate 

home mortgage debt, which is a measure of the value of household-owned real estate 

debt. 
 

Page 22 GAO-13-180 Financial Regulatory Reform

Figure 5: Value of Home Equity and Aggregate Mortgage Debt and Recession Periods, 1945 through 2011

Note: In 2011 constant dollars. 

Declines in the value of household investments in stocks and mutual 

funds also contributed to significant declines in household wealth after the 

crisis began. In addition to experiencing a decline in the value of their 

stock and mutual fund investments, households also experienced a 

decline in their retirement funds. As shown in figure 6, the value of 

corporate equities held in retirement funds dropped sharply in late 2008. 

While equity prices and the value of retirement fund assets generally 

have recovered since 2009, investors and pension funds that sold assets 

at depressed prices experienced losses. For example, officials from a 

large pension fund told us that they were forced to sell equity securities at 

depressed prices during the crisis to meet their liquidity needs. Experts 

have different views on how the crisis may have changed investors’ 

attitudes towards risk-taking. To the extent that investors are more risk 

averse and demand higher returns for the risks associated with certain 

investments, businesses could face increased funding costs that could 

contribute to slower growth.
 

Page 23 GAO-13-180 Financial Regulatory Reform

Figure 6: Aggregate Value of Corporate Equities Held in Retirement Funds, 

December 31, 2000, through December 31, 2011

Note: This figure includes corporate equities held directly or indirectly through private pension funds 

and federal, state, and local retirement funds.

In 2006, the percentage of loans in default or in foreclosure began to 

increase (see fig. 7).41 As we previously reported, a number of factors 

contributed to the increase in loan defaults and foreclosures, including a 

rapid decline in home prices throughout much of the nation and weak 

regional labor market conditions in some states where foreclosure rates 

were already elevated.42 During the 2007-2009 recession, the elevated 

unemployment rate and declining home prices worsened the financial 

circumstances for many families, along with their ability to make their 

mortgage payments. Foreclosures have been associated with a number 

 

41Foreclosure is a legal process that a mortgage lender initiates against a homeowner 

who has missed a certain number of payments. The foreclosure process has several 

possible outcomes but generally means that the homeowner loses the property, typically 

because it is sold to repay the outstanding debt or repossessed by the lender. The legal 

fees, foregone interest, property taxes, repayment of former homeowners’ delinquent 

obligations, and selling expenses can make foreclosure extremely costly to lenders.

42See GAO-12-296. 

Foreclosures 
 

Page 24 GAO-13-180 Financial Regulatory Reform

of adverse effects on homeowners, communities, the housing market, 

and the overall economy. Homeowners involved in a foreclosure often are 

forced to move out and may see their credit ratings plummet, making it 

difficult to purchase another home. A large number of foreclosures can 

have serious consequences for neighborhoods.43 For example, research 

has shown that foreclosures depress the values of nearby properties in 

the local neighborhood.44 Creditors, investors, and servicers can incur a 

number of costs during the foreclosure process (e.g., maintenance and 

local taxes) and a net loss, if there is a shortfall between the ultimate 

sales price and the mortgage balance and carrying costs. Large numbers 

of foreclosures can significantly worsen cities’ fiscal circumstances, both 

by reducing property tax revenues and by raising costs to the local 

government associated with maintaining vacant and abandoned 

properties.

 

43See, for example, GAO, Vacant Properties: Growing Number Increases Communities’ 

Costs and Challenges, GAO-12-34 (Washington, D.C.: Nov. 4, 2011). 

44See, for example, Brian A. Mikelbank, “Spatial Analysis of the Impact of Vacant, 

Abandoned and Foreclosed Properties,” study conducted for the Office of Community 

Affairs, Federal Reserve Bank of Cleveland, 2008; and Kai-yan Lee, “Foreclosure’s PriceDepressing Spillover Effects on Local Properties: A Literature Review” (Community Affairs 

Discussion Paper, Federal Reserve Bank of Boston, 2008). 
 

Page 25 GAO-13-180 Financial Regulatory Reform

Figure 7: Percentage of Loans in Default 90 Days or More or in Foreclosure and Recession Periods, March 1979 through 

September 2012

Some studies consider measures of fiscal costs—such as increases in 

federal government debt—when analyzing the losses associated with 

financial crises. Like past financial crises, the 2007-2009 financial crisis 

has been associated with large increases in the federal government’s 

debt and heightened fiscal challenges for many state and local 

governments. Factors contributing to these challenges include decreased 

tax revenues from reduced economic activity and increased spending 

associated with government efforts to mitigate the effects of the 

recession.

Federal, State, and Local 

Governments Have Faced 

Increased Fiscal 

Challenges Since the Start 

of the 2007-2009 Financial 

Crisis
 

Page 26 GAO-13-180 Financial Regulatory Reform

In prior work, we have reported that the economic downturn and the 

federal government’s response caused budget deficits to rise in recent 

years to levels not seen since World War II.45 While the structural 

imbalance between spending and revenue paths in the federal budget 

predated the financial crisis, the size and urgency of the federal 

government’s long-term fiscal challenges increased significantly following 

the crisis’s onset. From the end of 2007 to the end of 2010, federal debt 

held by the public increased from roughly 36 percent of GDP to roughly 

62 percent. Key factors contributing to increased deficit and debt levels 

following the crisis included (1) reduced tax revenues, in part driven by 

declines in taxable income for consumers and businesses; (2) increased 

spending on unemployment insurance and other nondiscretionary 

programs that provide assistance to individuals impacted by the 

recession; (3) fiscal stimulus programs enacted by Congress to mitigate 

the recession, such as the American Recovery and Reinvestment Act of 

2009 (Recovery Act);46 and (4) increased government assistance to 

stabilize financial institutions and markets.

While deficits during or shortly after a recession can support an economic 

recovery, increased deficit and debt levels could have negative effects on 

economic growth. For example, rising federal debt can “crowd out” private 

investment in productive capital as the portion of savings that is used to 

buy government debt securities is not available to fund such investment.

Lower levels of private investment can reduce future economic growth. In 

 

45GAO, The Federal Government’s Long-Term Fiscal Outlook: January 2011 Update, 

GAO-11-451SP (Washington, D.C.: Mar. 18, 2011). For the most recent update, see 

GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2012 Update, 

GAO-13-148SP (Washington, D.C.: Dec. 3, 2012).

46Pub. L. No. 111-5, 123 Stat. 115 (2009). The federal government’s largest response to 

the recession to date came in early 2009 with the passage of the Recovery Act. Fiscal 

stimulus programs are intended to increase aggregate demand—the spending of 

consumers, business firms, and governments—and may be either automatic or 

discretionary. Unemployment insurance, the progressive aspects of the tax code, and 

other fiscal stabilizers provide stimulus automatically by easing pressure on household 

incomes as economic conditions deteriorate. Discretionary fiscal stimulus, such as that 

provided by the Recovery Act, can take the form of tax cuts for households and 

businesses, transfers to individuals, grants-in-aid to state and local governments, or direct 

federal spending. In response, households, businesses, and governments may purchase 

more goods and services than they would have otherwise, and governments and 

businesses may refrain from planned workforce cuts or even hire additional workers. 

Thus, fiscal stimulus may lead to an overall, net increase in national employment and 

output.

Federal Government’s Fiscal 

Challenges 
 

Page 27 GAO-13-180 Financial Regulatory Reform

addition, increased debt increases the amount of interest the government 

pays to its lenders, all else equal. Policy alternatives to offsetting 

increased interest payments include increasing tax rates and reducing 

government benefits and services, which also can reduce economic 

growth. Moreover, increased fiscal challenges could make the United 

States more vulnerable to a fiscal crisis should investors lose confidence 

in the ability of the U.S. government to repay its debts. Such a crisis could 

carry enormous costs because the federal government would face a 

sharp increase in its borrowing costs.

The following discussion focuses on the costs associated with the federal 

government’s actions to assist the financial sector. Fiscal stimulus 

programs, such as the Recovery Act, and the Federal Reserve’s 

monetary policy operations were major components of the federal 

government’s efforts to mitigate the recession that coincided with the 

2007-2009 financial crisis. However, given our focus on the Dodd-Frank 

Act reforms, the potential short-term and long-term impacts of these 

efforts are beyond the scope of this report. Furthermore, our review did 

not consider the benefits or costs of government policy interventions 

relative to alternatives that were not implemented.

With respect to the most significant government programs and other 

actions to assist the financial sector, the following discussion reviews (1) 

expert perspectives on how these policy responses could have reduced 

or increased the severity of the financial crisis and the associated 

economic losses; (2) the potential costs associated with increased moral 

hazard; and (3) the financial performance (including income and losses) 

of the largest of these policy interventions.

Federal financial regulators and several academics and other experts we 

spoke with highlighted several interventions that they maintain likely 

helped to mitigate the severity of the 2007-2009 financial crisis. These 

interventions included

• providing emergency funding to support several key credit markets 

through the Federal Reserve’s emergency credit and liquidity 

programs;47

 

47For more information about these emergency programs, see GAO, Federal Reserve 

System: Opportunities Exist to Strengthen Policies and Processes for Managing 

Emergency Assistance, GAO-11-696 (Washington, D.C.: July 21, 2011).
 

Page 28 GAO-13-180 Financial Regulatory Reform

• extending federal government guarantees to a broader range of 

private sector liabilities through FDIC’s Temporary Liquidity 

Guarantee Program (TLGP) and Treasury’s Money Market Fund 

Guarantee Program;

• recapitalizing financial firms through Treasury’s Troubled Asset Relief 

Program’s Capital Purchase Program; and

• taking actions with respect to individual firms, such as Fannie Mae, 

Freddie Mac, American International Group (AIG), Citigroup, and 

Bank of America, to avert further destabilization of financial markets.

Many experts maintain that these large-scale interventions, in 

combination with other government actions, such as the stress tests, 

helped to restore confidence in the financial system and bring about a 

recovery in certain private credit markets in 2009.48 In contrast, other 

experts argue that certain federal government actions worsened, rather 

than mitigated, the severity of the financial crisis. For example, some 

experts maintain that the federal government’s rescue of Bear Stearns 

but not Lehman Brothers sent a conflicting signal to the market and 

contributed to a more severe panic. Some experts also have commented 

that government assistance to the financial and housing sectors may 

have slowed the economic recovery by preventing a full correction of 

asset prices. Many experts agree that several (if not all) of the federal 

government’s policy interventions likely averted a more severe crisis in 

the short-run and that the long-term implications of these interventions 

remain to be seen.

Experts generally agree that the government actions to assist the 

financial sector may have increased moral hazard—that is, such actions 

may have encouraged market participants to expect similar emergency 

actions in the future, thus weakening private incentives to properly 

manage risks and creating the perception that some firms are too big to 

fail. Increased moral hazard could result in future costs for the 

 

48In February 2009, to help restore confidence in the financial system, Treasury 

announced the Financial Stability Plan, which established the Supervisory Capital 

Assessment Program (SCAP). SCAP, as implemented by the Federal Reserve and other 

federal banking regulators, was to determine through a stress test whether the largest 19 

U.S. bank holding companies had enough capital for the next 2 years (2009-2010) to 

support their lending activities and survive a second similar economic shock. For more 

information about the stress tests, see GAO, Troubled Asset Relief Program: Bank Stress 

Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory 

Oversight, GAO-10-861 (Washington, D.C.: Sept. 29, 2010).
 

Page 29 GAO-13-180 Financial Regulatory Reform

government if reduced private sector incentives to manage risks 

contribute to a future financial crisis.

Although the financial performance of the federal government’s 

assistance to the financial sector can be measured in different ways, most 

of the federal government’s major programs earned accounting income in 

excess of accounting losses and the net losses for some interventions are 

expected to be small relative to the overall increase in the federal debt.49

For example, the Federal Reserve reported that all loans made under its 

emergency programs that have closed were repaid with interest and does 

not project any losses on remaining loans outstanding. Under FDIC’s 

TLGP, program participants, which included insured depository 

institutions and their holding companies, paid fees on debt and deposits 

guaranteed by the program; these fees created a pool of funds to absorb 

losses. According to FDIC data, as of November 30, 2012, FDIC had 

collected $11.5 billion in TLGP fees and surcharges, and this amount is 

expected to exceed the losses from the program.50 In contrast, Treasury’s 

investments in Fannie Mae and Freddie Mac under the Senior Preferred 

Stock Purchase Agreements program represent the federal government’s 

single largest risk exposure remaining from its emergency actions to 

assist the financial sector.51 Cumulative cash draws by the GSEs under 

this program totaled $187.4 billion as of September 30, 2012, and 

Treasury reported a contingent liability of $316.2 billion for this program 

as of September 30, 2011.52 As of September 30, 2012, Fannie Mae and 

 

49Between September 30, 2007, and September 30, 2011, the gross federal debt 

increased by about $7.1 trillion. In comparison, Fannie Mae and Freddie Mac’s cumulative 

cash draws (net of dividends paid on these draws) under Treasury’s Senior Preferred 

Stock Purchase Agreements program stood at approximately $137 billion as of September 

30, 2012. Some academic studies that review the costs of financial crises have found that 

costs associated with rescuing financial institutions are generally small relative to overall 

crisis costs. See, for example, Reinhart and Rogoff (2009).

50As of December 31, 2011, FDIC estimated losses of $2.2 billion on TLGP guarantees of 

deposits and reported that it had paid or accrued $152 million in estimated losses resulting 

from TLGP debt guarantees. 

51Under the Senior Preferred Stock Purchase Agreements program, Treasury has made 

funding advances to Fannie Mae and Freddie Mac to ensure that they have sufficient 

assets to support their liabilities. 

52This accrued contingent liability is based on the projected draws from Treasury under 

the Senior Preferred Stock Purchase Agreements program. It is undiscounted and does 

not take into account any of the offsetting dividends which may be received as a result of 

those draws. 
 

Page 30 GAO-13-180 Financial Regulatory Reform

Freddie Mac had paid Treasury a total of $50.4 billion in dividends on 

these investments.53 The amount that Treasury will recoup from these 

investments is uncertain. Table 2 provides an overview of income and 

losses from selected federal government interventions to assist the 

financial sector.

Table 2: Overview of Income and Losses for Selected Federal Government Interventions to Assist the Financial Sector during 

the 2007-2009 Financial Crisis

Program or Type of Assistance Dollar Amount Accounting Income / Losses

Programs with Broad-Based Eligibility

Federal Reserve System’s emergency 

credit and liquidity programsa > $1 trillion peak loans 

outstandingb Approximately $19.7 billion in gross interest and fee income as of June 30, 2012, according to estimates 

published on the Federal Reserve Bank of New York’s 

(FRBNY) website.c The Federal Reserve has reported no 

losses on the programs that have closed. FRBNY projects 

that the remaining facility with loans outstanding will not 

incur losses.

FDIC’s Temporary Liquidity Guarantee 

Program 

• Debt Guarantee Program (DGP)

• Transaction Account Guarantee 

Program (TAGP)

Approx. $345.8 billion (peak 

debt guaranteed)

Approx. $834.5 billion (peak

deposits guaranteed) 

Over $11 billion in total fee income is expected to exceed 

projected losses of around $2.4 billion.

All debt guaranteed by DGP was scheduled to mature by 

the end of 2012. FDIC collected $10.4 billion in DGP 

income from fees and surcharges. As of Dec. 31, 2011, 

FDIC reported estimated DGP losses of $152 million and 

projected that it would pay $682 thousand in interest 

payments on defaulting DGP-guaranteed notes in 2012.

TAGP closed on Dec. 31, 2010. FDIC collected $1.2 billion 

in fees. Cumulative estimated losses totaled $2.2 billion as 

of Dec. 31, 2011.

Treasury’s Guarantee Program for Money 

Market Funds

> $3 trillion money market 

fund shares guaranteed at 

$1 per share

$1.2 billion of fee income and no losses. The program 

closed on Sept. 18, 2009.

Treasury’s Capital Purchase Program 

(CPP)d $204.9 billion disbursed As of Oct. 31, 2012, Treasury had received almost $220 

billion from its CPP investments, exceeding the $204.9 

billion it disbursed. Of that disbursed amount, $8.3 billion 

remained outstanding as of Oct. 31, 2012. As of Sept. 30, 

2012, Treasury estimated that CPP would have a lifetime 

income of approximately $14.9 billion after all institutions 

exit the program.

 

53Under the current terms of the Senior Preferred Stock Purchase Agreements program, 

Fannie Mae and Freddie Mac must pay out all of their quarterly profits (if any) to Treasury. 
 

Page 31 GAO-13-180 Financial Regulatory Reform

Program or Type of Assistance Dollar Amount Accounting Income / Losses

Assistance to Individual Institutions

Fannie Mae and Freddie Mac (Treasury) $187.4 billion drawn from 

Treasury as of Sept. 30, 

2012

$316.2 billion contingent liability reported as of Sept. 30, 

2011, which is based on the value of projected investments 

in the GSEs as of this date.

American International Group, Inc. (AIG)

(Treasury and Federal Reserve System)

e $182 billion peak 

commitment by Treasury 

and FRBNY

$17.7 billion total net profit on all FRBNY assistance to 

AIG. FRBNY was repaid in full on all loans it provided to 

assist AIG.

Treasury’s preferred stock investments of $20.3 billion 

were fully repaid with interest income of $0.9 billion. 

Treasury’s sales of all of its AIG common stock have 

yielded total proceeds of about $51.6 billion. Together with 

its preferred stock investments in AIG, Treasury has 

recouped the total value of its assistance extended to AIG 

with a net gain of $5.0 billion. 

Assistance to Bank of America 

Corporation and Citigroup, Inc. (Treasury, 

FDIC, and Federal Reserve System)

$40 billion in additional 

capital ($20 billion for each 

firm) and agreements with 

regulators to protect against 

larger-than-expected losses 

on asset portfolios

$4.0 billion in net income earned by Treasury on its 

investments in Bank of America Corporation and Citigroup, 

Inc. under its Targeted Investment Program.

