FINANCIAL STABILITY

Continued Actions Needed 

to Strengthen New Council 

and Research Office

Statement of A. Nicole Clowers, Director 

Financial Markets and Community Investment

Testimony 

Before the Subcommittee on Oversight 

and Investigations, Committee on 

Financial Services, House of 

Representatives 

For Release on Delivery 

Expected at 10:00 a.m. EDT

March 14, 2013

GAO-13-467T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-467T, a testimony 

before the Subcommittee on Oversight and 

Investigations, Committee on Financial 

Services, House of Representatives

March 14, 2013

FINANCIAL STABILITY

Continued Actions Needed to Strengthen New 

Council and Research Office 

Why GAO Did This Study

For this testimony, GAO updated some 

information on the entities’ response to 

the recommendations in its September 

2012 report. 

What GAO Recommends

In its September 2012 report, GAO 

made 10 recommendations to FSOC 

and OFR, which among other things, 

recommends ways to improve the 

transparency and accountability of their 

decisions. In response to GAO’s 

report, Treasury said, as Chairperson, 

that the council and OFR had 

considered the recommendations. In 

March 2013 Treasury and OFR 

officials described steps that each 

entity was considering or taking to 

address some of them. 

What GAO Found

The Financial Stability Oversight Council (FSOC) and Office of Financial 

Research (OFR) face challenges in achieving their missions. For example, 

collaboration among FSOC members can be challenging, as almost all members

represent independent agencies that retain existing authorities. Additionally, OFR 

faces the challenge of building a world-class research organization while meeting 

shorter-term responsibilities. 

FSOC and OFR have developed some management structures to carry out their 

missions and taken steps to promote collaboration among their members and 

stakeholders. For example, FSOC established several standing committees 

composed of members’ and member agencies’ staffs to support the council in 

carrying out its business. FSOC also issued rules on the process for designating

nonbank financial firms for additional oversight. However, GAO reported in 

September 2012 that these efforts could be strengthened to conform to key

standards and practices and made 10 recommendations. 

• FSOC should develop a systematic approach to help identify potential threats 

to financial stability that includes collecting and sharing key financial risk 

indicators. FSOC’s Systemic Risk Committee, which is responsible for 

identifying risks to financial stability, has procedures to facilitate risk analysis

but does not have a systematic approach or comprehensive information. 

FSOC member agencies on their own may not be well positioned to judge 

which potential threats will benefit from interagency discussions.

• FSOC should develop more systematic approaches that are forward looking 

and help prioritize threats to the financial system in its annual reports. To date, 

FSOC’s annual reports have not reflected a forward-looking process for 

identifying emerging threats. 

• To improve transparency, (1) FSOC should keep detailed records of closeddoor sessions and (2) both FSOC and OFR should develop a communication 

strategy to improve communications with the public. Currently, public 

information on FSOC’s and OFR’s decision making and activities is limited. 

• OFR needs to further develop its strategic planning and performance 

management system to include some leading practices. OFR issued a 

strategic framework in March 2012 that did not, among other things, link 

activities to strategic goals and performance measurement systems. 

• FSOC should identify an agency or agencies to monitor or implement each 

recommendation from its annual reports within specified time frames. FSOC’s 

annual reports have not consistently identified which entities should monitor or 

implement the identified recommendations.

• FSOC should (1) develop policies to clarify when formal collaboration or 

coordination should occur, (2) more fully incorporate key practices for 

successful collaboration, and (3) clarify with OFR responsibility for 

implementing requirements to monitor risks to the financial system. 

• FSOC should develop a comprehensive framework for assessing the impact 

of its designation decisions. For example, FSOC has issued rules on 

processes for designating nonbank financial entities for additional oversight, 

but it has not developed plans to comprehensively evaluate whether the 

designations are having their intended impact.

View GAO-13-467T. For more information, 

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

or clowersa@gao.gov

In 2010, the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

created FSOC to identify and address 

threats to financial stability and OFR to 

support FSOC and Congress by 

providing financial research and data. 

This testimony primarily discusses 

findings from a September 2012 GAO 

report and addresses four topics (1) 

challenges FSOC and OFR face in 

carrying out their missions, (2) FSOC’s

and OFR’s efforts to establish 

management mechanisms, (3) FSOC’s

and OFR’s activities for supporting 

collaboration among their members 

and external stakeholders, and (4) 

FSOC’s rules for designating nonbank 

financial firms that pose threats to 

financial stability. 
Page 1 GAO-13-467T Financial Stability Entities

United States Government Accountability Office

Washington, DC 20548

Chairman McHenry, Ranking Member Green, and Members of the 

Subcommittee:

Thank you for the opportunity to be here today to discuss the Financial 

Stability Oversight Council (FSOC) and the Office of Financial Research 

(OFR). As you know, the 2007-2009 financial crisis focused attention on 

weaknesses in the U.S. regulatory structure, including the lack of an 

agency or mechanism responsible for monitoring and addressing risks 

across the financial system and a shortage of timely information to 

facilitate that oversight. In response to the crisis, Congress passed the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) in July 2010, which provided for a broad range of regulatory 

reforms.1 Among other things, the act established FSOC to monitor the 

stability of the U.S. financial system and take actions to mitigate risks that 

might destabilize the system.2 The Dodd-Frank Act also created OFR to 

support FSOC and Congress by providing financial research and data.3

My testimony today will address four topics: (1) the challenges FSOC and 

OFR face in fulfilling their missions; (2) FSOC’s and OFR’s efforts to 

establish management structures and mechanisms to carry out their 

missions and attain their goals; (3) FSOC’s and OFR’s activities 

supporting collaboration among members and external stakeholders, 

including international bodies and regulators; and (4) FSOC’s rules for 

Congress gave FSOC a number of significant authorities to help it 

execute its broad mission, including to designate nonbank financial 

companies for heightened supervision by the Board of Governors of the 

Federal Reserve System (Federal Reserve) and to require financial 

companies to provide data to OFR. Although Congress set up some 

specific accountability mechanisms for FSOC and OFR, some members 

of Congress have questioned whether more needs to be done to help 

ensure that FSOC and OFR use their authorities as Congress intended.