Bank of America Corporation and Citigroup, Inc. paid fees 

of $425 million and $50 million, respectively, to federal 

government parties to terminate the loss sharing 

agreements, and government parties received $5.3 billion 

in Citigroup preferred stock. 

Source: GAO presentation of information from FDIC, Federal Reserve System, and Treasury documents. 

Note: The financial performance of these programs can be measured in different ways. Accounting 

measures of financial performance have limitations. For example, they do not capture information 

about whether the interest, dividend, or other income the federal government received provided 

appropriate compensation for the risks it assumed.

a

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

(Federal Reserve)—a federal agency—and 12 regional Reserve Banks. The Federal Reserve Bank 

of New York operated most of the Federal Reserve System’s emergency programs. For more 

information about these emergency programs, see GAO, Federal Reserve System: Opportunities 

Exist to Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696

(Washington, D.C.: July 21, 2011).

b

Total lending under these emergency programs peaked at over $1 trillion in December 2008.

c

This estimate includes income from the broad-based emergency programs authorized under Section 

13(3) of the Federal Reserve Act, the Term Auction Facility, and the swap lines with foreign central 

banks. See Fleming, “Federal Reserve Liquidity Facilities Gross $22 Billion for U.S. Taxpayers”, 

accessed December 17, 2012, http://libertystreeteconomics.newyorkfed.org/2012/11/federal-reserveliquidity-facilities-gross-22-billion-for-us-taxpayers.html. 

d

Created in 2008, the Capital Purchase Program was the primary initiative under the Troubled Asset 

Relief Program to help stabilize the financial markets and banking system by providing capital to 

qualifying regulated financial institutions through the purchase of senior preferred shares and 

subordinated debt.

e

For more information about the assistance to AIG, see GAO, Troubled Asset Relief Program: 

Government’s Exposure to AIG Lessens as Equity Investments Are Sold, GAO-12-574 (Washington, 

D.C.: May 7, 2012).
 

Page 32 GAO-13-180 Financial Regulatory Reform

In our prior work, we have described how the national recession that 

coincided with the 2007-2009 financial crisis added to the fiscal 

challenges facing the state and local sectors.54 Declines in output, 

income, and employment caused state and local governments to collect 

less revenue at the same time that demand for social welfare services 

they provide was increasing. During the most recent recession, state and 

local governments experienced more severe and long-lasting declines in 

revenue than in past recessions. Because state governments typically 

face balanced budget requirements and other constraints, they adjust to 

this situation by raising taxes, cutting programs and services, or drawing 

down reserve funds, all but the last of which amplify short-term 

recessionary pressure on households and businesses. Local 

governments may make similar adjustments, unless they can borrow to 

make up for reduced revenue. The extent to which state and local 

governments took such actions was impacted by the federal 

government’s policy responses to moderate the downturn and restore 

economic growth. Under the Recovery Act, the federal government 

provided $282 billion in direct assistance to state and local governments 

to help offset significant declines in tax revenues.

States have been affected differently by the 2007-2009 recession. For 

example, the unemployment rate in individual states increased by 

between 1.4 and 6.8 percentage points during the recession. Recent 

economic research suggests that while economic downturns within states 

generally occur around the same time as national recessions, their timing 

and duration vary. States’ differing characteristics, such as industrial 

structure, contribute to these differences in economic activity.

Declines in state and local pension asset values stemming from the 2007-

2009 recession also could affect the sector’s long-term fiscal position. In 

March 2012, we reported that while most state and local government 

pension plans had assets sufficient to cover benefit payments to retirees 

for a decade or more, plans have experienced a growing gap between 

assets and liabilities.55 In response, state and local governments have 

 

54GAO, State and Local Governments: Knowledge of Past Recessions Can Inform Future 

Federal Fiscal Assistance, GAO-11-401 (Washington, D.C.: Mar. 31, 2011). 

55GAO, State and Local Government Pension Plans: Economic Downturn Spurs Efforts to 

Address Costs and Sustainability, GAO-12-322 (Washington, D.C.: Mar. 2, 2012).

State and Local Governments 
 

Page 33 GAO-13-180 Financial Regulatory Reform

begun taking a number of steps to manage their pension obligations, 

including reducing benefits and increasing member contributions.

The Dodd-Frank Act contains several provisions that may benefit the 

financial system and the broader economy, but the realization of such 

benefits depends on a number of factors. Our review of the literature and 

discussions with a broad range of financial market regulators, 

participants, and observers revealed no clear consensus on the extent to 

which, if at all, the Dodd-Frank Act will help reduce the probability or 

severity of a future crisis. Nevertheless, many of these experts identified a 

number of the same reforms that they expect to enhance financial 

stability, at least in principle, and help reduce the probability or severity of 

a future crisis. At the same time, such experts generally noted that the 

benefits are not assured and depend on, among other things, how 

regulators implement the provisions and whether the additional 

regulations result in financial activity moving to less regulated institutions 

or markets. Several experts also commented that the act also could 

enhance consumer and investor protections. While estimating the extent 

to which the act may reduce the probability of a future crisis is difficult and 

subject to limitations, studies have found statistical evidence suggesting 

that certain reforms are associated with a reduction in the probability of a 

crisis. 

Through our review of the literature and discussions with a broad range of 

financial market regulators, academics, and industry and public interest 

group experts, we found no clear consensus on the extent to which, if at 

all, the Dodd-Frank Act will help reduce the probability or severity of a 

future financial crisis. However, representatives of these groups identified 

many of the same provisions in the act that they expect to enhance 

financial stability, at least in principle, and help reduce the probability or 

severity of a future crisis. These provisions include the following:

• Creation of FSOC and OFR: The act created FSOC and OFR to 

monitor and address threats to financial stability.

• Heightened prudential standards for systemically important 

financial institutions (SIFI): The act requires that all SIFIs be 

subjected to Federal Reserve supervision and enhanced capital and 

other prudential standards. SIFIs include bank holding companies with 

The Dodd-Frank Act 

May Enhance 

Financial Stability and 

Provide Other 

Benefits, with the 

Extent of the Benefits 

Depending on a 

Number of Factors

Several Dodd-Frank 

Provisions May Help 

Reduce the Probability or 

Severity of a Future Crisis, 

but Uncertainty Exists 

about Their Effectiveness
 

Page 34 GAO-13-180 Financial Regulatory Reform

$50 billion or more in total consolidated assets and nonbank financial 

companies designated by FSOC for such supervision.56

• Orderly Liquidation Authority: The act provides regulators with new 

authorities and tools to manage the failure of a large financial

company in a way designed to avoid taxpayer-funded bailouts and 

mitigate the potential for such failures to threaten the stability of the 

financial system.

• Regulation of swaps: The act establishes a comprehensive 

regulatory framework for swaps.

• Mortgage-related and other reforms: The act includes provisions to 

modify certain mortgage lending practices, increase regulation of 

asset-backed securitizations, and restrict proprietary trading by large 

depository institutions.

Experts had differing views on these provisions, but many expect some or 

all of the provisions to improve the financial system’s resilience to shocks 

and reduce incentives for financial institutions to take excessive risks that 

could threaten the broader economy. While acknowledging these 

potential financial stability benefits, experts generally were cautious in 

their assessments for several reasons. Specifically, the effectiveness of 

certain provisions will depend not only on how regulators implement the 

provisions through rulemaking or exercise their new authorities but also 

on how financial firms react to the new rules, including whether currently 

regulated financial activity migrates to less regulated institutions or 

markets. In addition, a few experts with whom we spoke said that some of 

the act’s provisions could increase systemic risk and, thus, have adverse 

 

56While the Dodd-Frank Act does not use the term “systemically important financial 

institution,” this term is commonly used by academics and other experts to refer to bank 

holding companies with $50 billion or more in total consolidated assets and nonbank 

financial companies designated by FSOC for Federal Reserve supervision and enhanced 

prudential standards.
 

Page 35 GAO-13-180 Financial Regulatory Reform

effects on financial stability.57 Further, it may be neither possible nor 

necessarily desirable for the Dodd-Frank Act or any other legislation to 

prevent all future financial crises, in part because of the tradeoff inherent 

between financial stability and economic growth.

The 2007-2009 financial crisis highlighted the lack of an agency or 

mechanism responsible for monitoring and addressing risks across the 

financial system and a shortage of readily available information to 

facilitate that oversight.58 We reported in July 2009 that creating a new 

body or designating one or more existing regulators with the responsibility 

to oversee systemic risk could serve to address a significant gap in the 

current U.S. regulatory system.59 Before the Dodd-Frank Act’s passage, 

federal financial regulators focused their oversight more on individual 

financial firms (called microprudential regulation) and less on market 

stability and systemic risk (called macroprudential regulation). However, 

the recent crisis illustrated the potential for one financial firm’s distress to 

spill over into the broader financial system and economy. For example, 

the failures and near-failures of Lehman Brothers, AIG, Fannie Mae, 

Freddie Mac, and other large financial institutions contributed to the 

instability experienced in the financial system during the crisis. The crisis 

also illustrated the potential for systemic risk to be generated and 

propagated outside of the largest financial firms (such as by money 

market mutual funds), in part because of interconnections not only 

 

57In our March 2009 testimony on credit default swaps, we noted that no single definition 

for systemic risk exists. Traditionally, systemic risk has been viewed as the risk that the 

failure of one large institution would cause other institutions to fail. This micro-level 

definition is one way to think about systemic risk. Recent events have illustrated a more 

macro-level definition: the risk that an event could broadly affect the financial system 

rather than just one or a few institutions. See GAO, Systemic Risk: Regulatory Oversight 

and Recent Initiatives to Address Risk Posed by Credit Default Swaps, GAO-09-397T

(Washington, D.C.: Mar. 5, 2009).

58See, for example, Department of the Treasury, Financial Regulatory Reform, A New 

Foundation: Rebuilding Financial Supervision and Regulation (June 2009).

59See GAO, Financial Markets Regulation: Financial Crisis Highlights Need to Improve 

Oversight of Leverage at Financial Institutions and across System, GAO-09-739

(Washington, D.C.: July 22, 2009). 

Creation of FSOC and OFR to 

Monitor and Address Threats to 

Financial Stability
 

Page 36 GAO-13-180 Financial Regulatory Reform

between firms but also between markets.60 According to some academics

and other market observers, a significant market failure revealed by the 

recent crisis was that the market did not discourage individual financial 

firms from taking excessive risks that could impose costs on others, 

including the public.61 Such spillover costs imposed on others are known 

as negative externalities, and government intervention may be 

appropriate to address such externalities.

The Dodd-Frank Act established FSOC to provide, for the first time, an 

entity charged with the responsibility for monitoring and addressing 

sources of systemic risk.62 The act also created OFR to support FSOC 

and Congress by providing financial research and data.63 FSOC is 

authorized, among other things, to

• collect information across the financial system from member agencies 

and other government agencies, so that regulators will be better 

prepared to address emerging threats;

 

60Money market mutual funds (MMMF) are mutual funds that are registered under the 

Investment Company Act of 1940, and regulated under rule 2a-7 under that act. In 

September 2008, following the failure of Lehman Brothers Inc., many MMMFs faced 

severe liquidity pressures as redemption requests from their investors increased 

significantly. Many MMMF investors became concerned about potential losses on their 

investments when they learned that the Reserve Primary Money Fund, a large MMMF that 

suffered losses on holdings of Lehman Brothers commercial paper, “broke the buck”—that 

is, the net asset value of the fund dropped below its target value of $1 per share. 

Regulators became concerned that these pressures on MMMFs could further exacerbate 

turmoil in the markets. The potential widespread failure of MMMFs threatened systemic 

financial stability, as these funds were significant investors in many money market 

instruments, such as financial and nonfinancial commercial paper, floating rate notes, and 

CDs. Accordingly, regulators feared that a failure of the MMMF industry could have 

serious repercussions on other institutions and overall credit market conditions, as many 

businesses and investment vehicles would have had difficulty rolling over their liabilities 

and potentially been unable to finance their operations. Treasury and the Federal Reserve 

created temporary programs to assist MMMFs and reduce the likelihood that these funds 

would reduce their purchases of money market instruments issued by financial institutions.

61See, for example, Viral V. Acharya, Thomas Cooley, Matthew Richardson, and Ingo 

Walter, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global 

Finance (Hoboken, NJ: John Wiley & Sons, Inc., 2011). 

62The provisions of the Dodd-Frank Act dealing with FSOC are contained primarily in 

subtitle A of title I, §§ 111–123, codified at 12 U.S.C. §§ 5321–5333 and title VIII, codified 

at 12 U.S.C. §§ 5461–5472.

63The provisions of the Dodd-Frank Act dealing with OFR are contained primarily in 

subtitle B of title I, §§ 151–156, codified at 12 U.S.C. §§ 5341–5346.
 

Page 37 GAO-13-180 Financial Regulatory Reform

• designate certain nonbank financial companies for supervision by the 

Federal Reserve and subject them to enhanced prudential standards;

• designate as systemically important certain financial market utilities 

and payment, clearing, or settlement activities, and subject them to 

enhanced regulatory oversight;

• recommend stricter standards for the large, interconnected bank 

holding companies and nonbank financial companies designated for 

enhanced supervision;

• vote on any determination by the Federal Reserve that action should 

be taken to break up a SIFI that poses a “grave threat” to U.S. 

financial stability;

• facilitate information sharing and coordination among the member 

agencies to eliminate gaps in the regulatory structure; and

• make recommendations to enhance the integrity, efficiency, 

competitiveness, and stability of U.S. financial markets, promote 

market discipline, and maintain investor confidence. 

Financial market regulators, academics, and industry and public interest 

groups with whom we spoke generally view the creation of FSOC and 

OFR as positive steps, in principle, to address systemic risk and help 

identify or mitigate a future crisis for several reasons. First, FSOC and its 

member agencies now have explicit responsibility for taking a 

macroprudential approach to regulation, along with tools and authority to 

help identify and address threats to the financial stability of the United 

States. For example, certain nonbank financial companies posed 

systemic risk during the crisis but were subject to less regulation than 

bank holding companies. To close this regulatory gap, FSOC has the 

authority to designate a nonbank financial company for supervision by the 

Federal Reserve and subject it to enhanced prudential standards, if the 

material distress of that firm could pose a risk to U.S. financial stability.64

In addition, although the Dodd-Frank Act does not address all sources of 

systemic risk, the act authorizes FSOC to make recommendations to 

 

64As we previously reported, the act provided that FSOC may determine whether a 

nonbank financial company shall be supervised by the Federal Reserve and subject to 

prudential standards if it determines that material financial distress at the nonbank 

financial company, or the nature, scope, size, scale, concentration, interconnectedness, or 

mix of the activities of the company, could pose a threat to the financial stability of the 

United States. The act lists specific factors for FSOC to consider in making these 

determinations along with any other risk-related factors it deems appropriate. Bank 

holding companies with $50 billion or more in total consolidated assets are automatically 

subject to the Federal Reserve’s enhanced supervision and prudential standards. See 

GAO-12-886 and 77 Fed. Reg. 21,637 (Apr. 11, 2012).
 

Page 38 GAO-13-180 Financial Regulatory Reform

address regulatory gaps or other issues that threaten U.S. financial 

stability. For example, FSOC’s 2011 and 2012 annual reports discuss 

financial stability threats not directly addressed by the Dodd-Frank Act 

(e.g., money market mutual funds, tri-party repurchase agreements, and 

the GSEs) and make recommendations to address some of them.65

Finally, OFR may play an important role in gathering and analyzing data 

that FSOC and its members will be able to use to identify and address 

emerging risks to the financial system. OFR may also facilitate data 

sharing among the regulators, which may enable regulators to identify 

risks in areas emerging from beyond their immediate jurisdictions. Market 

participants also may benefit from the ability to use OFR data to analyze 

risks. 

Experts also identified a number of factors that could limit FSOC’s or 

OFR’s effectiveness. First, it is inherently challenging for a regulator to 

identify and address certain sources of systemic risk. For example, while 

asset price bubbles often become clear in hindsight, when such risks 

appear to be building, policymakers may disagree over whether any 

intervention is warranted. Second, FSOC’s committee structure cannot 

fully resolve the difficulties inherent in the existing, fragmented regulatory 

structure. For example, FSOC could encounter difficulties coming to 

decisions or advancing a reform if it faces resistance from one or more of 

its members. In addition, FSOC’s committee structure, including the 

Treasury Secretary’s role as FSOC chair, could subject FSOC’s decision 

making to political influence. According to a number of experts, 

establishing FSOC and OFR as independent entities could have better 

insulated them from political pressures that could dissuade them from 

recommending or taking actions to promote long-term financial stability, if 

such actions imposed short-term political costs. On the other hand, the 

selection of the Treasury Secretary as FSOC chair reflects the Treasury 

Secretary’s traditional role in financial policy decisions.

In a recent report, we identified a number of potential challenges for 

FSOC, some of which are similar to those discussed above.66 Specifically, 

we noted that key components of FSOC’s mission—to identify risks to 

U.S. financial stability and respond to emerging threats to stability—are 

 

65Financial Stability Oversight Council, Annual Report, 2011 and 2012 (Washington, D.C.: 

July 2011 and July 2012).

66See GAO-12-886. 
 

Page 39 GAO-13-180 Financial Regulatory Reform

inherently challenging. Risks to the stability of the U.S. financial system 

are difficult to identify because commonly used indicators, such as market 

prices, often do not reflect these risks and threats may not develop in 

precisely the same way as they did in past crises. Although the act 

created FSOC to provide for a more comprehensive view of threats to 

U.S. financial stability, it left most of the pre-existing fragmented and 

complex arrangement of independent federal and state regulators in 

place and generally preserved their statutory responsibilities. Further, we 

noted that FSOC does not have the authority to force agencies to 

coordinate or adopt compatible policies and procedures. However, we 

also reported that FSOC and OFR have made progress in establishing 

their operations and approaches for monitoring threats to financial 

stability, but these efforts could be strengthened. We made 

recommendations to strengthen the accountability and transparency of 

FSOC’s and OFR’s decisions and activities as well as to enhance 

collaboration among FSOC members and with external stakeholders. In 

response to our recommendations, Treasury emphasized the progress 

that FSOC and OFR have made since their creation and noted that more 

work remains, as they are relatively new organizations.

The 2007-2009 financial crisis also revealed weaknesses in the existing 

regulatory framework for overseeing large, interconnected, and highly 

leveraged financial institutions. Such financial firms were subject to some 

form of federal supervision and regulation, but these forms of supervision 

and regulation proved inadequate and inconsistent. For example, 

fragmentation of supervisory responsibility allowed owners of banks and 

other insured depository institutions to choose their own regulator. In 

addition, regulators did not require firms to hold sufficient capital to cover 

their trading and other losses or to plan for a scenario in which liquidity 

was sharply curtailed. Moreover, the regulatory framework did not ensure 

that banks fully internalized the costs of the risks that their failure could 

impose on the financial system and broader economy.

The Dodd-Frank Act requires the Federal Reserve to supervise and 

develop enhanced capital and other prudential standards for SIFIs, which 

include bank holding companies with $50 billion or more in consolidated 

assets and any nonbank financial company that FSOC designates.67 The 

act requires the enhanced prudential standards to be more stringent than 

 

67Dodd-Frank Act, § 165, 124 Stat. at 1423–1432, codified at 12 U.S.C. § 5365. 

Heightened Capital and Other 

Prudential Standards for SIFIs
 

Page 40 GAO-13-180 Financial Regulatory Reform

standards applicable to other bank holding companies and financial firms 

that do not present similar risks to U.S. financial stability. The act further 

allows the enhanced standards to increase in stringency based on the 

systemic footprint and risk characteristics of each firm. The Federal 

Reserve plans to implement some of its enhanced standards in 

conjunction with its implementation of Basel III, a new capital regime 

developed by the Basel Committee on Banking Supervision.68 The act’s 

provisions related to SIFIs include the following:

• Risk-based capital requirements and leverage limits: The Federal 

Reserve must establish capital and leverage standards, which as 

proposed would include a requirement for SIFIs to develop capital 

plans to help ensure that they maintain capital ratios above specified 

standards, under both normal and adverse conditions. In addition, the 

Federal Reserve has announced its intention to apply capital 

surcharges to some or all SIFIs based on the risks SIFIs pose to the 

financial system.

• Liquidity requirements: The Federal Reserve must establish SIFI 

liquidity standards, which as proposed would include requirements for 

SIFIs to hold liquid assets that can be used to cover their cash 

outflows over short time periods.

• Single-counterparty credit limits: The Federal Reserve must 

propose rules that, in general, limit the total net credit exposure of a 

 

68The Federal Reserve intends to satisfy some aspects of the Dodd-Frank Act heightened 

prudential standards rules for bank SIFIs through implementation of the Basel Committee 

on Banking Supervision standards. The Basel Committee has developed international 

standards for bank capital for its member economies since the 1980s. The United States, 

along with nearly all other major economies, agree to comply with international capital 

standards. Over the past few years, U.S. federal banking regulators have worked with 

other members of the Basel Committee to strengthen the regulatory capital regime for 

internationally active banks and develop a framework for a risk-based capital surcharge 

for the world’s largest, most interconnected banking companies. The new regime, known 

as Basel III, seeks to improve the quality of regulatory capital and introduces a new 

minimum common equity requirement. Basel III also raises the numerical minimum capital 

requirements and introduces capital conservation and countercyclical buffers to induce 

banking organizations to hold capital in excess of regulatory minimums. In addition, Basel 

III establishes for the first time an international leverage standard for internationally active 

banks. Federal banking regulators are working to implement the Basel III capital reforms 

in the United States. The Federal Reserve will separately implement consistent capital 

and liquidity standards for nonbank financial companies designated for enhanced 

supervision by FSOC. 
 

Page 41 GAO-13-180 Financial Regulatory Reform

SIFI to any single unaffiliated company to 25 percent of its total capital 

stock and surplus.

• Risk management requirements: Publicly traded SIFIs must 

establish a risk committee and be subject to enhanced risk 

management standards. 

• Stress testing requirements: The Federal Reserve is required to 

conduct an annual evaluation of whether SIFIs have sufficient capital 

to absorb losses that could arise from adverse economic conditions.69

• Debt-to-equity limits: Certain SIFIs may be required to maintain a 

debt-to-equity ratio of no more than 15-to-1.

• Early remediation: The Federal Reserve is required to establish a 

regulatory framework for the early remediation of financial 

weaknesses of SIFIs in order to minimize the probability that such 

companies will become insolvent and the potential harm of such 

insolvencies to the financial stability of the United States. 

A broad range of financial market regulators, academics, and industry 

and public interest group experts generally expect the enhanced 

prudential standards to help increase the resilience of SIFIs and reduce 

the potential for a SIFI’s financial distress to spill over to the financial 

system and broader economy. Higher capital levels increase a firm’s 

resilience during times of financial stress because more capital is 

available to absorb unexpected losses. Similarly, increased liquidity (e.g., 

holding more liquid assets and reducing reliance on short-term funding 

sources) can reduce the likelihood that a firm will have to respond to 

temporary strains in credit markets by cutting back on new lending or 

selling assets at depressed prices. Increased capital and liquidity levels 

together can limit the potential for large, unexpected losses in the 

financial system to disrupt the provision of credit and other financial 

services to households and businesses, which occurred in the most 

recent financial crisis. Finally, limiting counterparty credit exposures also 

can help to minimize spillover effects.

 

69Companies subject to enhanced prudential standards also must conduct annual or semiannual stress tests of their own, depending on their size. 
 

Page 42 GAO-13-180 Financial Regulatory Reform

A number of experts viewed the act’s enhanced prudential standards for 

SIFIs as particularly beneficial, because such institutions pose greater 

risks to the orderly functioning of financial markets than less systemically 

significant institutions, and subjecting SIFIs to stricter standards can 

cause them to internalize the costs of the risks they pose to the system. 

For example, the Federal Reserve intends to issue a proposal that would 

impose capital surcharges on SIFIs based on a regulatory assessment of 

the systemic risk they pose, consistent with a framework agreed to by the 

Basel Committee.70 In addition, the Dodd-Frank Act’s enhanced 

prudential standards provisions allow federal regulators to impose more 

stringent risk management standards and oversight of SIFIs’ activities, 

including by conducting stress tests, to help ensure that weaknesses are 

addressed before they threaten the financial system. Experts noted that 

these stricter standards, including the surcharges, could serve as a 

disincentive to financial firms to become larger or otherwise increase the 

risks they pose to the broader financial system.

Despite generally supporting an increase in the capital requirements, 

experts questioned the potential effectiveness of certain aspects of the 

enhanced prudential standards for SIFIs:

• Impact on “too-big-to-fail” perceptions: Experts suggested that the 

market may view SIFIs as too big to fail, paradoxically giving such 

firms an implicit promise of government support if they run into 

financial difficulties. As discussed below, perceptions that SIFIs are 

too big to fail can weaken incentives for creditors to restrain excessive 

risk-taking by SIFIs and could give such firms a funding advantage 

over their competitors. However, others noted that the heightened 

standards were specifically designed to address these issues and 

view the act as explicitly prohibiting federal government support for 

SIFIs. For example, the act revises the Federal Reserve Act to 

prohibit the Federal Reserve from providing support to individual 

institutions in financial distress and, as discussed below, the act 

creates a new option for liquidating such firms.

 

70See 77 Fed. Reg. 594 (Jan. 5, 2012).The Basel Committee has reached agreement on 

a framework for capital surcharges on global systemically important banking organizations 

that would increase their capital requirements by 1 to 2.5 percentage points, depending on 

their global systemic footprint. In its enhanced prudential standards proposal, the Federal 

Reserve announced its intention to issue a proposal implementing capital surcharges in 

the United States along the international timeline and in line with the framework developed 

by the Basel Committee.
 

Page 43 GAO-13-180 Financial Regulatory Reform

• Limits of Basel approach to capital standards: The Federal Reserve 

will base its enhanced regulatory capital standards, in part, on Basel’s 

approach, which several experts view as having limitations. They 

recognized that the Basel III standards address some of the 

limitations that the financial crisis revealed in the regulatory capital 

framework, but maintain that Basel III continues to place too much 

reliance on risk-based approaches to determining capital adequacy.71

During the 2007-2009 crisis, some banks experienced capital 

shortages, in part because they suffered large losses on assets that 

were assigned low risk weights under Basel’s standards but posed 

greater risk than their risk weights. The Basel III framework will 

increase risk weights for certain asset classes—and includes a 

leverage ratio as a safeguard against inaccurate risk weights—but 

experts noted that the potential remains for financial institutions to 

“game” the Basel risk weights by increasing holdings of assets that 

carry risk-weights that are lower than their actual risks. In addition, 

some experts maintain that the Basel standards overall may not 

provide a sufficient buffer to protect firms during times of stress. 

However, one regulator noted that the leverage ratio, and the higher 

requirements for common equity and tier 1 capital called for in the 

Basel III standards, represent a significant tightening of capital 

regulation (in combination with the imposition of some higher risk 

weights and better quality of capital).

Implementation of these SIFI provisions is ongoing. In January 2012, the 

Federal Reserve proposed rules to implement the enhanced prudential 

standards, but has not yet finalized all of these rules.72 In addition, the 

Federal Reserve and other federal prudential regulators are continuing to 

 

71Regulators generally require that banks maintain certain ratios of capital as a share of 

assets to ensure that they have sufficient capital to absorb losses. Under the Basel 

approaches, banks may weight certain assets based on their risks, and use these riskweighted assets to calculate their capital adequacy ratios. 

72On January 5, 2012, the Federal Reserve published proposed rules to strengthen 

regulation and supervision of large bank holding companies and systemically important 

nonbank financial companies. The proposal includes a wide range of measures 

addressing issues such as capital, liquidity, credit exposure, stress testing, risk 

management, and early remediation requirements. See 77 Fed. Reg. 594. The rules 

concerning stress testing have been finalized. 77 Fed. Reg. 62,378 (Oct. 12, 2012); 77 

Fed. Reg. 62,396 (Oct. 12, 2012). The Federal Reserve has also published a proposed 

rule for large foreign banking organizations and foreign nonbank financial companies 

supervised by the Federal Reserve. 77 Fed. Reg. 76,628 (Dec. 28, 2012).
 

Page 44 GAO-13-180 Financial Regulatory Reform

work to implement Basel III.73 As of December 2012 FSOC had not yet 

designated any nonbank financial companies for Federal Reserve 

supervision; the Federal Reserve will subsequently be responsible for 

developing rules for the heightened capital and other prudential standards 

for these entities.74

Faced with the impending failure of a number of large financial companies

during the 2007-2009 financial crisis, federal financial regulators generally 

had two options: (1) allowing these companies to file for bankruptcy at the 

risk of exacerbating the crisis (e.g., Lehman Brothers) or (2) providing 

such companies with emergency funding from the government at the risk 

of increasing moral hazard (e.g., AIG). As we previously reported, 

traditional bankruptcy may not be effective or appropriate for financial 

companies for a variety of reasons.75 For example, in bankruptcy 

proceedings for companies that hold derivatives or certain other qualified 

financial contracts, creditors may terminate such contracts, even though 

creditors generally may not terminate other contracts because they are 

subject to automatic stays. Termination of derivative contracts can lead to 

large losses for the failed firm and other firms through fire sales and other 

interconnections.76 For example, the insolvency of Lehman Brothers had 

a negative effect on financial stability by contributing to a run on money

 

73The Federal Reserve, FDIC, and OCC published in the Federal Register in August 2012 

joint notices of proposed rulemaking to implement Basel III, the Standardized Approach 

for risk-based capital, and revisions to the Advanced Approaches for risk-based capital. 

See 77 Fed. Reg. 52,792 (Aug. 30, 2012); 77 Fed. Reg. 52,888 (Aug. 30, 2012); 77 Fed. 

Reg. 52,978 (Aug. 30, 2012). 

74In a recent report, we developed indicators to monitor changes in SIFI characteristics 

that might be suggestive of the Dodd-Frank Act’s impact on these firms. See GAO, The 

Dodd-Frank Act: Agencies’ Efforts to Analyze and Coordinate Their Rules, GAO-13-101

(Washington, D.C.: Dec. 18, 2012).

75GAO, Bankruptcy: Complex Financial Institutions and International Coordination Pose 

Challenges, GAO-11-707 (Washington, D.C.: July 19, 2011). Certain financial institutions, 

including insured depository institutions and insurance companies, may not file for 

protection under the Bankruptcy Code. Broker-dealers may qualify for liquidation, but not 

reorganization, under either the Bankruptcy Code or the Securities Investor Protection Act 

of 1970. 

76Fire sales are the disorderly sale of assets to meet margin requirements or other urgent 

cash needs. Such a sudden sell-off drives down prices, potentially below their intrinsic 

value, when the quantities to be sold are large relative to the typical volume of 

transactions.

Orderly Liquidation Authority
 

Page 45 GAO-13-180 Financial Regulatory Reform

market mutual funds and disrupting certain swaps markets.77 Further, 

bankruptcy is a domestic legal process that varies by jurisdiction. Thus, 

the bankruptcy of a financial company with foreign subsidiaries, such as 

Lehman Brothers, can raise difficult international coordination challenges.

In contrast to the Lehman case, the government provided support to 

some financial firms, such as AIG, because of concerns that their failures 

would further disrupt the broader financial system. A number of experts 

maintain this government assistance increased moral hazard by 

encouraging market participants to expect similar emergency actions in 

future crises for large, interconnected financial institutions—in effect, 

reinforcing perceptions that some firms are too big to fail. The perception 

of certain firms as too big to fail weakens market discipline by reducing 

the incentives of shareholders, creditors, and counterparties of these 

companies to discipline excessive risk taking.78 For example, creditors 

and shareholders may not demand that firms they view as too big to fail 

make adequate disclosures about these risks, which could further 

undermine market discipline.79 Perceptions that firms are too big to fail 

also can produce competitive distortions because companies perceived 

as ‘too big to fail’ may be able to fund themselves at a lower cost than 

their competitors.

The Dodd-Frank Act’s Title II provides the federal government with a new 

option for resolving failing financial companies by creating a process 

under which FDIC has the authority to liquidate large financial companies, 

including nonbanks, outside of the bankruptcy process—called orderly 

liquidation authority (OLA). In general, under this authority, FDIC may be 

appointed receiver for a financial firm if the Treasury Secretary 

determines that the firm’s failure would have a serious adverse effect on

U.S. financial stability. Under OLA, FDIC must maximize the value of the 

firm’s assets, minimize losses, mitigate systemic risk, and minimize moral 

 

77Approximately 80 percent of the derivative counterparties to Lehman’s primary U.S. 

derivatives entity terminated their contracts within 5 weeks of Lehman’s bankruptcy filing.

78Market discipline enables investors and other market participants to constrain the risk 

taking of financial firms by investing in firms that they view as taking appropriate risks—

and withdrawing support for firms engaging in behavior market participants view as 

excessively risky. 

79We previously reported that for market discipline to be effective, market participants 

need access to adequate information about the institutions, and institutions need to have 

sound risk management systems in place, among other things. See GAO-09-739. 
 

Page 46 GAO-13-180 Financial Regulatory Reform

hazard. OLA also establishes additional authorities for FDIC as receiver, 

such as the ability to set up a bridge financial company and to borrow 

funds from the Treasury to carry out the liquidation.80 FDIC can 

subsequently collect funding for the OLA process from the financial 

industry after a company has been liquidated.

A range of financial market regulators, academics, and industry and 

public interest group experts identified a number of ways in which the 

Dodd-Frank Act’s OLA provisions could help mitigate threats to the 

financial system posed by the failure of SIFIs or other large, complex, 

interconnected financial companies. First, the OLA framework may be 

effective in addressing the limitations of the bankruptcy process. For 

example, experts noted that under OLA, FDIC will be able to control the 

liquidation process and can temporarily prevent creditors from terminating 

their qualified financial contracts, the termination of which could prompt 

fire sales that could be destabilizing.81 Second, under its rules, FDIC has 

indicated that it will ensure that creditors and shareholders of a company 

in OLA will bear the losses of the company. By helping to ensure that 

creditors and shareholders will bear losses in the event of a failure, OLA 

could strengthen incentives for creditors and shareholders to monitor 

these firms’ risks. Finally, OLA could help convince market participants 

that government support will no longer be available for SIFIs, which could 

increase investors’ incentives to demand that SIFIs become more 

transparent and refrain from taking excessive risks.

 

80GAO, Bankruptcy: Agencies Continue Rulemaking for Clarifying Specific Provisions of 

Orderly Liquidation Authority, GAO-12-735 (Washington, D.C.: July 12, 2012). When FDIC 

is appointed receiver of the financial company it must liquidate and wind up the affairs of 

the company, which may involve managing the assets of the company, determining the 

validity of creditor claims against the company, and paying creditor claims. The act 

generally requires that all creditors of a financial company with similar priority be treated

similarly; however, FDIC has the authority to treat similarly situated creditors differently. In 

some cases, FDIC may repudiate contracts to which a financial company is a party or may 

enforce certain contracts that otherwise could have been terminated because of the 

financial company’s insolvency.