 

1

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

2

The 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. The following sections of this testimony describe FSOC’s 

specific functions in detail.

3

The provisions dealing with OFR are contained primarily in subtitle B of title I, §§ 151-

156, codified at 12 U.S.C. §§ 5341-5346.

 
 

Page 2 GAO-13-467T Financial Stability Entities

designating nonbank financial companies that pose threats to financial 

stability.

My remarks are primarily based on our September 2012 report on FSOC 

and OFR.4 For that report, we reviewed our prior reports on financial 

reform and the 2007-2009 financial crisis, statements by government 

officials and academic experts, and agency documents, including 

information on the entities’ budgeting, staffing, and planning. In addition, 

we analyzed FSOC policies, procedures, and products to determine 

whether and how their collaboration practices compared with key 

elements of effective collaboration we have previously identified and to 

determine processes FSOC used to issue products.5 We also interviewed 

FSOC and OFR staff; officials from FSOC’s member agencies; and 

external stakeholders, including foreign officials, industry trade groups, 

and academics. In March 2013, we interviewed Treasury and OFR 

officials to obtain updates on the progress FSOC and OFR had made in 

implementing our recommendations. The work on which this statement is 

based was conducted from November 2011 through September 2012 and 

in March 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.

FSOC consists of 10 voting members and 5 nonvoting members (fig. 1). 

The 10 voting members include 9 federal regulators and an independent 

insurance expert. The 5 nonvoting members include state-level 

representatives from bank, securities, and insurance regulators and 

directors of OFR and the Federal Insurance Office. As the chairperson of 

FSOC, the Secretary of the Treasury has certain powers and 

responsibilities related to FSOC’s meetings, rulemakings, 

recommendations, and reports and testimony to Congress. The 

 

4

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).

5

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

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

Background 
 

Page 3 GAO-13-467T Financial Stability Entities

Secretary, in consultation with the other FSOC members, is also 

responsible for regular consultation with the financial regulatory entities 

and other appropriate organizations of foreign governments or 

international organizations. FSOC has established seven standing 

committees that are generally composed of staff of FSOC members and 

member agencies to help carry out the council’s business.6

Figure 1: FSOC Membership

The Dodd-Frank Act established OFR to serve FSOC and its member 

agencies by improving the quality, transparency, and accessibility of 

financial data and information; conducting and sponsoring research 

related to financial stability; and promoting best practices in risk 

 

6

The committees are the Deputies Committee, Systemic Risk Committee, Designation of 

Nonbank Financial Companies Committee, Designation of Financial Market Utilities 

Committee, Heightened Prudential Standards Committee, Orderly Liquidation Committee, 

and Data Committee. 
 

Page 4 GAO-13-467T Financial Stability Entities

management. The act requires OFR to set up a data center and a 

research and analysis center to, among other things,

• collect and provide data to FSOC and member agencies;

• standardize the types and formats of data reported and collected;

• perform applied and essential long-term research;

• develop tools for risk measurement and monitoring; and

• make the results of its activities available to financial regulatory 

agencies.

FSOC and OFR face several challenges as they work to carry out their 

responsibilities and achieve their missions. First, FSOC’s missions—to 

identify risks to U.S. financial stability and respond to emerging threats to 

stability—are inherently challenging, for several reasons. Identifying risks 

to financial stability is challenging because (1) key indicators, such as 

market prices, often do not reflect threats to financial stability; (2) such 

threats do not develop in precisely the same way in successive crises; (3) 

financial innovations are not well understood; and (4) according to 

experts, effectively monitoring and mitigating systemic risk is both vast 

and procedurally complex. In addition, actions to preemptively mitigate 

emerging threats may appear unnecessary or too costly at the time they 

are proposed or taken.

Second, although the Dodd-Frank Act created FSOC to provide for a 

more comprehensive view of threats to U.S. financial stability, it left most 

of the fragmented and complex arrangement of independent federal and 

state regulators in place and generally preserved their statutory 

responsibilities. As a result, FSOC’s effectiveness in providing for a more 

comprehensive view of threats to U.S. financial stability hinges to a large 

extent on collaboration among its many members, almost all of whom 

have their own independent regulatory responsibilities. In testifying on the 

coordination of Dodd-Frank rulemakings assigned to specific FSOC 

members before the U.S. House Financial Services Committee in 

October 2011, the chairperson of FSOC recognized this challenge. 