81FDIC retrospectively examined how it could have used OLA to resolve Lehman Brothers 

Holdings Inc. and concluded it could have promoted systemic stability and made the 

shareholders and creditors, not taxpayers, bear the losses. See FDIC, “The Orderly 

Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act,” FDIC Quarterly, 

vol. 5, no. 1 (2011). Critics of this report have noted, among other things, that the analysis 

does not acknowledge the widespread weakness in financial markets that affected many 

financial institutions during the financial crisis. 
 

Page 47 GAO-13-180 Financial Regulatory Reform

Experts also identified a number of potential challenges and limitations of 

OLA. OLA is new and untested, and its effectiveness in reducing moral 

hazard will depend on the extent to which the market believes FDIC will 

use OLA to make creditors bear losses of any SIFI failure. Experts 

identified a conflict between OLA’s goal of eliminating government 

bailouts on one hand and minimizing systemic risk on the other. For 

example, if FDIC imposes losses on some creditors of a failed SIFI, these 

losses could cause other SIFIs to fail.82 In that regard, some experts 

observed that governments historically have not allowed potentially 

systemically important financial firms to fail during a crisis and question 

whether a different outcome can be expected in the future. Moreover, 

experts questioned whether FDIC has the capacity to use OLA to handle 

multiple SIFI failures, which might occur during a crisis. Another concern 

is that OLA will be applied to globally active financial institutions, and how 

FDIC and foreign regulators will handle the non-U.S. subsidiaries of a 

failed SIFI remains unclear.

In addition, SIFIs must formulate and submit to their regulators resolution 

plans (or “living wills”) that detail how they could be resolved in 

bankruptcy should they encounter financial difficulties.83 Experts noted 

that resolution plans may provide regulators with critical information about 

a firm’s organizational structure that could aid the resolution process. The 

plans also could motivate SIFIs to simplify their structures, and this 

simplification could help facilitate an orderly liquidation. However, other 

experts commented that while resolution plans may assist regulators in 

gaining a better understanding of SIFI structures and activities, the plans 

may not be useful guides during an actual liquidation—in part because of 

 

82A related concern focused on whether FDIC may have the discretion to impose losses 

on creditors that might be larger than the market would expect or to pull in types of 

creditors not otherwise subject to losses under the Bankruptcy Code. If FDIC acts counter 

to the market’s expectations, the result could be to undermine market confidence in the 

OLA process.

83Dodd-Frank Act, § 165(d), 124 Stat. 1426–1427, codified at 12 U.S.C. § 5365(d). As we 

previously reported (see GAO-11-707) this provision requires each nonbank financial 

company supervised by the Federal Reserve and each bank holding company with total 

consolidated assets of $50 billion or more to submit periodically to the Federal Reserve, 

FDIC, and FSOC a plan for the firm’s rapid and orderly resolution in the event of material 

financial distress or failure. Such a firm also must submit a report on the nature and extent 

of credit exposures the company has to significant bank holding companies and significant 

nonbank financial firms and the same types of exposures such firms have to the reporting 

firm. The Federal Reserve and FDIC have not yet finalized their joint proposed rule to 

implement the credit exposure reporting requirements.
 

Page 48 GAO-13-180 Financial Regulatory Reform

the complex structures of the institutions or because the plans may not be 

helpful during a crisis. Resolution plans also may provide limited benefits 

in simplifying firm structures, in part because tax, jurisdictional, and other 

considerations may outweigh the benefits of simplification.

FDIC has finalized key OLA rules and is engaged in a continuing process 

of clarifying how certain aspects of the OLA process would work.84 For 

example, FDIC officials have clarified that the OLA process will focus on 

the holding company level of the firm, and stated that the creation of the 

bridge institution will help ensure that solvent subsidiaries may continue 

to function. In addition, FDIC and the Federal Reserve are in the process 

of reviewing the first set of resolution plans, which were submitted in July 

2012.

Except for credit default swaps (CDS)—a type of derivative used to hedge 

or transfer credit risk—other over-the-counter (OTC) swaps and derivative 

contracts generally were not central to the systemwide problems 

encountered during the financial crisis, according to FSOC.85

Nonetheless, FSOC noted that OTC derivatives generally were a factor in 

the propagation of risks during the recent crisis because of their 

complexity and opacity, which contributed to excessive risk taking, a lack 

of clarity about the ultimate distribution of risks, and a loss in market 

confidence. In contrast to other OTC derivatives, credit default swaps

exacerbated the 2007-2009 crisis, particularly because of AIG’s large 

holdings of such swaps, which were not well understood by regulators or 

other market participants. Furthermore, the concentration of most OTC 

derivatives trading among a small number of dealers created the risk that 

the failure of one of these dealers could expose counterparties to sudden 

losses and destabilize financial markets. While some standardized 

swaps, such as interest rate swaps, have traditionally been cleared 

through clearinghouses—which stand between counterparties in 

 

84FDIC issued a final rule on July 15, 2011 (which took effect on August 15, 2011) to 

implement certain provisions to resolve covered financial companies, including (i) 

recoupment of compensation from senior executives and directors; (ii) the clarification of 

power to avoid fraudulent or preferential transfers; (iii) the priorities of expenses and 

unsecured claims; and (iv) the administrative process for initial determination of claims. 76 

Fed. Reg. 41,626. In addition, FDIC and the Federal Reserve published a final rule on 

resolution plans on November 1, 2011. 76 Fed. Reg. 67,323. For more information, see 

GAO-12-735. 

85FSOC, Annual Report, 2011.

Regulation of Swaps
 

Page 49 GAO-13-180 Financial Regulatory Reform

assuming the risk of counterparty default—most CDS and most other 

swaps have been traded in the OTC market where holders of derivatives 

contracts bear the risk of counterparty default.86 In addition, swaps traded 

in the OTC market have typically featured an exchange of margin 

collateral to cover current exposures between the two parties, but not 

“initial” margin to protect a nondefaulting party against the cost of 

replacing the contract if necessary. As of the end of the second quarter of 

2012, the outstanding notional value of derivatives held by insured U.S. 

commercial banks and savings associations totaled more than $200 

trillion.87

As noted earlier, Title VII of the Dodd-Frank Act, also known as the Wall 

Street Transparency and Accountability Act of 2010, establishes a new 

regulatory framework for swaps to reduce risk, increase transparency, 

and promote market integrity in swaps markets. Among other things, Title 

VII generally

• provides for the registration and regulation of swap dealers and major 

swap participants, including subjecting them to (1) prudential 

regulatory requirements, such as minimum capital and minimum initial 

and variation margin requirements and (2) business conduct 

requirements to address, among other things, interaction with 

counterparties, disclosure, and supervision;88

 

86A derivatives clearinghouse or similar organization enables each party to a derivatives 

transaction to substitute the credit of the clearinghouse for the credit of the parties, 

provides for the settlement or netting of obligations from the transaction, or otherwise 

provides services mutualizing or transferring the credit risk from the transaction. Dealers

participate in the derivatives market by quoting prices to, buying derivatives from, and 

selling derivatives to end users and other dealers. 

87OCC, Quarterly Report on Bank Trading and Derivatives Activities, Second Quarter

2012. According to the report, the four banks with the most derivatives activity held 93.2 

percent of all derivatives, while the largest 25 banks accounted for nearly 100 percent of 

all contracts. OCC noted that changes in notional volumes are generally reasonable 

reflections of business activity and therefore can provide insight into potential revenue and 

operational issues. However, the notional amount of derivatives contracts does not 

provide a useful measure of either market or credit risks. 

88In general, minimum capital requirements are designed to provide firms with sufficient 

liquidity to meet unsubordinated obligations to customers and counterparties and sufficient 

resources to wind down in an orderly manner without the need for a formal proceeding. 

Minimum margin requirements are generally intended to regulate the amount of credit 

directed into swaps and related transactions and to help protect swaps entities and their 

customers from price fluctuations and against losses arising from undue leverage. 

Minimum margin requirements also can help manage counterparty credit risk.
 

Page 50 GAO-13-180 Financial Regulatory Reform

• imposes mandatory clearing requirements on swaps but exempts 

certain end users that use swaps to hedge or mitigate commercial 

risk;89

• requires swaps subject to mandatory clearing to be executed on an 

organized exchange or swap execution facility, which promotes pretrade transparency (unless no facility offers the swap for trading);90

and

• requires all swaps to be reported to a registered swap data repository 

or, if no such repository will accept the swap, to CFTC or SEC, and 

subjects swaps to post-trade transparency requirements (real-time 

public reporting of swap data).

Figure 8 illustrates some of the differences between swaps traded on 

exchanges and cleared through clearinghouses and swaps traded in the 

OTC market.91

 

89Any entity acting as a clearinghouse, or central counterparty, must register with CFTC, 

SEC, or both, as appropriate (unless granted an exemption) and is subject to regulatory 

requirements established by CFTC, SEC, or both, as appropriate.

90Organized exchanges and swap execution facilities are subject to comprehensive 

registration, operational, and self-regulatory requirements.

91Clearinghouses use initial and variation margin as a key part of their risk management 

programs. Initial margin serves as a performance bond against potential future losses. If a 

clearing member fails to meet its obligations to the clearinghouse (such as failing to pay 

variation margin when due), resulting in a default, the clearinghouse may use the 

defaulter’s initial margin to cover any loss resulting from the default. Variation margin 

entails marking open positions to their current market value each day and transferring 

funds between the clearing members to reflect any change in value since the previous 

time the positions were marked. This process minimizes the risk that exposures will 

accumulate over time and thereby reduces the potential impact of a clearing member 

default and the size of the loss resulting from the default should one occur.
 

Page 51 GAO-13-180 Financial Regulatory Reform

Figure 8: Overview of Clearing, Trading, and Reporting Requirements under Swaps Reforms

A broad range of financial market regulators, participants, and observers 

expect various provisions under Title VII to help promote financial 

stability, but they also identified potential obstacles or challenges.92

 

92In addition to identifying financial stability benefits of Title VII, experts noted that the 

provisions can provide other benefits to market participants, such as increased market 

liquidity and lower costs through increased competition and greater transparency.
 

Page 52 GAO-13-180 Financial Regulatory Reform

• Clearing through clearinghouses: According to experts, the 

clearing of swaps through clearinghouses could be beneficial. 

Clearing can reduce the vulnerability of the financial system to the 

failure of one or a few of the major swap dealers by transferring credit 

risk from the swap counterparties to the clearinghouse.93 By becoming 

the central counterparty in every trade, a clearinghouse can provide 

multilateral netting efficiencies to reduce counterparty credit and 

liquidity risks faced by market participants. Unlike dealers, 

clearinghouses do not take positions on the trades they clear and may 

have stronger incentives to develop effective risk management 

measures and monitor their members’ financial condition. In addition, 

clearinghouses have tools to mitigate counterparty credit risk, for 

instance, initial and variation margin, as well as the ability to assess 

their members for additional financial contributions. At the same time, 

experts have pointed out that clearinghouses concentrate credit risk 

and thus represent a potential source of systemic risk.94 For example, 

a former regulatory official told us that, in her opinion, clearinghouses 

essentially are too big to fail, given that the Dodd-Frank Act includes 

provisions mandating centralized clearing of standardized swaps and 

authorizing the Federal Reserve to provide emergency liquidity to

systemically important clearinghouses provided certain conditions are 

met. Others commented that clearinghouses may be engaged in 

clearing less standardized or illiquid products, which could pose riskmanagement challenges for clearinghouses and expose them to 

greater risks.

• Margin requirements: Experts expect the margin requirements for 

uncleared swaps with swap dealers and major swap participants to 

help promote financial stability by helping to ensure that market 

participants have enough collateral to absorb losses. For example, 

imposing both initial and variation margin requirements on uncleared 

swaps could help prevent the type of build-up of large, 

uncollateralized exposures experienced by AIG. Some experts 

 

93Counterparty credit risk is the risk to each party in an OTC derivatives contract that the 

other party will not perform the contractual obligations. Technically, the clearing house 

members interact with the counterparties.

94FSOC has identified certain clearinghouses as systemically important financial market 

utilities, which are subject to risk management and other enhanced supervisory and 

prudential requirements under the Dodd-Frank Act and may be afforded access to 

collateralized emergency liquidity from Federal Reserve Banks in unusual or exigent 

circumstances.
 

Page 53 GAO-13-180 Financial Regulatory Reform

commented that margin requirements, depending how they are 

implemented, could have a negative impact on liquidity if there is not a 

sufficient supply of quality securities that can be posted as collateral 

to meet margin requirements.

• Reporting requirements: Many experts generally expect the swaps 

reforms that improve transparency to benefit the financial system. For 

example, the requirement for regulatory reporting of swaps 

transactions may provide regulators with a better understanding of the 

current risks in the swaps market and help enhance their oversight of 

the market. Similarly, public reporting of swap data could benefit 

market participants by providing them with data on prices and other 

details about swaps that they can use to better assess their risks. A 

number of industry representatives noted that the public reporting 

requirement could lead some market participants to reduce their 

participation out of fear that others can take advantage of such 

information. In their view, this could result in a loss of liquidity to the 

system. 

CFTC and SEC have finalized many of the regulations needed to 

implement Title VII, though several had yet to be finalized as of 

December 2012. OTC derivatives are globally traded, and many other 

jurisdictions are in the process of developing new regulatory regimes. 

However, the United States is one of the first jurisdictions to have enacted 

legislation in this area. Indeed, the implementation of at least one 

derivatives-related provision has already been delayed because of the 

importance of coordinating with international entities. The outcome of the 

reform process in other jurisdictions will determine the extent to which 

U.S. firms could be at a competitive advantage or disadvantage. (See 

app. II for a description of international coordination efforts.)

While the previously discussed Dodd-Frank Act provisions were 

commonly cited as the most important ones for enhancing U.S. financial 

stability, several financial market regulators, participants, and observers 

we spoke with identified other provisions that they expect to help enhance 

financial stability. As with the provisions discussed above, certain key 

rules implementing the following provisions have not yet been finalized.

• Mortgage-related reforms: According to experts, problems in the 

mortgage market, particularly with subprime mortgages, played a 

Mortgage-Related and Other 

Reforms That Could Enhance 

Financial Stability
 

Page 54 GAO-13-180 Financial Regulatory Reform

central role in the recent financial crisis, and the act’s mortgagerelated reforms may help prevent such problems in the future.95 Some

bank and nonbank mortgage lenders weakened their underwriting 

standards and made mortgage loans to homebuyers who could not 

afford them or engaged in abusive lending practices before the crisis. 

These factors, along with the decline in housing prices, contributed to 

the increase in mortgage defaults and foreclosures. A number of the 

act’s provisions seek to reform the mortgage market—for example, by 

authorizing CFPB to supervise nonbank mortgage lenders and by 

prohibiting certain mortgage lending practices, such as issuing 

mortgage loans without making a reasonable and good faith effort to 

determine that the borrower has a reasonable ability to repay.96 Some 

industry representatives have expressed concerns that these reforms 

could prevent certain potential homebuyers from being able to obtain 

mortgage loans. However, other experts noted that before the crisis 

some loans had rates that did not fully reflect their risks, which 

contributed to an excess of credit, and the act’s reforms may help 

ensure that loans are accurately priced to reflect risks. Many of the 

Dodd-Frank Act’s mortgage reforms have not yet been implemented 

through rulemaking.

• Risk retention for asset securitizations: According to experts, the 

securitization of residential mortgages into mortgage-backed 

securities that subsequently were part of other securitizations also 

played a central role in the crisis, and the act contains provisions to 

reform the market.97 Experts also noted that institutions that created 

mortgage-backed securities in the lead-up to the crisis engaged in a 

number of practices that undermined the quality of their securities, 

 

95Subprime mortgages generally are made to borrowers with blemished credit and feature 

higher interest rates and fees than prime loans. We have previously reported that the 

subprime market experienced substantially steeper increases in default and foreclosure 

start rates than the prime and government insured markets, accounting for two thirds or 

more of the overall increase in the number of loans between the second quarter of 2005 

and the second quarter of 2007. See GAO, Information on Recent Default and 

Foreclosure Trends for Home Mortgage and Associated Economic and Market 

Developments, GAO-08-78R (Washington, D.C.: Oct. 16, 2007). 

96According to the Dodd-Frank Act, a lender is presumed to have satisfied this 

requirement and receives some protection from liability when it originates a “qualified 

mortgage” (QM) that meets nine specific criteria, initially set forth in the act, but authorizes 

CFPB to change these criteria. 

97A securitization is a financial transaction in which assets, such as mortgage loans, are 

pooled and securities representing interests in the pool are issued.
 

Page 55 GAO-13-180 Financial Regulatory Reform

including not adequately monitoring the quality of the mortgages 

underlying their securities, because they did not bear the risk of 

significant losses if those mortgages defaulted.98 The act contains 

provisions that require securitizers of asset-backed securities to retain 

some “skin in the game” in the form of a certain percentage of the 

credit risk in asset-backed securities they create.99 However, experts 

have different views on the extent to which the level of risk retention 

for securitizations was central to the problems encountered during the 

recent crisis, and a few do not view these provisions as potentially 

beneficial for financial stability. Regulators proposed implementing 

rules for the provision in 2011 but had yet to finalize the rules as of 

December 2012.

• The Volcker rule: The role that proprietary trading—trading activities 

conducted by banking entities for their own account as opposed to 

those of their clients—played in the recent crisis is a matter of 

debate.100 However, a number of experts maintain that the ability of 

banking entities to use federally insured deposits to seek profits for 

their own account provides incentives for them to take on excessive 

risks. In particular, some have noted that commercial banks that 

benefit from the federal financial safety net enjoy access to subsidized 

capital and thus do not bear the full risks of their proprietary trading 

activities. To address these concerns, section 619 of the Dodd-Frank 

Act, referred to as the Volcker rule, generally prohibits a banking 

entity from engaging in proprietary trading or acquiring or retaining 

 

98To securitize mortgage loans, mortgage lenders or originators can either securitize the 

loans themselves or sell their loans to third parties (some of which are affiliated third 

parties)—either directly to securitizing institutions or loan aggregators that serve as 

intermediaries between originators and securitizers—generating funds that could be used 

to originate more loans. Securitizing institutions include investment banks, retail banks, 

mortgage companies, and real estate investment trusts.

99Dodd-Frank Act, § 941, 124 Stat. at 1890–1896, codified at 15 U.S.C. § 78o–11. 

Specifically, the Dodd-Frank Act requires mortgage securitizers (and certain originating 

lenders) to retain a financial exposure of no less than 5 percent of the credit risk of any 

securitized residential mortgage that does not meet a separate set of criteria (to be 

defined by six federal regulators, excluding CFPB). Securitized mortgages that meet these 

criteria are exempt from this risk retention requirement, referred to as “qualified residential 

mortgage” (QRM). The QRM risk retention requirement can be more restrictive than the 

QM criteria but not less restrictive. 15 U.S.C. § 1639c(b)(2)(A), (3)(B)(i), (c)(1)(B).

100See GAO, Proprietary Trading: Regulators Will Need More Comprehensive Information 

to Fully Monitor Compliance with New Restrictions When Implemented, GAO-11-529, 

(Washington, D.C.: July 13, 2011). 
 

Page 56 GAO-13-180 Financial Regulatory Reform

more than a certain maximum percentage of any equity, partnership, 

or other ownership interest in, or sponsoring, a hedge fund or a 

private equity fund, among other restrictions involving transactions 

between covered banking entities and sponsored hedge funds and 

private equity funds.101 A number of experts view these restrictions as 

enhancing financial stability by discouraging excessive risk-taking by 

these institutions. Others, however, have noted that the Volcker rule, 

by prohibiting certain proprietary activities of these institutions, could 

have adverse effects on liquidity and, in turn, the unintended effect of 

undermining financial stability. In 2011, regulators proposed rules to 

implement the Volcker rule but had not yet finalized them as of 

December 2012. 

Financial market regulators, participants, and observers whom we 

interviewed also identified provisions that may result in benefits beyond 

increased financial stability. For example, the act may enhance consumer 

and investor protections and improve economic efficiency. As with the 

provisions previously noted, the realization of such benefits will depend, 

in part, on how regulators implement the provisions. Benefits beyond 

financial stability that experts highlighted include the following:

• Enhanced consumer protections: The Dodd-Frank Act’s Title X 

consolidates rulemaking and other authorities over consumer financial 

products and services under CFPB. The new agency assumes 

authority to implement consumer protection laws, such as the Truth in 

Lending Act and Home Ownership and Equity Protection Act of 1994. 

CFPB could assist consumers by improving their understanding of 

financial products and services.102 For example, experts noted that 

consumers could benefit from CFPB’s efforts, which include providing 

information on consumer financial products and simplifying

 

101Dodd-Frank Act § 619, 124 Stat. at 1620-1631 codified at 12 U.S.C. § 1851. Section 

619 of the act requires the federal banking agencies, SEC, and CFTC to promulgate rules 

implementing the prohibition. 12 U.S.C. § 1851(b). The Volcker Rule also generally 

prohibits a banking entity from engaging in any permitted activity that, among other things, 

would involve or result in a material conflict of interest between the banking entity and its 

customers or that would result in a material exposure to a high-risk asset or trading 

strategy. 12 U.S.C. § 1851(d)(2)(A)(i). 

102Board of Governors of the Federal Reserve System and Department of the Treasury 

Offices of Inspector General, Review of CFPB Implementation Planning Activities 

(Washington, D.C.: July 15, 2011).

Other Dodd-Frank 

Provisions May Lead to 

Additional Consumer and 

Investor Benefits
 

Page 57 GAO-13-180 Financial Regulatory Reform

disclosures for mortgages, credit cards, and other consumer financial 

products. 

• Enhanced investor protections: Certain provisions in the act could 

provide shareholders with greater influence over, and insight into, the 

activities of publicly traded companies. For example, the act contains 

provisions that require shareholder advisory votes on executive 

compensation, disclosure of the ratio between the chief executive 

officer’s annual total compensation and median annual total 

compensation for all other employees, and clawback policies for 

erroneously awarded incentive-based compensation.103

• Improving resource allocation in the economy: Some experts 

noted that mortgages and related credit instruments were not 

accurately priced before the crisis to reflect their risks. As a result, the 

economy experienced a credit bubble that facilitated a misallocation of 

resources to the housing sector. For example, one expert noted that 

residential housing construction during the 2000s was excessive and 

inefficient. To the extent that the act contributes to a more accurate 

pricing of credit, the economy could benefit from a more efficient 

allocation of resources across the broader economy.

The Dodd-Frank Act’s potential benefit of reducing the probability or 

severity of a future financial crisis cannot be readily observed and this 

potential benefit is difficult to quantify. Any analyses must be based on 

assumptions about, or models of, the economy. Consequently, the results 

of such analyses are subject to substantial uncertainty. Nonetheless, as 

we noted previously in this report, a working group of the Basel 

Committee on Banking Supervision summarized several studies that 

analyze the costs of financial crises, and that used different 

macroeconomic models of the economy to estimate the impact of more 

 

103Dodd-Frank Act, §§ 951, 953, 954, 124 Stat. at 1899–1900, 1903–04, codified at 15 

U.S.C. §§ 78n–1, 78j–4, 78l note. Clawbacks of erroneously awarded incentive-based 

compensation are recoveries by the company of amounts paid to an employee based on 

materially inaccurate financial statements. This is money that the executive would not 

have received if the accounting were done properly and to which the executive was not

entitled. 

Quantifying Potential 

Benefits Is Difficult, but 

Some Approaches May 

Provide Useful Insights
 

Page 58 GAO-13-180 Financial Regulatory Reform

stringent capital and liquidity standards on the annual likelihood of a 

financial crisis, and the benefits of avoiding associated output losses.104

The Basel Committee report suggests that increases in capital and 

liquidity ratios are associated with a reduction in the probability that a 

country will experience a financial crisis. Higher capital and liquidity 

requirements may generate social benefits by reducing the frequency and 

severity of banking crises and the consequent loss of economic output. 

The Basel Committee working group found that although there is 

considerable uncertainty about the exact magnitude of the effect, the 

evidence suggests that higher capital and liquidity requirements can 

reduce the probability of banking crises. For example, the models 

suggest, on average, that if the banking system’s capital ratio—as 

measured by the ratio of tangible common equity to risk-weighted 

assets—is 7 percent, then a 1 percentage point increase in the capital 

ratio is associated with a 1.6 percentage point reduction in the probability 

of a financial crisis—from 4.6 percent to 3.0 percent per year. The 

working group also found that if the capital ratio was 7 percent, then a 

12.5 percent increase in the ratio of liquid assets to total assets in the 

banking system is associated with a 0.8 percentage point reduction in the 

probability of a crisis per year, on average. In addition, the incremental 

benefits of higher capital requirements are greater when bank capital 

ratios are increased from lower levels and they decline as standards 

become progressively more stringent. For example, the models suggest, 

on average, that the reduction in the likelihood of a crisis is three times 

larger when the capital ratio is increased from 7 percent to 8 percent than 

it is when the capital ratio is increased from 10 percent to 11 percent. The 

further away banks are from insolvency, the lower their marginal benefit is 

from additional protection.

Estimates of the reduced probability of a financial crisis are subject to a 

number of limitations. For example, researchers note that the reduction in 

the probability of a crisis depends on the baseline assumptions about the 

average probability of a crisis before the policy changes—in this case, 

before the increase in capital requirements. In addition, overall economic 

conditions, or factors outside of the financial system, also may affect the 

probability of a financial crisis.

 

104Basel Committee on Banking Supervision, “An Assessment of the Long-Term 

Economic Impact of Stronger Capital and Liquidity Requirements,” Bank for International 

Settlements (Basel, Switzerland: Aug. 2010).
 

Page 59 GAO-13-180 Financial Regulatory Reform

The Basel Committee working group also summarized the studies’ 

estimates of the potential benefits from higher capital and liquidity 

requirements in terms of economic output gains that could result from a 

lower probability of a crisis. The studies used estimates of the costs of a 

crisis to estimate that a 1 percent decrease in the annual probability of a 

crisis could have a benefit of 0.2 percent to 1.6 percent per year of 

increased economic output, depending on the extent to which the crisis 

losses are temporary or permanent. If, for example, annual GDP were 

$15 trillion (around the size of U.S. GDP) these estimates suggest that 

the economic benefit in terms of increased GDP could range from 

approximately $29 billion to about $238 billion per year. These estimates 

also are subject to limitations, however. As we previously discussed in 

this report, estimates of financial crisis losses have varied widely 

depending on the assumptions made. In addition, these models did not 

take into account variations in responses to higher capital and liquidity 

requirements among institutions and regulatory environments.

Given the difficulty of measuring the extent to which the Dodd-Frank Act 

may reduce the probability of a future crisis, a few academics have 

proposed a more conceptual approach for comparing the act’s potential 

benefits and costs.105 According to these experts, the benefits of the act 

can be framed by determining the percent by which the cost of a financial 

crisis needs to be reduced to be equal to the act’s costs. If the cost of a 

future crisis is expected to be in the trillions of dollars, then the act likely 

would need to reduce the probability of a future financial crisis by only a 

small percent for its expected benefit to equal the act’s expected cost. 

Although an academic told us this thought exercise helped put the 

benefits and costs of the Dodd-Frank Act into perspective, it provides no 

insight into whether the act reduces the probability of a future crisis by 

even a small percent.

 

105See, for example, Steven Schwarcz, “Systemic Risk,” Georgetown Law Journal, vol. 

97: 193-249 (2008).
 

Page 60 GAO-13-180 Financial Regulatory Reform

The Dodd-Frank Act requires federal agencies and the financial services 

industry to expend resources to implement or comply with its 

requirements, and some of its reforms are expected to impose costs on 

the economy. First, federal agencies are devoting resources to fulfill rulemaking and other new regulatory responsibilities created by the act. A 

large portion of these agency resources are funded by fees paid by 

industry participants or other revenue sources outside of congressional 

appropriations, limiting the impact of these activities on the federal budget 

deficit. Second, the act contains a broad range of reforms that generally 

are imposing or will impose additional regulations and costs on a 

correspondingly broad range of financial institutions, including banks, 

broker-dealers, futures commission merchants, investment advisers, and 

nonbank financial companies. Given the act’s focus on enhancing 

financial stability, large, complex financial institutions will likely bear the 

greatest costs, but smaller financial institutions and other financial market 

participants also will incur costs.106 Third, by imposing costs on the 

financial services industry, the act also may impose costs on the broader 

economy and reduce output. For example, financial institutions may 

charge their customers more for credit or other financial services. While 

the act’s costs can be viewed as the price to be paid to achieve a more 

resilient financial system and other benefits, some industry 

representatives question whether the costs, individually or cumulatively, 

are excessive. Furthermore, observers have also expressed concerns 

about potential unintended consequences of the act, such as reducing the 

competiveness of U.S. financial institutions in the global financial 

marketplace.

The amount of funding that 10 federal financial entities have reported as 

associated with their implementation of the Dodd-Frank Act varied 

significantly from 2010 through 2013, and the amounts have been 

increasing for some of these entities. Funding resources associated with 

the Dodd-Frank Act’s implementation from 2010 through 2012 ranged 

from a low of $4.3 million for FHFA to a high of $432.3 million for CFPB 

(see table 2). In addition, funding associated with the act’s 

implementation increased from 2011 through 2012 for all but one of the 

agencies, FHFA, and more than doubled for four entities: OFR, FSOC, 

 

106See, for example, GAO, Community Banks and Credit Unions: Impact of the DoddFrank Act Depends Largely on Future Rule Makings, GAO-12-881 (Washington, D.C.: 

Sept. 13, 2012).

Significance of the 

Act’s Costs Is Not 

Fully Known

Resources Devoted to the 

Dodd-Frank Act’s 

Implementation Vary 

Widely across Federal 

Agencies
 

Page 61 GAO-13-180 Financial Regulatory Reform

CFPB, and OCC. Three of these four entities—OFR, FSOC, and CFPB—

were created through the Dodd-Frank Act and thus are in the process of 

establishing management structures and mechanisms to carry out their 

missions. Likewise, according to CFPB and OFR, while some of their 

funding was used for recurring staffing costs, other funding was used for 

start-up costs, such as systems development, contractor support, and 

data purchases. According to FSOC and OFR, the increase in funding is 

directly proportional to the growth in their staffing and reflects an increase 

in the size and scope of their organizations. Some new funding resources 

reported by agencies may represent transfers between entities rather 

than new funding resources. For example, the large increase in DoddFrank-related funding for OCC between 2011 and 2012 reflects OCC’s 

integration of OTS responsibilities and staff, according to OCC officials. In 

addition, new funding resources for CFPB include some funding 

resources transferred from the Federal Reserve. In such cases, these 

new funding resources do not represent an incremental cost of the act’s 

implementation.

Table 3: Summary of 10 Federal Entities’ Reported Funding Resources Associated with Implementation of the Dodd-Frank 

Act, 2010 through 2013

(dollars in millions)

Agency/Entity 2010 2011 2012 2010-2012 Total

2013

Projections 

FSOCa $0.0 $2.9 $6.0 $8.9 $8.7

OFRa 0.0 11.3 39.5 50.8 78.1

CFPBa 9.2 123.3 299.8 432.3 447.7

Federal Reserve 7.3 62.7 93.1 163.1 Not available

CFTC 0.0 15.4 21.9 37.3 80.0

SEC 0.0 23.5 39.5 63.0 129.0

FDIC 2.3 19.9 38.1 60.3 Not available

FHFA 0.0 2.2 2.1 4.3 2.1

OCC 0.0 34.9 235.0 269.9 Not available

Treasury 0.0 5.6 9.2 14.8 9.4

Source: GAO presentation of data from individual entities. 

Note: For 2010, 2011, and 2012, FSOC, OFR, CFPB, and Treasury provided estimates of actual 

resources expended on Dodd-Frank-related activities, and the other agencies provided estimates of 

the total resources made available or requested for Dodd-Frank-related activities. Federal Reserve 

and FDIC data are reported on a calendar year basis, but the other agency data are reported on a 

fiscal year basis. At the time of this review, the Federal Reserve, FDIC and OCC did not provide 

projections for 2013.

a

New entity.
 

Page 62 GAO-13-180 Financial Regulatory Reform

To meet their Dodd-Frank-related responsibilities, federal entities

reported that they have hired new staff, redirected staff from other areas, 

or used staff transferred from other entities. The number of full-time 

equivalents (FTE) reported by the 10 federal entities as associated with 

their implementation of the act also varied significantly from 2010 through 

2013, and the amounts have been increasing for some entities (see table

3). The entities’ estimates of new FTEs related to implementing the DoddFrank provisions for 2010 through 2012 ranged from a low of 18 for FHFA 

to a high of 964 for the Federal Reserve. Some new FTEs reported by 

agencies represent transfers of staff between agencies rather than new 

hires. New FTEs for OCC in 2011 include staff transferred from OTS. In 

addition, new FTEs for CFPB include staff transferred from the agencies 

whose consumer protection responsibilities were transferred to CFPB. In 

such cases where new FTEs for an entity have resulted from a transfer of 

existing regulatory responsibilities between entities, these new FTEs do 

not represent an incremental cost of the act’s implementation.

Table 4: Summary of 10 Federal Entities’ Reported New and Redirected Full-Time Equivalents Associated with 

Implementation of the Dodd-Frank Act, 2010 through 2013

Agency/Entity 2010 2011 2012 2010-2012 Total

2013

Projections 

FSOC 0 17 7 24 0

OFR 0 13 47 60 167

CFPB 0 178 653 831 528

Federal Reserve 69 367 528 964 Not available

CFTC 0 121 126 247 268

SEC 0 14 51 65 227

FDIC 0 55 91 146 Not available

FHFA 0 16 2 18 9

OCC 0 133 0 133 0

Treasury 0 33 10 43 3 

Source: GAO presentation of data from individual entities. 

Note: Federal Reserve and FDIC data are reported on a calendar year basis, and the other agency 

data are reported on a fiscal-year basis. At the time of this review, the Federal Reserve and FDIC did 

not provide projections for 2013. OCC reported that 131 FTEs for fiscal year 2011 were transferred 

from OTS, which the Dodd-Frank Act dissolved as of July 21, 2011. Because these FTEs were 

already on board at the beginning of fiscal year 2012, they are not considered new Dodd-Frankrelated FTEs in fiscal year 2012. OCC also noted that the ongoing aspects of the Dodd-Frank Act, 

such as rulemakings and participating in FSOC-related activities, have been integrated into the 

agency’s ongoing programs and activities and thus are not shown as separate initiatives related to 

the act’s implementation.
 

Page 63 GAO-13-180 Financial Regulatory Reform

A large portion of the federal entities’ resources devoted to the act’s 

implementation are funded by fees paid by regulated institutions or other 

sources outside the congressional appropriations process, limiting the 

impact of these activities on the federal budget deficit. Seven of the 

entities (CFPB, FSOC, OFR, FDIC, FHFA, OCC, and the Federal 

Reserve) are funded in full through assessments, fees, or other revenue 

sources and, thus, have not received any congressional appropriations. 

Moreover, FSOC and OFR are funded by assessments on large bank 

holding companies and nonbank financial companies designated by 

FSOC for supervision by the Federal Reserve.107 SEC receives 

appropriations, but SEC collects transaction fees and assessments that 

are designed to recover the costs to the federal government of its annual 

appropriation. CFPB receives a mandatory transfer of funding from the 

Federal Reserve, subject to certain limits, but may request discretionary 

appropriations. Treasury and CFTC are funded through congressional 

appropriations.108 Although entities’ funding resources and staff have 

increased due to implementation of the act, these increases are not 

expected to have a significant impact on the federal deficit. In 2011, CBO 

estimated that the Dodd-Frank Act would reduce federal deficits by $3.2 

billion over the period from 2010 to 2020.