However, he also noted that certain agencies were working much more 

closely together than before FSOC’s creation. The federal financial 

regulators have also emphasized the importance of maintaining their 

independence while serving as members of FSOC. For example, several 

member agencies noted in our prior work on Dodd-Frank rulemakings 

FSOC and OFR Face 

Challenges Achieving 

Their Missions
 

Page 5 GAO-13-467T Financial Stability Entities

that any effort to coordinate rulemakings assigned to specific agencies 

through FSOC would need to be balanced against the statutory 

requirements of the independent agencies involved.7 Regulators have 

also pointed to their differing statutory requirements to explain why they 

have differing views on policy issues. During the Basel II deliberations 

prior to the financial crisis, for instance, U.S. bank regulators—the 

Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and the 

Office of the Comptroller of the Currency (OCC)—each had a different 

view of various aspects of those requirements.8

Third, OFR faces the challenge of trying to build a world-class research 

organization from the ground up, including acquiring staff with the needed 

skills, while meeting its short-term responsibility to support FSOC. The 

researchers who supported the creation of OFR suggested that it would 

take many years for the new entity to provide the insights that would 

ultimately be expected of it. Though OFR now has a confirmed director, 

these researchers had also noted that the long absence of a director for

the organization had slowed this process.

The regulators traced 

their differences back to their specific statutory responsibilities.

FSOC and OFR have taken steps toward meeting the challenges they 

face. For example, they have taken steps to build mechanisms to identify 

potential threats to financial stability, provide information to the public 

about their activities and progress, and establish management and 

planning structures. However, additional actions could strengthen the 

accountability and transparency of these efforts. As we have reported in 

the past, agencies can manage or mitigate many of the challenges of 

 

7

GAO, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional 

Analyses and Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011). 

8

Basel II is a risk-based capital framework for banks that is based on an international 

accord. For more information on Basel II adoption in the United States, see GAO, RiskBased Capital: Bank Regulators Need to Improve Transparency and Overcome 

Impediments to Finalizing the Proposed Basel II Framework, GAO-07-253 (Washington, 

D.C.: Feb. 15, 2007) and Risk-Based Capital: New Basel II Rules Reduced Certain 

Competitive Concerns, but Bank Regulators Should Address Remaining Uncertainties,

GAO-08-953 (Washington, D.C.: Sept. 12, 2008). 

FSOC and OFR Could 

Strengthen 

Mechanisms to Fully 

Ensure Accountability 

and Transparency
 

Page 6 GAO-13-467T Financial Stability Entities

setting up new organizations by developing strong management 

structures and control mechanisms.9

FSOC has taken steps to meet its statutory responsibilities related to 

identifying risks and potential emerging threats to U.S. financial stability 

but has not yet developed comprehensive and systematic mechanisms to 

realize these goals. These steps include setting up the Systemic Risk 

Committee—one of the seven standing FSOC committees—that is 

responsible for systemic risk monitoring and plays a key role in reviewing 

sources of systemic risk. The committee is operating under draft 

procedures, with member agency staff suggesting risks or threats that, in 

their view, may benefit from interagency coordination.10

 

9

GAO, Millennium Challenge Corporation: Progress Made on Key Challenges in First Year 

of Operations,

According to 

FSOC policy staff, if there is agreement that an issue warrants further 

examination, an agency is assigned to develop it, including identifying 

vulnerabilities in the financial system. When the committee determines 

that the issue is sufficiently developed, it presents the issue to the 

Deputies Committee. According to the draft procedures, if issues are 

elevated beyond the Deputies Committee to FSOC members, agencies 

may respond with a variety of actions, including enhanced monitoring, 

additional analysis, the development of potential policy responses, or the 

implementation of a particular policy response. Potential threats to 

financial stability are also discussed at FSOC meetings; for example, 

GAO-05-625T (Washington, D.C.: Apr. 27, 2005) and Troubled Asset Relief 

Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and 

Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). Such mechanisms include: 

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

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

Standards: Internal Control Management and Evaluation Tool, GAO-01-1008G

(Washington, D.C.: August 2001). For the importance of objectives and performance 

measures in determining accountability and efficiency, see, for example, GAO, ResultsOriented Government: GPRA Has Established a Solid Foundation for Achieving Greater 

Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004) and Government Performance: 

GPRA Modernization Act Provides Opportunities to Help Address Fiscal, Performance, 

and Management Challenges, GAO-11-466T (Washington, D.C.: Mar. 16, 2011).

10FSOC officials noted that the procedures were marked “draft” because the process was 

new and the committee expected to change the procedures based on its initial experience. 

Identifying Potential Risks 

and Emerging Threats to 

Financial Stability
 

Page 7 GAO-13-467T Financial Stability Entities

FSOC officials noted that a teleconference was convened to discuss MF 

Global’s bankruptcy.11

OFR participates in the Systemic Risk Committee and is building capacity 

to monitor the financial system for threats to financial stability. OFR has 

developed the Financial Stability Monitor, a collection of metrics and 

indicators related to financial stability that is to be continuously updated, 

according to OFR and Treasury officials. According to these officials, 

OFR began sharing the Financial Stability Monitor with the Systemic Risk 

Committee and FSOC member agency staff in February 2012. OFR is 

also assessing options for analyzing risks to financial stability and 

produced a working paper in collaboration with outside researchers, 

published in January 2012 to survey existing approaches.12 In addition, 

OFR and FSOC sponsored conferences in December 2011 and 

December 2012 to discuss a range of issues related to risks to financial 

stability.13 OFR staff said that they were evaluating a range of metrics and 

methods for measuring and analyzing financial markets and systems and 

were in the early stages of developing network maps and other tools to 

assess financial stability. For example, OFR evaluated 11 measures 

against a series of crises over time and reported on some of these efforts 

in its 2012 Annual Report.14

However, FSOC and OFR have not developed a comprehensive, 

systemic approach to identifying and addressing threats to the financial 

system. Without a more systematic approach and comprehensive 

information, FSOC member agencies on their own may not be well 

 

11In October 2011, MF Global, the third largest independent broker dealer in the United 

States, filed for bankruptcy. MF Global Holdings Ltd. and MF Global Finance USA Inc. 

filed on a consolidated basis for relief under Chapter 11 bankruptcy protection. The jointly 

registered broker-dealer and futures commission merchant, operating as MF Global Inc., 

entered liquidation proceedings under the Securities Investor Protection Act. A series of 

events, including increased exposure to European sovereign debt securities, preceded the 

bankruptcy filing.

12Dimitrios Bisias, Mark Flood, Andrew W. Lo, and Stavros Valavanis, A Survey of 

Systemic Risk Analytics, Office of Financial Research Working Paper #0001 (Washington, 

D.C.: Jan. 15, 2012). 

13The Macroprudential Toolkit: Measurement and Analysis. Conference held in 

Washington, DC, December 1-2, 2011, and Assessing Financial Intermediation: 

Measurement and Analysis. Conference held in Washington, DC, December 6, 2012. 

14Office of Financial Research, 2012 Annual Report (Washington, D.C.: July 2012). 
 

Page 8 GAO-13-467T Financial Stability Entities

positioned to judge which potential threats will benefit from interagency 

discussions. FSOC and OFR could improve their efforts to identify risks 

and threats by collecting and sharing a common set of financial 

indicators.15

In addition, FSOC does not have sufficient processes for identifying or 

prioritizing potential emerging threats to U.S. financial stability for its 

annual reports. FSOC’s annual reporting process is an ongoing 

responsibility which, in the absence of a strategic plan, functions as its 

major strategic planning document and method for communicating with 

Congress and the public, especially regarding potential emerging threats 

to U.S. financial stability. FSOC’s 2011 and 2012 annual reports generally 

addressed the subjects mandated by the Dodd-Frank Act. These reports 

also provided extensive information about the current economy and 

complex issues, such as high-frequency trading and the MF Global 

bankruptcy. In addition, the reports contained extensive discussions of 

current known threats, such as those associated with money market 

funds and the European sovereign-debt crisis, and made some 

recommendations to address them. However, FSOC has not developed a 

structure that supports having a systematic or comprehensive process for 

identifying potential emerging threats. In particular, FSOC does not have 

processes for consistently identifying such threats, separating them from 

more current threats, or prioritizing them. For instance, certain potential 

threats related to U.S. debt are not in the 2011 Annual Report. However, 

the 2012 Annual Report identifies the U.S. debt as a potential threat but 

does not explain what has changed since the 2011 report. Similarly, the 

Systematic collection, analysis, and sharing of financial 

indicators of key risk factors such as leverage, liquidity, concentrations, 

underwriting standards, collateral quality, and delinquencies should 

provide insight into vulnerabilities affecting particular types of financial 

intermediaries or reveal patterns occurring across the financial system. 

OFR, through a mechanism such as the Financial Stability Monitor, could 

play a role in collecting, analyzing, and reporting on these indicators. To 

improve FSOC’s approaches for monitoring threats to financial stability, 

we recommended that FSOC develop an approach that included 

systematic sharing of key financial risk indicators across FSOC members 

and member agencies to assist in identifying potential threats for further 

monitoring or analysis.

 

15Such a data-sharing exercise is akin to what the International Monetary Fund proposes 

with its Financial Soundness Indicators. See International Monetary Fund, Financial 

Soundness Indicators: Compilation Guide (Washington, D.C.: March 2006).
 

Page 9 GAO-13-467T Financial Stability Entities

2011 or 2012 annual reports identify risks, such as those associated with 

the European sovereign debt crisis or money market funds, which are 

ongoing or have previously been identified as potentially emerging. 

Further, FSOC identifies a large number of threats without explicitly 

prioritizing them. In contrast, other entities, such as the International 

Monetary Fund and European Central Bank, issue reports that explicitly 

prioritize potentially significant threats. Treasury and FSOC officials and 

staff noted that FSOC’s annual reports have a different purpose and 

implicitly prioritize the threats in the recommendations sections of the 

reports. As a result of FSOC’s limited processes for identifying and 

prioritizing potential emerging threats to financial stability in its annual 

reports, policymakers and market participants do not have the information 

they need to develop effective and timely responses to those threats. We 

recommended that FSOC develop more systematic approaches for 

identifying emerging threats to financial stability that are forward-looking 

and help prioritize such threats in annual reports.

Although FSOC and OFR have adopted communication methods to 

provide information on their activities to the public and Congress, some of 

their methods could be strengthened. For example, both entities have 

web pages on Treasury’s website. FSOC’s web pages include minutes of 

the council’s meetings, annual reports, frequently asked questions, and 

information on FSOC rulemakings. OFR has also posted key documents 

on its web pages, including its annual report, strategic framework, and 

updates on recent developments, such as the status of the legal entity 

identifier.

However, FSOC does not keep detailed records of deliberations or 

discussions that take place at the council’s meetings or at the committee 

level. While no specific level of detail is required for FSOC minutes, the 

limited documentation of their discussions makes it difficult to assess 

FSOC’s performance. For instance, the minutes typically describe agenda 

items for the meetings and information on the presenters for each agenda 

item but lack additional detail even when the information being discussed 

is not likely to be market sensitive or limit the quality of deliberations. As a 

result, the public receives little information about FSOC’s activities and 

deliberations, limiting its understanding of these activities.