109 CBO projected that the act 

would increase revenues by $13.4 billion and increase direct spending by 

$10.2 billion over this period. While CBO’s analysis did not consider the 

potential impacts of the act’s reforms on economic growth, its estimates 

suggest that the size of the act’s direct impacts on federal spending is 

small relative to total federal net outlays of $3.6 trillion in fiscal year 2011. 

While fees and assessments paid by financial institutions to the federal 

 

107FSOC and OFR have not received appropriated funds. During the 2-year period 

following the enactment of the Dodd-Frank Act, the Federal Reserve provided OFR funds 

to cover the expenses of the office. Now, OFR is funded through assessments levied on 

bank holding companies with total consolidated assets of $50 billion or more and nonbank 

financial companies designated by FSOC for supervision by the Federal Reserve. Until 

FSOC designates nonbank financial companies, assessments will be levied only against 

large bank holding companies. The collected assessments are deposited into the 

Financial Research Fund, which was established within Treasury to fund the expenses of 

OFR. FSOC’s expenses are considered expenses of OFR. 12 U.S.C. §§ 5328, 5345. 

108Some of Treasury’s expenses are funded through statutory provisions that authorize 

Treasury to spend certain of its receipts.

109See D. Elmendorf, CBO, “Review of CBO’s Cost Estimate for the Dodd-Frank Wall 

Street Reform and Consumer Protection Act” (testimony before the Subcommittee on 

Oversight and Investigations, Committee on Financial Services, U.S. House of 

Representatives, Washington, D.C., Mar. 30, 2011).
 

Page 64 GAO-13-180 Financial Regulatory Reform

entities help to limit the act’s direct impacts on the federal budget deficit, 

they represent a cost to these institutions and could have indirect impacts 

on the economy, as discussed later in this report.

In collecting and analyzing this information, we found challenges and 

limitations that affected our efforts to aggregate the data. For example, 

agencies told us that their reported funding and FTE resources for 2013 

reflect their best estimates of the level of resources required to implement 

existing and new responsibilities but stated that these estimates were 

uncertain. As shown in tables 3 and 4, a few agencies did not provide 

projections for 2013 resources related to the act’s implementation. In 

addition, not all of the federal entities are on a federal fiscal year, so the 

reported budgetary activities for some entities cover different time frames. 

Moreover, the entities may have used different approaches to estimate 

the funding and FTE resources, potentially making the figures harder to 

compare across entities.

The Dodd-Frank Act’s provisions and regulations generally impose or are 

expected to impose costs on banks and other financial institutions. 

According to some academics and others, certain types of costs imposed 

by the act on financial institutions serve to make such institutions 

internalize costs that they impose on others through their risk-taking and 

thereby reduce the risk that they pose to the financial system. The extent 

to which the act imposes costs on financial institutions may vary among 

not only different types of financial firms (e.g., banks versus nonbank 

financial companies) but also among the same types of firms (e.g., large 

banks versus small banks). In discussions with regulators, industry 

representatives, and other experts, we identified two main categories of 

financial impacts on financial institutions: (1) increased regulatory 

compliance and other costs and (2) reduced revenue associated with new 

restrictions on certain activities.110 However, as commonly noted by 

financial firms in their annual reports, the Dodd-Frank Act’s full impact on 

their businesses, operations, and earnings remains uncertain, in part 

 

110Compliance costs generally are the costs that firms incur to undertake an activity that 

they otherwise would not have undertaken in the absence of regulation. Such costs 

include the costs for regulated firms to hire and train staff, devote staff and management 

time to compliance activities, hire outside legal or other expertise, and make new 

investments in information technology or other systems. Compliance costs can include 

start-up, or one-time, costs (e.g., upgrading computer systems) and recurring costs (e.g., 

periodic reporting requirements).

The Act Imposes Costs on 

the Financial Services 

Industry but Limited Data 

Exist on the Magnitude of 

the Costs
 

Page 65 GAO-13-180 Financial Regulatory Reform

because of the rulemakings that still need to be completed. For example, 

in its 2012 annual report, one large bank holding company noted that it 

could not quantify the possible effects of the significant changes that were 

under way on its business and operations, given the status of the 

regulatory developments. Furthermore, even when the reforms have been 

fully implemented, it may not be possible to determine precisely the 

extent to which observed costs can be attributed to the act versus other 

factors, such as changes in the economy.

No comprehensive data are readily available on the costs that the 

financial services industry is incurring to comply with the Dodd-Frank Act.

Representatives from financial institutions and industry associations told 

us that firms generally do not track their incremental costs for complying 

with the act. Moreover, they said that the piecemeal way that the act is 

being implemented makes it difficult to measure their regulatory costs. 

Likewise, none of the industry associations we met with are tracking the 

incremental costs that their members are incurring to comply with the act. 

Regulators and others have collected some data on certain compliance 

costs. Specifically, federal agencies typically estimate the cost of 

complying with any recordkeeping and reporting requirements of their 

rules under the Paperwork Reduction Act, but these estimates do not 

capture other types of compliance costs, which can be more 

substantial.111 For example, an SEC rule on asset-backed securities 

requires issuers of such securities to conduct, or hire a third party to 

conduct, a review of the assets underlying the securities; this cost is not a 

paperwork-related cost and thus not included in the compliance costs 

captured under the Paperwork Reduction Act.112 In May 2012, the 

Treasury Secretary asked the Federal Reserve’s Federal Advisory 

Council, a group of bank executives, to prepare a study to provide 

regulators with more specific examples of the regulatory burdens imposed 

by the act’s reforms.

A number of the Dodd-Frank Act provisions target large financial firms

and are expected to increase their compliance or other costs more 

 

111See GAO, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional 

Analyses and Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011). OCC 

reviews potential costs and benefits of each proposed rule in accordance with 

requirements of the Unfunded Mandates Reform Act, the Regulatory Flexibility Act, and 

the Congressional Review Act. 

11276 Fed. Reg. 4231 (Oct. 13, 2010). 

Regulatory Compliance and 

Other Costs
 

Page 66 GAO-13-180 Financial Regulatory Reform

significantly than for other financial firms. In particular, several provisions 

specifically apply to SIFIs, which include bank holding companies with 

$50 billion or more in total consolidated assets (which we refer to as 

“bank SIFIs”) and nonbank financial companies designated by FSOC for 

supervision by the Federal Reserve. Examples of provisions targeting 

large financial institutions include the following:

• Enhanced prudential standards: Higher capital and liquidity 

requirements can increase funding costs for banks.113 Studies by the 

Basel Committee on Banking Supervision, IMF, and Organization for 

Economic Cooperation and Development estimated that increased 

capital and liquidity requirements would have modest impacts on 

funding costs for financial institutions. In contrast, a study by the 

International Institute of Finance, a global association of financial 

institutions, found much larger negative impacts. Differences in these 

studies’ estimates result from differences in certain assumptions. For 

example, the size of the estimated impact on funding costs depends 

on assumptions about how much of the increase in banks’ capital 

levels is due to regulatory reforms rather than other factors. Some 

researchers have noted that attributing all of the increase in banks’ 

capital levels to regulatory reforms may overstate the cost impacts of 

these reforms, because banks likely increased their capital levels, to 

some extent, in response to market forces after the crisis.

• Resolution plans: Regulators and industry officials stated that bank 

SIFIs have devoted significant staffing resources to developing the 

required resolution plans and that some plans submitted in July 2012 

 

113Higher capital requirements can require banks to increase the portion of their funding 

that comes from equity capital rather than debt. Heightened liquidity standards can require 

banks to rely more on longer-term rather than shorter-term debt financing. The results of 

academic, industry, and other research on the impact of such heightened prudential 

standards on financial institutions and their customers have varied widely. It generally is 

more expensive for banks to fund themselves through equity capital (such as by selling 

stock to investors) than through debt. This is because equity holders are residual 

claimants and assume more risk than debt holders. In theory, increasing the required 

proportion of equity funding relative to debt funding should not affect a firm’s overall cost 

of funding as it reduces the risk that the firm will fail, thereby reducing the returns 

demanded by both equity and debt holders. However, certain government policies make 

equity financing (such as through issuing stock to investors) more expensive for financial 

institutions than debt financing. For example, interest on debt is tax deductible, while 

dividends on equity securities are not. In addition, bank deposits benefit from federal 

guarantees and the cost of these liabilities does not fall as capital levels and the perceived 

safety of the firm increase.
 

Page 67 GAO-13-180 Financial Regulatory Reform

were thousands of pages in length.114 Regulators estimated that each 

bank SIFI required to complete a full resolution plan (20 banks) will 

spend, on average, 9,200 hours to complete the first plan and 2,561 

hours to update the plan annually.115

• Stress tests: In accordance with the act, the Federal Reserve, OCC, 

and FDIC have issued rules for stress testing requirements for certain 

bank holding companies, banks, thrift institutions, state member 

banks, savings and loan companies, and nonbank financial 

companies FSOC designates for supervision by the Federal 

Reserve.

116 Bank holding companies with $50 billion or more in assets 

and nonbank financial companies designated by FSOC will be 

required to conduct company-run stress tests semi-annually, and the 

Federal Reserve will be required to conduct stress tests on these 

companies annually. Financial companies with more than $10 billion 

but less than $50 billion in assets will be required to conduct 

company-run stress tests annually as directed by their primary federal 

banking supervisor. According to industry representatives, stress 

testing requires newly covered firms to incur significant compliance 

costs associated with building information systems, contracting with 

outside vendors, recruiting experienced personnel, and developing 

stress testing models that are unique to their organization. 

• Regulatory assessments: The Dodd-Frank Act also increases 

operating costs for SIFIs and certain large banks through new or 

higher regulatory assessments. First, under the act, large bank 

holding companies and nonbank financial companies designated by 

FSOC for supervision by the Federal Reserve must fund the Financial 

Research Fund, which funds the operating costs of FSOC and OFR, 

and certain expenses for the implementation of the orderly liquidation 

activities of FDIC, through a periodic assessment.117 The President’s 

 

114Dodd-Frank Act, § 165(d), 124 Stat. at 1426–1427, codified at 12 U.S.C. § 5365(d); 76 

Fed. Reg. 67,323 (Nov. 1, 2011).

115As discussed earlier, SIFIs must develop annual resolution plans that describe how 

their institution’s failure would proceed through bankruptcy. The rule allows less complex 

SIFIs to file a tailored resolution plan with reduced information requirements.

11677 Fed. Reg. 62,378 (Oct. 12, 2012); 77 Fed. Reg. 62,396 (Oct. 12, 2012); 77 Fed. 

Reg. 62,417 (Oct. 15, 2012); and 77 Fed. Reg. 61,238 (Oct. 9, 2012).

117Dodd-Frank Act, § 155(d), 124 Stat. at 1419, codified at 12 U.S.C. § 5345(d); 77 Fed. 

Reg. 29,884 (May 21, 2012).
 

Page 68 GAO-13-180 Financial Regulatory Reform

fiscal year 2013 budget included estimates of about $158 million for 

the Financial Research Fund for fiscal year 2013.118 Second, pursuant 

to the act, FDIC issued a final rule changing the assessment base for 

the deposit insurance fund and the method for calculating the deposit 

insurance assessment rate.119 According to FDIC, the change in the 

assessment base shifted some of the overall assessment burden from 

community banks to the largest institutions, which rely less on 

domestic deposits for their funding than smaller institutions, but 

without affecting the overall amount of assessment revenue collected. 

According to FDIC data, following implementation of the new 

assessment base, from the first to the second quarter of 2011, total 

assessments for banks with $10 billion or more in assets increased by 

$413 million.

120

In addition to increasing compliance costs for SIFIs and other large 

financial institutions, Title VII of the Dodd-Frank Act establishes a new 

regulatory framework for swaps, which is expected to impose substantial 

compliance and other costs on swap dealers, which generally include 

large banks, and other swap market participants.

• Business conduct standards: Swap dealers and major swap

participants will face increased costs to comply with new business 

conduct standards under the act. These requirements address, 

among other things, interaction with counterparties, disclosure, 

reporting, recordkeeping, documentation, conflicts of interest, and 

avoidance of fraud and other abusive practices. Under CFTC’s final 

rules, swap dealers and major swap participants will need to adopt or 

amend written policies and procedures, obtain needed 

representations from counterparties, and determine whether existing 

counterparty relationship documents need to be otherwise changed or 

supplemented.

 

118As noted earlier, the Federal Reserve funded the Financial Research Fund through 

July 20, 2012. 

119Dodd-Frank Act, §§ 332, 334, 124 Stat. at 1539, codified at 12 U.S.C. § 1817; 76 Fed. 

Reg. 10,672 (Feb. 25, 2011). The deposit insurance fund insures deposits at banks.

Deposit insurance fund assessments are insurance assessments collected from its 

member depository institutions. 

120 After the rule became effective on April 1, 2011, deposit insurance fund assessments 

for community banks (those with less than $10 billion in assets) decreased in aggregate 

by $342 million.
 

Page 69 GAO-13-180 Financial Regulatory Reform

• Clearing, exchange trading, and data reporting: Changes to the 

market infrastructure for swaps—such as clearing and exchangetrading requirements—and real-time reporting requirements for 

designated major swap dealers or major swap participants will require 

firms to purchase or upgrade information systems. Industry 

representatives and regulators said that while some compliance costs 

of the derivatives reforms could be recurring, a large part of these 

costs will come from one-time upfront investments to update 

processes and technology. For example, according to industry groups 

and agency officials, the real-time reporting and swap execution 

facility technology upgrades for reporting are among the largest 

technology investment compliance cost areas for derivatives reforms, 

and costs to develop new reporting technology for firms may vary 

depending on the compatibility of the new reporting system with the 

prior system used. In its final rule on real-time reporting of swap data, 

CFTC estimated that the annual information collection burden on 

swap dealers and major swap participants would be approximately 

260,000 hours.121

• Margin rules: Swap dealers and end users will incur costs to post the 

additional collateral required under the new margin rules, including 

costs to borrow assets to pledge as collateral.122 For newly raised 

funds, the net cost would be the difference between the interest rate 

paid on the borrowed funds and the interest rate earned on the 

securities purchased to use as collateral. Estimating the incremental 

costs is difficult, in part because the incremental cost must take into 

account the extent to which swap dealers in the past, even if they did 

not require margin explicitly, may have charged end users more to 

price in a buffer to absorb losses.

Although the Dodd-Frank Act reforms are directed primarily at large, 

complex U.S. financial institutions, many of the act’s provisions are 

 

12177 Fed. Reg. 1182 (Jan. 9, 2012).

122One study estimates that over half a trillion dollars of net new collateral could be 

required as a result of moving swaps to clearinghouses. See, for example, M. Singh, 

Collateral, Netting and Systemic Risk in the OTC Derivatives Market, IMF Working Paper, 

10/99 (Washington, D.C.: 2010). Swap market participants will face costs associated with 

funding this additional collateral. Among other options, swap dealers could sell longerterm securities to replace them with lower-yielding government securities that are eligible 

as collateral. For non-dealers, one option is to borrow funds in order to buy securities to 

use as collateral. 
 

Page 70 GAO-13-180 Financial Regulatory Reform

expected to impose costs on other financial institutions as well. For 

example, we recently reported that the act’s reforms covering residential 

mortgages, securitizations, executive compensation, and other areas may 

impose additional requirements and, thus, costs on a broad range of 

financial institutions, but the magnitude of these costs will depend on, 

among other things, how the provisions are implemented.

123

In addition to imposing compliance and other costs on financial 

institutions, the Dodd-Frank Act’s provisions may limit or restrict financial 

institutions’ business activities and reduce their revenue or revenue 

opportunities.124 Examples of such provisions include the following.

• Volcker rule: By generally prohibiting banks from engaging in 

proprietary trading and limiting their ability to sponsor or invest in 

hedge and private equity funds, the restrictions could eliminate past 

sources of trading and fee income for some banks.125 In addition, 

according to industry representatives, some banks currently holding 

private funds face the risk of incurring losses on the investments, if 

they are required to liquidate such investments at a substantial 

discount within an allotted period.

• Swaps reform: The provisions of the Dodd-Frank Act requiring 

central clearing and exchange trading of certain swaps could reduce 

the volume of dealers’ higher-profit margin swaps and thereby reduce 

their revenue. In addition, the margin requirements could reduce the 

ability of U.S. dealers to compete internationally, according to industry 

representatives.

• Single counterparty credit limit: Section 165(e) of the act directs 

the Federal Reserve to establish single-counterparty credit limits for 

SIFIs to limit the risks that the failure of any individual company could 

 

123See GAO-12-881. 

124Some reforms may reduce revenue or profits for certain financial institutions but benefit 

other market participants and, thus, may not necessarily result in a net cost to the broader 

economy. As discussed later in this report, reforms that effect transfers between groups 

can give rise to economic costs if there are efficiency losses associated with these 

transfers. 

125As we previously reported, while bank holding companies earned profits from their 

proprietary trading operations in most years, in some years they suffered significant 

losses. See GAO-11-529. 

Limitations or Restrictions on 

Business Activities 
 

Page 71 GAO-13-180 Financial Regulatory Reform

pose to a SIFI. According to industry representatives, the Federal 

Reserve’s proposed rule to implement credit limits would, among 

other things, require some SIFIs to reduce their derivatives and 

securities lending activities.

• Debit card interchange fees: Under section 1075 of the act (known 

as the Durbin amendment) the Federal Reserve issued a final rule 

that places a cap on debit card interchange fees charged by debit 

card issuers with at least $10 billion of assets.126 In their SEC filings, 

several large debit card issuers have estimated lost revenues from the 

Durbin amendment to be in the hundreds of millions of dollars 

annually. Similarly, we recently reported that large banks that issue 

debit cards initially have experienced a decline in their debit 

interchange fees as a result of the rule but that small banks generally 

have not.127 The reduction in debit interchange fees following the 

adoption of the rule likely has resulted or will result in savings for 

merchants. However, debit card issuers, payment card networks, and 

merchants are continuing to react to the rule; thus, the rule’s impact 

has not yet been fully realized.