FSOC policy officials recognized the need for transparency but also noted 

that certain information was protected from disclosure under various 

statutes and could not be released. FSOC staff also noted the need to 

balance the desire for transparency with the need to provide an 

Transparency
 

Page 10 GAO-13-467T Financial Stability Entities

environment that allows for open discussion and deliberation of issues 

and policy options. However, similar bodies, such as the Federal Open 

Market Committee, publish minutes that provide greater detail, and the 

Federal Open Market Committee voluntarily releases transcriptions of its 

meetings 5 years after a meeting occurs. As we have previously reported, 

transparency is a key feature of accountability even when there is a need 

to safeguard certain sensitive information to protect the marketplace. We 

recommended that FSOC keep detailed records of closed door sessions 

of key meetings.16

In our September 2012 report, we also recommended that both entities 

develop a communication strategy to improve communications with the 

public, which could include more fully developing their websites. 

According to Treasury and OFR officials, both entities have taken steps to 

improve their websites. In November 2012, a Treasury official noted that 

OFR was actively engaged in redesigning its website but had still not 

posted some information that would show the progress the agency was 

making in standing up its operations. While the updated website includes 

a copy of OFR’s organizational chart, that chart does not include the 

names of its top managers or indicate which positions are filled, as we 

noted in our report. In comparison, the Consumer Finance Protection 

Bureau, which was also created by the Dodd-Frank Act, has for some 

time had its own domain name, an easily identifiable website that includes 

a detailed organizational chart, and online services that provide regular 

updates to interested parties.

According to Treasury officials, the Deputies 

Committee has reviewed FSOC’s existing transparency policy in light of 

this recommendation and may be positioned to make a recommendation 

to the Council on addressing our recommendation in the coming weeks.

FSOC’s management structures include a dedicated policy office within 

Treasury’s Office of Domestic Finance and an executive director.17

 

16See, GAO Troubled Asset Relief Program: Continued Stewardship Needed as Treasury 

Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, 

FSOC 

has also implemented bylaws, a transparency policy, and a consultation 

framework, and members have signed a memorandum of understanding 

GAO-10-151 (Washington, D.C.: Nov. 2, 2009). 

17FSOC’s policy office within Treasury’s Office of Domestic Finance has been led by a 

Deputy Assistant Secretary. More recently, on December 13, 2012, the Council also 

approved the appointment of an executive director. 

Management Structures 

and Strategic Planning
 

Page 11 GAO-13-467T Financial Stability Entities

(MOU) on sharing confidential information to govern FSOC activities and 

promote accountability and transparency. OFR has also taken steps to 

set up needed management structures. It has developed an 

organizational structure that is built around a Data Center and a Research 

and Analysis Center—the two programmatic units established by the 

Dodd-Frank Act.

FSOC is subject to the Government Performance and Results Act of 1993 

(GPRA), as amended, which requires agencies to periodically produce 

strategic plans, annual performance plans, and performance updates. 

FSOC has begun planning how it can satisfy these requirements but may 

request an exemption from some. Treasury’s strategic plan for fiscal year 

2012-2015 does not include information on FSOC’s goals or describe 

how it will measure FSOC’s progress in achieving them.

OFR, which is not independently subject to GPRA, received limited 

discussion in Treasury’s 2012-2015 strategic plan and has begun its own 

strategic planning process. OFR issued a strategic framework in March 

2012 to cover fiscal years 2012-2014 that lists five strategic goals, 

including:

• supporting FSOC through the secure provision of high-quality financial 

data and conducting the analyses needed to monitor threats to 

financial stability;

• developing and promoting data-related standards and best practices;

• establishing a center of excellence for research on financial stability 

and promoting best practices for financial risk management;

• providing the public with key data and analyses while protecting 

sensitive information; and

• establishing OFR as an efficient organization and world-class 

workplace.

OFR’s framework also highlights a number of objectives under those 

goals and lays out implementation priorities for fiscal year 2012.18

 

18 The framework also notes the importance of transparency and indicates that OFR is 

subject to oversight from the Treasury Office of the Inspector General (OIG) and GAO, 

which have both exercised that authority during OFR’s first 2 years, and that the DoddFrank Act requires that the OFR Director testify before Congress annually on OFR’s 

activities. 

However, OFR acknowledges that it has not yet put other key elements of 
 

Page 12 GAO-13-467T Financial Stability Entities

performance management in place, including linking programmatic, 

human resources, and budgetary decision making to its strategic goals 

and developing a performance measurement system. To support the 

growth of OFR into a viable and sustainable entity, we recommended that 

OFR build on its strategic framework by further developing its strategic 

planning and performance management system so that it linked its 

activities to its goals and used publicly available performance measures 

to measure its progress. OFR officials said that they had developed 

performance measures and planned to describe these in their fiscal year 

2014 budget submission.19

In the absence of a strategic plan, FSOC’s annual reports serve as a key 

accountability document. FSOC staff noted that its annual reports 

provided Congress and the public with a description of FSOC’s activities, 

its views on potential emerging threats to U.S. financial stability, and 

recommendations to enhance the integrity, efficiency, competitiveness, 

and stability of U.S. financial markets. They added that the chairperson 

was required to testify annually before Congress on the report, an activity 

that served as another accountability mechanism.

When discussing accountability, FSOC members have noted the 

importance of the statement contained in the front of the reports (and 

signed by each member) that FSOC is taking reasonable steps to ensure 

financial stability and mitigate systemic risk. FSOC members have also 

acknowledged the need to follow up on the report’s recommendations, 

and FSOC staff noted that recommendations would be monitored by 

FSOC as a whole. However, the annual reports do not specify how FSOC 

will conduct this monitoring. For example, they do not consistently 

designate an FSOC member or members to monitor or implement the 

recommendations or establish time frames for certain actions, such as 

reporting to the council on the status of recommendations. Treasury 

officials noted that the Dodd-Frank Act did not give the chairperson or 

council authority to require that independent regulators take action or 

impose time frames on member agencies. However, they noted that 

some recommendations in the 2012 Annual Report were made to specific 

agencies and put greater stress on more immediate action than others. 