Financial markets can channel funds from savers and investors looking 

for productive investment opportunities to borrowers who have productive 

investment opportunities but not the funds to pursue them. By serving this 

financial intermediation function, financial markets can contribute to 

higher production and efficiency in the economy. Banks and other 

financial institutions can facilitate transactions between savers and 

borrowers and reduce the associated costs, as well as provide other 

financial services and products that contribute to economic growth.128

 

126Dodd-Frank Act, § 1075, 124 Stat. at 2068, codified at 15 U.S.C. § 1693o-2; 77 Fed. 

Reg. 46,258 (Aug. 3, 2012). When a consumer uses a debit card to make an electronic 

purchase, the merchant does not receive the full purchase amount. Part of the amount 

(called the merchant discount fee) is deducted and distributed among the merchant’s 

bank, debit card issuer, and payment card network processing the transaction. 

Historically, the majority of the merchant discount fee was paid from the merchant’s bank 

to the debit card issuer in the form of an interchange fee.

127See GAO-13-101 and GAO-12-881. 

128Financial institutions can help contribute to economic growth by providing financial 

products and services to businesses and households. For example, they lend funds; 

transform credits with short term maturities into credits with long-term maturities; provide 

payment services, investment vehicles, and risk management; and support the functioning 

of financial markets. 

While the Dodd-Frank Act 

Could Impose Costs on the 

Economy, Quantifying 

Such Costs Is Difficult
 

Page 72 GAO-13-180 Financial Regulatory Reform

However, according to academics and industry representatives, by 

imposing higher costs on financial institutions, the Dodd-Frank Act may 

indirectly impose higher costs on businesses and households and reduce 

their investment and consumption with a consequent effect on economic 

output. 

Industry representatives, academics, and others generally expect the 

costs imposed by the act on the economy to be more significant than the 

act’s compliance costs for regulated institutions. At the same time, 

experts have noted that such costs can be viewed as part of the price to 

pay to realize the act’s potential financial stability and other benefits. For 

example, reforms that increase safety margins in the financial system—

such as by requiring increased capital and collateral to absorb potential 

losses—represent a tradeoff between lower economic growth in the short 

term and a lower probability of a financial crisis in the long term. 

Furthermore, reforms may cause financial market participants to 

internalize costs that their failure could impose on others through, for 

example, triggering declines in asset prices and strains in funding 

markets; thus, such reforms could improve overall economic outcomes. 

Nevertheless, experts continue to debate whether the economic costs of 

the act’s reforms, individually and cumulatively, could be excessive 

relative to their potential benefits.

One way through which the Dodd-Frank Act could impose costs on the 

broader economy is through its reforms that ultimately increase the cost 

or reduce the availability of credit for households and businesses. All else 

equal, when credit becomes more expensive or harder to obtain, 

households may reduce purchases and businesses may reduce 

investments that are funded by debt. These declines in consumption and 

investment can reduce GDP. According to academics, industry 

associations and firms, and others, reforms that could increase the cost 

or reduce the availability of credit include higher capital and liquidity 

requirements for financial institutions, the Volcker rule, counterparty credit 

limits, and mortgage-related provisions.129

 

129As discussed earlier in this report, some experts noted that mortgage and related credit 

instruments were not accurately priced before the crisis to reflect their risks. As a result, 

the economy experienced a credit bubble that facilitated a misallocation of resources to 

the housing sector. To the extent that the act’s reforms contribute to a more accurate 

pricing of credit, the economy could benefit from a more efficient allocation of resources. 
 

Page 73 GAO-13-180 Financial Regulatory Reform

• Capital and liquidity requirements: Higher capital and liquidity 

requirements for banks can increase their funding and other costs. 

While banks can respond to these additional costs in a variety of 

ways, they generally are expected to pass on some of these costs to 

borrowers by charging higher interest rates on their loans, which could 

lead to a reduction in output. Some studies have assessed the 

potential short-term and long-term cost impacts of higher capital and 

liquidity requirements. Differences in estimates produced by different 

studies follow from differences in key modeling assumptions.130 With 

respect to short-term impacts, studies generally suggest that 

increasing capital and liquidity requirements for banks will likely be 

associated with short-term increases in interest rates for borrowers 

and short-term decreases in lending volumes, output, and economic 

growth rates during the period over which banks transition to these 

new requirements, but the magnitudes vary considerably across 

studies. For example, a Macroeconomic Assessment Group study 

summarized research by its members on the impact of the transition 

to the Basel III capital and liquidity requirements and found that 

interest rates for borrowers are likely to increase and lending volumes 

are likely to fall during the transition period, but that the ultimate 

 

130One key assumption is the choice of baseline levels of capital and liquidity against 

which changes attributed to financial regulatory reforms are measured. Selecting precrisis 

levels of capital and liquidity as a baseline could lead to overestimated costs due to 

financial reforms if financial institutions would have increased capital and liquidity in the 

absence of such reforms based on lessons learned from the crisis. Other key assumptions 

relate to the length of the transition period, the responsiveness of bank equity and debt 

prices to changes in banks’ capital and liquidity levels, the responsiveness of lending rates 

to changes in banks’ funding costs, and the extent to which monetary policy can be used 

to offset any upward pressure on lending rates. For additional discussion of key 

assumptions that impact estimates of the costs of the act’s reforms, see Santos and 

Elliott, Estimating the Costs of Financial Regulation, IMF Staff Discussion Note, 

September 11, 2012.
 

Page 74 GAO-13-180 Financial Regulatory Reform

reductions in output and growth are likely to be modest.131 Studies 

from the IMF and the Organization for Economic Cooperation and 

Development found broadly similar results.132 In contrast, a study by 

the Institute of International Finance estimated the impact of banks’ 

making the transition to meeting Basel III and additional countryspecific requirements and found much larger short-term impacts on 

lending rates, lending volumes, output, and growth rates during the 

transition period.133 Studies also suggest that increasing capital and 

liquidity requirements for banks will likely be associated with long-term 

or permanent changes in lending rates and output. For example, a 

Basel Committee working group assessed the long-term impact of 

higher capital and liquidity requirements and found that they are likely 

to be associated with modest long-term increases in lending spreads 

and modest long-term reductions in output.134 An IMF study found 

similar results.135

• Volcker rule: Some experts and industry representatives have 

expressed concern that the Volcker rule’s restriction on proprietary 

 

131This study estimated that a 1 percentage point increase in the target ratio of tangible 

common equity to risk-weighted assets would lead to a maximum decline in the level of 

GDP of about 0.19 percent from the baseline path, which would occur 4 1⁄2 years after the 

start of implementation (equivalent to a reduction in the annual growth rate of 0.04 

percentage points over this period), followed by a gradual recovery of growth towards the 

baseline. See Macroeconomic Assessment Group, Interim Report: Assessing the 

Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements, 

Bank for International Settlements, (Basel, Switzerland: August 2010), and 

Macroeconomic Assessment Group, Final Report: Assessing the Macroeconomic Impact 

of the Transition to Stronger Capital and Liquidity Requirements, Bank for International 

Settlements, (Basel, Switzerland: December 2010). The Macroeconomic Assessment 

Group was established by the Financial Stability Board and the Basel Committee on 

Banking Supervision and includes central banks and banking regulators from 15 countries, 

as well as several multilateral organizations.

132See Scott Roger and Francis Vitek, The Global Macroeconomic Costs of Raising Bank 

Capital Adequacy Requirements, IMF Working Paper WP/12/44, February 2012, and 

Patrick Slovik and Boris Cournède, Macroeconomic Impact of Basel III, OECD Economics 

Department Working Paper No. 844, OECD Publishing, 2011. 

133See Institute of International Finance, The Cumulative Impact on the Global Economy 

of Changes in the Financial Regulatory Framework, September 2011.

134Basel Committee on Banking Supervision, An Assessment of the Long-term Economic 

Impact of Stronger Capital and Liquidity Requirements, Bank for International Settlements 

(Basel Switzerland: August 2010).

135Santos and Elliott, Estimating the Costs of Financial Regulation. 
 

Page 75 GAO-13-180 Financial Regulatory Reform

trading by banks could reduce market liquidity and increase the cost 

of raising funds in the securities markets and thus reduce output. As 

we previously reported, some market observers maintain that 

restrictions on proprietary trading by banks under the Volcker rule 

may reduce the amount of liquidity in the securities markets, 

depending on how the restrictions are implemented.136 For example, 

the rule could reduce the amount of market-making provided by banks 

for certain debt securities and ultimately result in higher borrowing 

rates for corporations, state and local governments, or others that use 

debt securities to help finance their activities.137 A study sponsored by 

an industry association estimated that the Volcker rule could increase 

annual borrowing costs for debt securities issuers by billions of 

dollars, and reduce liquidity in a wide range of markets, and 

consequently, to some extent, impede the ability of businesses to 

access capital through increases in cost of funds to borrowers.138

However, other experts have asserted that the study’s estimate is too 

high, in part because they believe it understates the potential for other 

firms to fill the gap left by banks and provide liquidity to the market.

• Single counterparty credit limit: According to industry 

representatives, the Federal Reserve’s proposed single counterparty 

credit limit rule could restrict the ability of SIFIs to engage in 

derivatives transactions with each other to hedge risk. In turn, such 

interference could reduce market liquidity and result in higher funding, 

hedging, and transaction costs for businesses.

• Mortgage-related reforms: The act’s provisions regulating the 

underwriting of mortgages also could restrict the availability of 

mortgage loans and raise mortgage costs for some homebuyers.139

 

136GAO-11-529. 

137For example, industry groups have expressed concern that strict enforcement of the 

Volcker rule could cause banks to reduce or withdraw from client-driven trading activities, 

such as making markets in certain securities (which entails standing ready to buy and sell 

a security from a client even when there is no other client to take the opposite side of the 

trade) and providing hedging services to clients. While some have attempted to estimate 

the impacts of the Volcker rule, these estimates are based on assumptions about how it 

will be implemented, which may differ significantly from how it is actually implemented. 

138Oliver Wyman, “The Volcker Rule Restrictions on Proprietary Trading: Implications for 

Market Liquidity” (Feb. 2012).

139GAO, Mortgage Reform: Potential Impacts of Provisions in the Dodd-Frank Act on 

Homebuyers and the Mortgage Market, GAO-11-656 (Washington, D.C.: July 19, 2011). 
 

Page 76 GAO-13-180 Financial Regulatory Reform

For example, the act amends the Truth in Lending Act to prohibit 

lenders from making mortgage loans without regard to borrowers’ 

ability to repay them. As described earlier in this report, lenders may 

comply with the ability-to-repay standard by originating qualified 

mortgages that meet criteria that will be finalized by CFPB in 

rulemaking. In addition, securitized mortgages that meet certain 

criteria and which are referred to as “qualified residential mortgages” 

(QRM), are exempt from the act’s risk retention requirements. While 

there is general agreement that new Dodd-Frank rules should restrict 

certain types of risky loans and loan products that proliferated in the 

lead-up to the crisis, many market observers have expressed concern 

that these restrictions could go too far. For example, some mortgage 

industry representatives have raised concerns that including overly 

restrictive requirements for loan-to-value and debt service-to-income 

ratios in the qualified residential mortgage criteria could restrict the 

availability of mortgages to lower-income borrowers.140

Measuring the costs of financial regulation to the broader economy is 

challenging because of the multitude of intervening variables, the 

complexity of the global financial system, and data limitations. Many of 

the rules implementing the act’s reforms have not been finalized, and it is 

difficult to predict how regulated institutions will respond to the act’s 

reforms. For example, the extent to which regulated institutions pass on a 

portion of their increased costs to their customers may be impacted by 

competitive forces or other factors. Furthermore, even when the reforms 

have been fully implemented, it may not be possible to determine 

precisely the extent to which observed costs can be attributed to the act 

versus other factors, such as changes in the economy. Differences in 

assumptions about the appropriate baseline for comparison can lead to 

significant variation in estimates of the act’s impacts. As discussed below, 

other sources of uncertainty, such as the potential for regulatory 

arbitrage, add to the challenges of estimating the act’s potential costs.

Some of the act’s reforms have the effect of transferring wealth across 

groups and may create economic costs if they result in resources being 

deployed less efficiently. For example, new assessments to fund the 

 

140The loan-to-value ratio is the loan amount divided by the value of the home at 

mortgage origination. As the required loan-to-value ratio falls, the required borrower down 

payment increases. The debt-service-to-income ratio represents the percentage of a 

borrower’s income that goes toward all recurring debt payments, including mortgage 

payments.
 

Page 77 GAO-13-180 Financial Regulatory Reform

Financial Research Fund, which funds the operating costs of FSOC, 

OFR, and certain expenses for the implementation of the orderly 

liquidation activities of FDIC, represent an economic transfer from bank 

holding companies to the Financial Research Fund. In addition, as noted 

previously, changes in the deposit insurance fund assessment base shift 

some of the overall assessment burden from smaller banks to the largest 

institutions without affecting the overall amount of assessment revenue 

collected. Similarly, while the Durbin amendment has reduced revenues 

from interchange fees for large debit card issuers, these lost revenues will 

be offset to some extent by financial benefits to merchants who will pay 

lower interchange fees. Predicting the extent to which such transfers 

across groups could reduce economic growth is difficult, in part because 

how financial institutions will respond to these changes is unclear. For 

example, financial institutions could respond to increased assessment 

burdens or reduced revenue streams by cutting other expenses or 

increasing fees and other costs for their customers. Some market 

observers have noted that some financial institutions have increased fees 

on certain services, such as bank checking accounts, to compensate for 

lost revenues and increased fee assessments from the act. However, 

financial institutions’ business strategies are impacted by a wide range of 

factors, and determining the extent to which such increased fees can be 

attributed to the Dodd-Frank Act is difficult.

Academics, industry representatives, and others we spoke with also have 

expressed concern about the potential for the Dodd-Frank Act’s reforms 

to have unintended consequences that could harm U.S. economic growth 

or the global competitiveness of U.S. financial markets.141 Experts have a 

wide range of views on the act’s potential to enhance financial stability, 

with some maintaining that certain reforms could make the financial 

system more vulnerable to a crisis. For example, some experts suggest 

that higher capital, liquidity, and collateral requirements will cause 

regulated institutions to increase significantly their holdings of relatively 

safe and liquid securities, such as U.S. Treasuries. Such an outcome 

could inflate the value of such securities and result in large losses if there 

were a sharp correction in the securities’ valuation.

 

141 See, for example, Federal Financial Analytics, Inc., “Strategic Regulatory Landscape:

Regulatory Intent versus Policy and Market Risk in Financial-Services Industry – Capital, 

Liquidity, Risk Management and Related Prudential Requirements” (October 2012).

The Potential for 

Unintended Consequences 

Adds to Challenges of 

Assessing Benefits and 

Costs 
 

Page 78 GAO-13-180 Financial Regulatory Reform

In addition, experts raised concerns about the potential for certain reforms 

to cause financial activities to shift to less regulated or unregulated 

markets and pose risks to U.S. financial stability. Of particular concern is 

the potential for increased regulation of U.S. financial markets to cause 

financial activities in the United States to move to foreign jurisdictions with 

less stringent regulations. For example, some academics and industry 

groups contend that if the United States imposes new margin 

requirements on swaps before other countries, the swap business could 

migrate to countries with lower margin requirements. Similarly, industry 

representatives have raised concerns about the potential for the Volcker 

rule and single counterparty credit limit to disadvantage U.S. financial 

institutions relative to foreign competitors that will be permitted to engage 

in proprietary trading activities outside the United States. While 

acknowledging these concerns and the need for harmonizing international 

regulatory standards, regulators noted that it can be advantageous for the 

United States to be the leader in implementing new regulatory 

safeguards. For example, when financial institutions are more resilient to 

unexpected shocks, they can continue to provide loans and other 

financial services that are important to economic growth, even during 

periods of market turmoil.

These potential unintended consequences add to the challenge of 

assessing the costs and full impacts of the Dodd-Frank Act. Currently, the 

act is imposing costs on the financial services industry that could 

contribute to slower economic growth. At the same time, the act may help 

reduce the probability or severity of a future financial crisis, which would 

benefit the economy by preventing or mitigating crisis-related costs. 

However, the Dodd-Frank Act remains untested in a number of areas, 

has yet to be fully implemented, and leaves unresolved certain potential 

sources of system risk, such as money market funds and the tri-party 

repo market. As noted earlier, because the costs associated with a 

financial crisis can total trillions of dollars, the Dodd-Frank Act might need 

to reduce the probability of a crisis by only a small fraction for its benefits 

to equal its costs. Whether the act can achieve that outcome is unknown. 

As the impact of the act’s multitude of provisions, individually or 

cumulatively, materializes, their benefits and costs will become more fully 

known and understood—enabling policy makers and regulators to revise 

the requirements, as needed, to achieve the appropriate balance between 

the act’s benefits and costs to the U.S. economy.
 

Page 79 GAO-13-180 Financial Regulatory Reform

We provided a draft of this report to CFPB, CFTC, FDIC, the Federal 

Reserve, FSOC, OCC, OFR, Treasury, and SEC for their review and 

comment. We also provided excerpts of the draft report for technical 

comment to FHFA. All of the agencies provided technical comments, 

which we have incorporated, as appropriate.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to CFPB, CFTC, FDIC, 

FHFA, the Federal Reserve, FSOC, OCC, OFR, Treasury, and SEC, 

interested congressional committees, members, and others. In addition, 

this report will be available at no charge on our web site at 

http://www.gao.gov.