For example, the 2012 report emphasized the importance of a 

 

19OFR’s budget submission will be included as part of the President’s fiscal year 2014 

budget submission. 
 

Page 13 GAO-13-467T Financial Stability Entities

recommendation to the Securities and Exchange Commission (SEC) to 

take action to address money market fund risks by noting that wholesale 

short-term funding markets were a critical component of a well-functioning 

financial system. FSOC continues to be focused on structural 

vulnerabilities in money market funds that could disrupt these markets 

and has proposed specific recommendations for addressing these. 

However, SEC has not taken further action, and FSOC does not have the 

authority to require that its proposals be implemented.

To improve FSOC’s accountability, we recommended in September 2012 

that FSOC should make recommendations in the annual report more 

specific by identifying which FSOC member agency or agencies, as 

appropriate, were recommended to monitor or implement such actions 

within specified time frames. In March 2013, Treasury officials told us that 

FSOC had begun the development process for the 2013 annual report 

and that our recommendations about the annual reports were provided to 

the team assigned to pull together this year’s annual report for their 

consideration.

Title I of the Dodd-Frank Act directs FSOC to facilitate information sharing 

and coordination among its member agencies and other federal and state 

agencies regarding domestic financial services policy development, 

rulemaking, examinations, reporting requirements, and enforcement 

actions.20 The Dodd-Frank Act encourages collaboration between FSOC 

and external stakeholders, especially state regulators and international 

entities. It also specifies a number of duties for OFR that require 

collaboration with FSOC members and others. In particular, OFR must 

collect data on behalf of FSOC, provide the data to FSOC and member 

agencies, and standardize data collection among the agencies.21

 

2012 U.S.C. § 5322(a)(2)(E).

These 

activities require collaboration not only with FSOC member agencies but 

also with commercial data providers, publicly available data sources, and 

the financial industry.

21The Dodd-Frank Act provides that member agencies, in consultation with OFR, must 

implement regulations promulgated by OFR to standardize the types and formats of data 

reported and collected on behalf of FSOC. However, it also explicitly notes that this 

provision does not supersede or interfere with the independent authority of a member 

agency under other laws to collect data in the format that the agency requires.

FSOC and OFR Have 

Taken Steps to 

Collaborate but Could 

Enhance Their Efforts
 

Page 14 GAO-13-467T Financial Stability Entities

FSOC and OFR have taken steps to enhance collaboration among FSOC 

members. Members’ staffs told us that FSOC’s organizational and 

committee structures helped support collaboration among FSOC 

members both on a formal and informal basis. In addition, FSOC is 

working to standardize data reporting systems among FSOC member 

agencies. OFR officials noted that the agency had begun a three-stage 

process to assemble an inventory of data collected by FSOC member 

agencies as a first step toward standardizing data, reducing duplication, 

and eventually lowering costs for industry and regulators.

FSOC and OFR have taken some actions to collaborate by leveraging the 

expertise of external stakeholders and coordinating U.S. activities 

internationally. In particular, FSOC and OFR held joint conferences in 

December 2011 and 2012 to discuss a range of issues related to risks to 

financial stability. OFR has also initiated a working paper series in which 

OFR researchers have collaborated with outside academics to catalog 

systemic risk monitoring systems and ways to improve risk management 

at financial institutions. In addition, OFR created the Financial Research 

Advisory Committee in November 2012 to solicit advice, 

recommendations, analysis, and information from academics, 

researchers, industry leaders, government officials, and experts in the 

fields of data and technology. Moreover, OFR is working with industry, 

foreign government entities, and international bodies to create a legal 

entity identifier, which OFR describes as an emerging global standard 

that will enable regulators and companies around the world to quickly and 

accurately identify parties to financial transactions.

However, FSOC could do more to promote collaboration and coordination 

and apply key practices for successful collaboration that we have 

previously identified, such as leveraging resources, agreeing on roles and 

responsibilities, and establishing mutually reinforcing or joint strategies. 

For example, FSOC has not taken advantage of opportunities to leverage 

resources through its authority to appoint technical and professional 

advisory committees. Industry representatives have commented on the 

benefits of having industry input through such committees, but to date 

FSOC has not established such committees. Moreover, while FSOC 

members from federal regulatory agencies are able to draw on staff from 

across their agencies, the independent insurance member and state 

representatives have limited support structures—a shortcoming that could 

be remedied by having other state regulators participate through advisory 

councils.
 

Page 15 GAO-13-467T Financial Stability Entities

In addition, FSOC and OFR have not defined their roles and 

responsibilities for monitoring risks to the financial system. As noted 

earlier, FSOC is tasked with monitoring the financial services marketplace 

to identify potential threats to U.S. financial stability, and OFR must 

develop and maintain metrics and reporting systems for risks to U.S. 

financial stability as well as monitor, investigate, and report on changes in 

systemwide risk levels. These responsibilities overlap somewhat, but this 

overlap is not unexpected given OFR’s primary mission of supporting 

FSOC. The Dodd-Frank Act defines certain responsibilities for FSOC and 

OFR, but the lack of clear responsibility for implementation can lead to 

duplication, confusion, and gaps in their efforts. This risk is further 

compounded by the fact that many FSOC member agencies have risk 

analysis and data collection functions associated with their supervisory 

responsibilities. Some of these functions are explicitly focused on risks to 

financial stability, and some member agencies have created their own 

programs to examine them. To the extent that these programs provide 

unique information to FSOC, they will be contributing to the overall effort. 

However, if not properly coordinated, these separate efforts could be 

duplicative, resulting in wasted time and resources. We recommended 

that FSOC and OFR clarify responsibility for implementing requirements 

to monitor threats to financial stability across FSOC and OFR, including 

among FSOC members and member agencies.

Further, although FSOC has taken action to better coordinate members’ 

rulemakings, additional action is needed. In October 2010 it issued an 

integrated implementation road map for the Dodd-Frank Act that included 

a list of the rules regulators were required to promulgate, provided a time 

line for those rulemakings, and identified the agencies responsible for 

each one. FSOC has also developed a consultation framework for the 

agencies involved in rulemakings. In a November 2011 report, we noted 

that although FSOC’s road map and consultation framework were a 

positive development in facilitating coordination, they had limited 

usefulness.22

 

22

For example, the consultation framework does not provide, 

nor according to FSOC staff is it intended to provide, any specifics about 

staff responsibilities or processes to facilitate coordination. It also does 

not describe when interagency coordination is required or what happens 

when rules conflict with or duplicate each other. We recommended that 

FSOC work with federal financial regulators to (1) develop formal 

GAO-12-151. 
 

Page 16 GAO-13-467T Financial Stability Entities

coordination policies that would clarify issues such as the timing of 

coordination, the process for soliciting and addressing comments, and 

FSOC’s role in facilitating coordination and (2) more fully incorporate the 

key practices for successful collaboration that we have previously 

identified.

The Dodd-Frank Act gave FSOC the authority to designate financial 

market utilities (FMUs) as systemically important if FSOC determines that 

the failure of an FMU or a disruption in its functioning could threaten U.S. 

financial stability. Similarly, the Dodd-Frank Act provided FSOC with the 

authority to designate nonbank financial companies for supervision by the 

Federal Reserve under its enhanced prudential standards.23

Each rule, with any accompanying interpretive guidance, outlines a 

multistage process that FSOC intends to follow in designating these 

entities. For example, the interpretive guidance that accompanies the rule 

for designating nonbank financial companies for Federal Reserve 

supervision includes a number of thresholds that a firm must meet to 

move beyond the first stage of the process. Financial companies must 

meet a size threshold of $50 billion in assets and one of five other 

thresholds, including measures of leverage and debt. In its 2012 Annual 

Report, FSOC reported that it had designated eight FMUs as systemically 

important. However, FSOC is still engaged in its process for designating 

The act 

stipulates that FSOC may designate these companies if material financial 

distress at that company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the company could pose a 

threat to U.S. financial stability. While individual designations are not 

made through rulemakings, in an effort to be more transparent FSOC has 

issued rulemakings for designating FMUs as systematically important and 

designating nonbank firms for Federal Reserve supervision. FSOC issued 

final rules, which explain the processes and criteria FSOC intends to use 

in making the individual designations, in July 2011 and April 2012, 

respectively.

 

23The Dodd-Frank Act also subjects large bank holding companies with total consolidated 

assets of $50 billion or more to enhanced supervision and prudential standards. No FSOC 

designation is required for these bank holding companies to be subjected to enhanced 

supervision and standards. In addition, some potential nonbank holding companies that 

may be designated are already subject to some Federal Reserve oversight because they 

are thrift holding companies. The Dodd-Frank Act transferred the oversight of these 

companies from the Office of Thrift Supervision to the Federal Reserve.

FSOC Has Not Yet 

Designated Nonbank 

Financial Companies 

for Enhanced 

Supervision 
 

Page 17 GAO-13-467T Financial Stability Entities

nonbank financial companies, and therefore no company has yet been 

designated.

FSOC is subject to laws and executive orders that require certain 

regulatory analyses as part of its rulemaking processes, including the 

Paperwork Reduction Act and the Regulatory Flexibility Act, as well as 

Executive Orders 12866 and 13563.24

Nonetheless, the designations were intended to address certain risks to 

financial stability posed by these entities and have the potential to confer 

other benefits and costs on the wider economy as well as on the 

individual entities designated. For example, some research has shown 

that certain large, interconnected financial institutions considered too big 

to fail may have lower borrowing costs than would otherwise be 

warranted. But being designated would impose a significant regulatory 

burden on the designated companies according to some of those who 

commented on the nonbank financial company rule during the rulemaking 

process. FSOC has some limited processes in place to review its 

designations of nonbank financial companies, including an annual review 

of material changes for a designated company and a review of the stage 

one thresholds stated in dollar terms at least every 5 years. However, it 

has not set up processes to conduct a comprehensive assessment of the 

overall impact of the designations and to determine whether they are 

achieving the intended result.

However, FSOC was required to 

consider costs and benefits of its FMU and nonbank financial company 

rules only as they related to the Paperwork Reduction Act. FSOC did not 

conduct a benefit-cost analysis for the rules designating FMUs or 

nonbank financial companies because the Office of Management and 

Budget determined that these rules were not economically significant. 

Treasury officials noted that the rule did not impose substantive 

requirements on specific entities but only laid out the process by which 

they could become subject to other rules and regulations. In addition, 

FSOC member staff noted that the costs and benefits of the designation 

were not among the factors that the Dodd-Frank Act directed FSOC to 

consider when making a designation.