Should you or your staff have questions concerning this report, please 

contact me at (202) 512-8678 or clowersa@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 to this report are listed in 

appendix IV.

A. Nicole Clowers

Director

Financial Markets and

 Community Investment

Agency Comments
Appendix I: Objectives, Scope, and 

Methodology

Page 80 GAO-13-180 Financial Regulatory Reform

The objectives of our report were to examine what is known about (1) the 

losses and related economic impacts associated with the 2007-2009 

financial crisis; (2) the benefits of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the Dodd-Frank Act), particularly its key 

financial stability provisions, for the U.S. financial system and broader 

economy; and (3) the costs associated with the act, particularly its key 

financial stability provisions.

To address our first objective, we reviewed and analyzed studies by 

regulators and academics. We conducted searches of social science, 

economic, and federal research databases, including EconLit, Google 

Scholar, and JSTOR, to identify relevant studies that examine the losses 

associated with the 2007-2009 financial crisis. To help us identify relevant 

studies, we also relied on federal agencies and academic and other 

experts. Although we found these studies to be sufficiently reliable for the 

purposes of our report, the results should not necessarily be considered 

as definitive, given the potential methodological or data limitations 

contained in the studies individually or collectively. In addition, we 

reviewed our prior work that addresses economic impacts associated with 

the crisis, including the impacts on the fiscal challenges faced by federal, 

state, and local governments. We interviewed federal financial regulators, 

academics, industry associations, market participants and others to 

obtain their perspectives on how the recent financial crisis impacted the 

economy and what methods have been used to quantify the economic 

impacts associated with the crisis. Based on our literature review and 

interviews with experts, we identified approaches commonly used by 

experts to quantify or describe the economic losses associated with the 

crisis, and the limitations of these approaches. For example, we 

summarized approaches used by some researchers to quantify losses 

associated with the financial crisis in terms of lost gross domestic product, 

which measures the total goods and services produced in the economy.

To describe trends in economic measures associated with the financial 

crisis, we collected and analyzed data from the Bureau of Economic 

Analysis, the Bureau of Labor Statistics, CoreLogic, the Federal Reserve 

Flow of Funds database, and the National Bureau of Economic Research.

Lastly, we obtained and analyzed perspectives on the role of the federal 

government’s policy interventions in mitigating the costs of the financial 

crisis. We obtained and analyzed data from government financial 

statements and other reports on the income and losses for the most 

significant government programs to assist the financial sector, including 

the Troubled Asset Relief Program, the Board of Governors of the 

Federal Reserve System’s (Federal Reserve) emergency liquidity 

programs, the Temporary Liquidity Guarantee Program, and assistance 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 81 GAO-13-180 Financial Regulatory Reform

provided to rescue individual institutions, such as American International 

Group, Inc. and the government-sponsored enterprises. Our review did 

not consider the potential short-term and long-term impacts of other 

federal policy responses to the recession that coincided with the financial 

crisis, including the American Recovery and Reinvestment Act of 2009. 

To address our second objective, we obtained and analyzed a broad 

range of perspectives on the potential economic benefits of the DoddFrank Act and factors that could impact the realization of these benefits.

Using a literature search strategy similar to the one described under our 

first objective, we identified and analyzed academic and other studies that 

evaluate the potential benefits of one or more of the act’s reforms. In 

addition, we reviewed relevant reports and public statements by federal 

financial regulators, industry associations, and others. We obtained 

additional perspectives from regulators, academics, and representatives 

of industry and public interest groups through interviews and an expert 

roundtable we held with the assistance of the National Academy of 

Sciences (NAS). Based on our literature review, interviews, and expert 

roundtable, we identified provisions of the act that could have the most 

significant impacts on financial stability, and factors that could impact the 

effectiveness of these provisions. In addition, we obtained and 

summarized expert perspectives on potential benefits of the act beyond 

enhanced financial stability, such as increased consumer and investor 

protections. Finally, we reviewed and summarized approaches used by 

researchers to quantify potential benefits of the act’s reforms. Although 

we found these studies to be sufficiently reliable for the purposes of our 

report, the results should not necessarily be considered as definitive, 

given the potential methodological or data limitations contained in the 

studies individually or collectively.

To address our third objective, we obtained and analyzed information on 

the costs of implementing the Dodd-Frank Act, including for the federal 

government, the financial sector, and the broader economy. We obtained 

and summarized data on the incremental budgetary costs associated with 

the act’s implementation for 10 federal entities (Board of Governors of the 

Federal Reserve System, Commodity Futures Trading Commission, 

Federal Deposit Insurance Corporation, Federal Housing Finance 

Agency, Office of the Comptroller of the Currency, Securities and 

Exchange Commission, Department of the Treasury, Consumer Financial 

Protection Bureau, Financial Stability Oversight Council, and the Office of 

Financial Research). We requested data on the entities’ estimates of their 

funding and full-time equivalents agency-wide and for activities related to 

the Dodd-Frank Act in 2010, 2011, 2012, and 2013. We also requested 
Appendix I: Objectives, Scope, and 

Methodology

Page 82 GAO-13-180 Financial Regulatory Reform

that the entities identify their sources of funding (appropriations, 

assessments of supervised institutions, revenue from investments or 

providing services, and transfers of funds from other agencies), and 

describe the extent to which new resources related to the Dodd-Frank Act 

would be funded on a one-time or recurring basis. We corroborated the 

information with other data, where available. In addition, we reviewed the 

Congressional Budget Office’s estimate of the act’s effect on the federal 

government’s direct spending and revenue and, in turn, deficit. To 

describe the potential costs for the financial sector and the broader 

economy, we reviewed published works, public statements, and other 

available analyses by financial regulators, industry representatives, 

academics, and other experts. We also obtained perspectives from 

representatives of these groups through interviews and the expert 

roundtable we held in coordination with NAS. We also had two financial 

markets experts review a draft of our report and incorporated their 

comments, as appropriate.

To help inform our work on the second and third objectives, we 

contracted with NAS to convene a 1-day roundtable of 14 experts to 

discuss the potential benefits and potential costs of the Dodd-Frank Act. 

The group of experts was selected with the goal of obtaining a balance of 

perspectives and included former financial regulatory officials, 

representatives of financial institutions impacted by the act’s reforms, 

academic experts on financial regulation, a representative of a public 

interest group, and an industry analyst. The discussion was divided into 

three moderated sub-sessions. The sub-sessions addressed (1) the 

potential benefits of the act’s key financial stability reforms; (2) the 

potential costs of these key financial stability reforms; and (3) 

methodological approaches and challenges in measuring the impacts of 

the act’s reforms. For a list of the 14 experts, see appendix III.

For parts of our methodology that involved the analysis of computerprocessed data, we assessed the reliability of these data and determined 

that they were sufficiently reliable for our purposes. Data sets for which 

we conducted data reliability assessments include gross domestic 

product data from the Bureau of Economic Analysis; employment data 

from the Bureau of Labor Statistics; home price data from CoreLogic; 

Federal Reserve Flow of Funds data on retirement fund assets; loan 

default and foreclosure data from the Mortgage Bankers Association; and 

recession data from the National Bureau of Economic Research. We 

reviewed information on the statistical collection procedures and methods 

for these data sets to assess their reliability. In addition, we assessed the 

reliability of estimates federal entities provided for the funding resources 
Appendix I: Objectives, Scope, and 

Methodology

Page 83 GAO-13-180 Financial Regulatory Reform

and full-time equivalents associated with Dodd-Frank implementation by 

comparing these estimates to agency budget documents and interviewing 

agency staff about how the data were collected. Finally, for studies that 

present quantitative estimates of the economic impacts associated with 

financial crises or financial regulatory reforms, we assessed the 

reasonableness of the methodological approaches used to generate 

these estimates. Although we found certain studies to be sufficiently 

reliable for the purposes of our report, the results should not necessarily 

be considered definitive, given the potential methodological or data 

limitations contained in the studies, individually or collectively.

We conducted this performance audit from November 2011 to January 

2013 in accordance with generally accepted government auditing 

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

obtain sufficient, appropriate evidence to provide a reasonable basis for 

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

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: International Financial Reform 

Efforts

Page 84 GAO-13-180 Financial Regulatory Reform

Many U.S. financial firms conduct business around the world and thus 

generally are subject to rules on banking, securities, and other financial 

market activities in multiple jurisdictions. In response to the financial crisis 

that began in 2007, the United States and other countries have taken 

steps to introduce financial reforms into their domestic legal and 

regulatory systems. In parallel with these domestic reform efforts, 

international organizations have issued new standards and principles to 

guide their members’ efforts. The goal of these international efforts is to 

harmonize and coordinate views and policies across different jurisdictions 

to minimize opportunities for regulatory arbitrage—the ability of market 

participants to profit from differences in regulatory regimes between one

jurisdiction and another.

Examples of some of these efforts include the following: 

• The G20, a group that represents 20 of the largest global economies, 

created the Financial Stability Board (FSB) to coordinate and monitor 

international financial regulatory reform efforts, among other activities.

• The Basel Committee on Banking Supervision (BCBS)—hosted at the 

Bank for International Settlements (BIS)—has developed a new set of 

capital and, for the first time, liquidity requirements for banks. 

• The Committee on Payment and Settlement Systems (CPSS), which 

is comprised of central banks, focuses on the efficiency and stability 

of payment, clearing, and settlement arrangements, including financial 

market infrastructures. Recently, CPSS has worked jointly with the 

International Organization of Securities Commissions (IOSCO) to 

produce a new set of prudential standards for financial market 

infrastructures. 

• IOSCO, a multilateral organization of securities market regulators, has 

issued policy documents to guide national securities commissions’ 

regulatory reform efforts.

• Various other forums and groups, including the International 

Association of Insurance Supervisors (IAIS), are housed at BIS and 

cooperate on financial regulatory reform initiatives. For example, the 

Joint Forum—which includes representatives of IAIS, BCBS, and 

IOSCO—works to coordinate financial services reforms.

• Separately, multilateral organizations, such as the International 

Monetary Fund and Organization for Economic Cooperation and 

Appendix II: International Financial Reform 

Efforts 
Appendix II: International Financial Reform 

Efforts

Page 85 GAO-13-180 Financial Regulatory Reform

Development, have published research and analysis of international 

financial reforms.

Table 5 summarizes selected international financial regulatory reform 

efforts.

Table 5: Selected Organizations Engaged in Coordination of International Financial Regulatory Reform Efforts

Organization Sector Membership Purpose Activities

FSBa Multiple Finance and central bank 

officials from members of the 

G20 as well as representatives 

of other international economic 

and financial standard-setting 

organizationsb

 

International coordination of 

national financial authorities 

and international standardsetting bodies

Development and promotion 

of effective regulatory, 

supervisory, and other 

financial sector policies

Establish principles for 

financial regulatory reform

Monitor implementation of 

financial regulatory reforms, 

issue progress reports

BIS Banking Central banks or monetary 

authorities of 59 economies plus 

the European Central Bankc

Forum for international

cooperation among central 

banks and within financial and 

supervisory communities

Acts as a bank for central 

banks

Publishes economic and 

monetary research

Counterparty for central 

banks in their financial 

transactions

Agent or trustee in connection 

with international financial 

operations

Hosts other international 

financial organizations and 

groups

BCBSa Banking Central bank or bank 

supervisory officials 

representing 27 economiesd

Forum for cooperation on 

issues related to banking 

supervision

Establishes capital and 

liquidity standards for 

member banking systems

CPSSa Banking Central banks’ payment and 

settlement officials

Monitor and analyze 

developments in domestic, 

cross-border, and 

multicurrency payment, 

settlement, and clearing 

systems

Sets standards for payment, 

clearing, and settlement 

systems

IOSCO Securities Securities regulatory officials 

from more than 100 jurisdictions

Forum for international 

cooperation among securities 

regulators 

Facilitates standard setting

Offers technical assistance

IAISa Insurance Insurance regulators and 

supervisors from more than 190 

jurisdictionse

Forum for global insurance 

supervision 

Establishes principles, 

standards, and guidance; 

works with other counterparts 

to promote financial stability

Source: GAO summary information collected from each organization’s web site.

a

Hosted at the Bank for International Settlements.

b

FSB member economies: Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong 

SAR, India, Indonesia, Italy, Japan, Mexico, the Netherlands, Republic of Korea, Russia, Arabia, 

Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United 
Appendix II: International Financial Reform 

Efforts

Page 86 GAO-13-180 Financial Regulatory Reform

States. FSB Member organizations: Bank for International Settlements, European Central Bank, 

European Commission, International Monetary Fund, Organization for Economic Cooperation and 

Development, and The World Bank. Other FSB member groupings: Basel Committee on Banking 

Supervision, Committee on the Global Financial System, Committee on Payment and Settlement 

Systems, International Association of Insurance Supervisors, International Accounting Standards 

Board, and the International Organization of Securities Commissions.

c

BIS member central banks: Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, 

Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, the Czech Republic, Denmark, Estonia, 

Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Ireland, 

Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Macedonia (FYR), Malaysia, Mexico, the 

Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Portugal, Romania, Russia, Saudi 

Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, 

Turkey, the United Arab Emirates, the United Kingdom and the United States, plus the European 

Central Bank.

d

BCBS member economies: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, 

Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, 

Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United 

Kingdom, and the United States.

e

Insurance professionals participate as observers in some activities.
Appendix III: Experts Participating in the GAO 

Roundtable on the Benefits and Costs of the 

Dodd-Frank Act

Page 87 GAO-13-180 Financial Regulatory Reform

Eric Baggesen, California Public Employees’ Retirement System

Sheila Bair, The Pew Charitable Trusts

Robert Bliss, Wake Forest University

Charles Calomiris, Columbia University

Athanassios Diplas, Deutsche Bank

Douglas Elliott, The Brookings Institution

Peter Fisher, BlackRock

Sandra Lawson, Goldman Sachs

Annette Nazareth, Davis, Polk, and Wardwell, LLP

Karen Shaw Petrou, Federal Financial Analytics

Matthew Richardson, New York University

Marcus Stanley, Americans for Financial Reform

Steve Strongin, Goldman Sachs

Paul Volcker, Former Chairman of the Board of Governors of the Federal 

Reserve System

Appendix III: Experts Participating in the GAO 

Roundtable on the Benefits and Costs of the 

Dodd-Frank Act 
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 88 GAO-13-180 Financial Regulatory Reform

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the contact named above, Richard Tsuhara (Assistant 

Director), William R. Chatlos, John Fisher, Catherine Gelb, G. Michael 

Mikota, Marc Molino, Courtney LaFountain, Robert Pollard, Jennifer 

Schwartz, Andrew J. Stephens, and Walter Vance made significant 

contributions to this report.

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments
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Page 89 GAO-13-180 Financial Regulatory Reform

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Related GAO Products

Page 92 GAO-13-180 Financial Regulatory Reform

Community Banks and Credit Unions: Impact of the Dodd-Frank Act 

Depends Largely on Future Rule Makings. GAO-12-881. Washington, 

D.C.: September 13, 2012.

Financial Stability: New Council and Research Office Should Strengthen 

the Accountability and Transparency of Their Decisions. GAO-12-886. 

Washington, D.C.: September 11, 2012.

Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific 

Provisions of Orderly Liquidation Authority. GAO-12-735. Washington, 

D.C.: July 12, 2012.

Unemployed Older Workers: Many Experience Challenges Regaining 

Employment and Face Reduced Retirement Security. GAO-12-445. 

Washington, D.C.: April 25, 2012.

State and Local Government Pension Plans: Economic Downturn Spurs 

Efforts to Address Costs and Sustainability. GAO-12-322. Washington, 

D.C.: March 2, 2012.

Dodd-Frank Act Regulations: Implementation Could Benefit from 

Additional Analyses and Coordination. GAO-12-151. Washington, D.C.: 

November 10, 2011.

Bankruptcy: Complex Financial Institutions and International Coordination 

Pose Challenges. GAO-11-707. Washington, D.C.: July 19, 2011.

Mortgage Reform: Potential Impacts in the Dodd-Frank Act on

Homebuyers and the Mortgage Market. GAO-11-656. Washington, D.C.: 

July 19, 2011.

Dodd-Frank Act: Eleven Agencies’ Estimates of Resources for 

Implementing Regulatory Reform. GAO-11-808T. Washington, D.C.: 

July 14, 2011.

Proprietary Trading: Regulators Will Need More Comprehensive 

Information to Fully Monitor Compliance with New Restrictions When 

Implemented. GAO-11-529. Washington, D.C.: July 13, 2011.

State and Local Governments: Knowledge of Past Recessions Can 

Inform Future Federal Fiscal Assistance. GAO-11-401. Washington, D.C.: 

March 31, 2011.

Related GAO Products
Related GAO Products

Page 93 GAO-13-180 Financial Regulatory Reform

The Federal Government’s Long-Term Fiscal Outlook: January 2011 

Update. GAO-11-451SP. Washington, D.C.: March 18, 2011.

Financial Assistance: Ongoing Challenges and Guiding Principles 

Related to Government Assistance for Private Sector Companies. 

GAO-10-719. Washington, D.C.: August 3, 2010.

Credit Cards: Rising Interchange Fees Have Increased Costs for 

Merchants, but Options for Reducing Fees Pose Challenges, GAO-10-45

Washington, D.C.: November 19, 2009. 

Financial Markets Regulation: Financial Crisis Highlights Need to Improve 

Oversight of Leverage at Financial Institutions and across System. 

GAO-09-739. Washington, D.C.: July 22, 2009.

Systemic Risk: Regulatory Oversight and Recent Initiatives to Address 

Risk Posed by Credit Default Swaps. GAO-09-397T. Washington, D.C.: 

March 5, 2009.

Financial Regulation: A Framework for Crafting and Assessing Proposals 

to Modernize the Outdated U.S. Financial Regulatory System. 

GAO-09-216. Washington, D.C.: January 8, 2009.

(250638)
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