 

24A regulatory action is determined to be “economically significant” if the Office of 

Management and Budget determines that it is likely to have an annual effect on the 

economy of $100 million or more or to adversely affect in a material way the economy, a 

sector of the economy, productivity, competition, jobs, the environment, public health or 

safety, or state, local, or tribal governments or communities. 
 

Page 18 GAO-13-467T Financial Stability Entities

Doing a comprehensive analysis to assess whether designations are 

having their intended impact of providing greater financial stability and the 

extent of any other impacts will be challenging, but FSOC is uniquely 

positioned to address that challenge. Establishing a baseline from which 

to evaluate the overall impact of various rules will likely be complex 

because the impact of being designated will depend on the application of 

a number of rules being written by multiple independent regulatory 

agencies—Commodity Futures Trading Commission (CFTC), FDIC, the 

Federal Reserve, and SEC—and issued over a span of time.25 For 

example, the Federal Reserve has not issued final rules on the enhanced 

prudential standards that designated nonbank financial companies will be

subject to, but other final rules that will apply to these entities have been 

issued. These rules include one on resolution plans or “living wills” that 

was jointly issued by the Federal Reserve and FDIC and that will require 

designated nonbank financial companies to prepare resolution plans. 

Treasury has also issued a rule that establishes an assessment schedule 

for the Financial Research Fund, which finances OFR and FSOC under 

the Dodd-Frank Act.26

Because FSOC is responsible for designating FMUs and nonbank 

financial companies and its member agencies are responsible for writing 

the rules that will impact these designated entities, it has certain 

advantages in conducting a comprehensive analysis. Moreover, FSOC 

can rely on OFR for some data collection and analysis. However, FSOC 

Moreover, not all of these agencies are required to 

conduct cost-benefit analyses that might be useful in establishing a 

baseline. Finally, while some regulatory agencies may conduct periodic 

retrospective reviews of their rules, these reviews tend to focus only on 

the rules issued by their agency.

 

25In GAO-12-151 we note the importance of setting up baselines early to support later 

retrospective reviews of individual rules. In addition, we reported that in light of its various 

statutory requirements, FSOC plans to assess the future impact of significant Dodd-Frank

rules. Given these plans, we previously recommended that FSOC direct OFR to begin 

collecting the necessary data to carry out these analyses. 

26Other Dodd-Frank provisions impose additional requirements on large bank holding 

companies and nonbank financial companies designated by FSOC. These include a 

requirement that the Federal Reserve subject designated nonbank financial companies 

that engage in proprietary trading to additional capital requirements, the authority of CFTC 

to impose limitations on the ability of those companies to control derivative clearing 

organizations and exchanges, and the ability of FDIC to impose risk-based assessments 

on large bank holding companies and designated nonbank financial companies if 

necessary to repay any obligations issued by FDIC to Treasury under the orderly 

liquidation authority. 
 

Page 19 GAO-13-467T Financial Stability Entities

members would need to collaborate on such an assessment, because 

FSOC policy and OFR staff, who are Treasury employees, may not have 

access to all of the needed information. In addition, collaboration is 

needed because, according to Treasury officials, it would be inappropriate 

for FSOC staff to review rules drafted by independent agencies unless 

those agencies agreed to participate in the comprehensive 

assessment. Without such an assessment, decision makers may not 

have the information they will need to determine whether designating new 

entities for enhanced supervision and other requirements and restrictions 

is addressing a perceived gap in the regulatory system and improving the 

stability of the financial system or whether policy changes should be 

considered. To strengthen the accountability of FSOC’s decisions, FSOC 

should establish a collaborative and comprehensive framework for 

assessing the impact of decisions for designating FMUs and nonbank 

financial companies on those entities and the wider economy.

Over the past 2 1⁄2 years, FSOC and OFR have made progress in 

establishing their operations and approaches for monitoring threats to 

financial stability. Both entities have also worked to establish 

accountability and transparency mechanisms and promote collaboration 

among FSOC members and with external stakeholders. However, as we 

reported in September 2012, continued efforts are needed. We made 10 

recommendations to FSOC and OFR to strengthen the accountability and 

transparency of their decisions and activities as well as enhance 

collaboration among FSOC members and with external stakeholders.

In its November 2012 response to our report and recommendations, 

Treasury noted that FSOC and OFR had considered the 

recommendations. In March 2013, Treasury officials described steps that 

each entity was considering or taking to address some of the 

recommendations, such as reviewing FSOC’s transparency policy and 

updating the websites. Although fully addressing the recommendations 

will likely take time, doing so will help FSOC and OFR shed more light on 

their decision making and activities and allow Congress to hold them 

accountable for results. Furthermore, addressing our recommendations 

can help FSOC and OFR enhance collaboration among FSOC’s 

members and with external stakeholders, activities that are critical to their 

ability to achieve their missions. We will continue to monitor FSOC’s and 

OFR’s progress in implementing our recommendations and stand ready 

to assist Congress as it continues its oversight of these entities.

Concluding Remarks
 

Page 20 GAO-13-467T Financial Stability Entities

Chairman McHenry, Ranking Member Green, and Members of the 

Subcommittee, this completes my prepared statement. I would be 

pleased to respond to any questions that you may have at this time.

For questions regarding this testimony, please contact A. Nicole Clowers 

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 statement. Other individuals who made key contributions to this 

testimony statement include Kay Kuhlman (Assistant Director), Nancy 

Barry, Emily Chalmers, Christopher Forys, Michael Hoffman, and Rachel 

Siegel.

GAO Contact and 

Staff 

Acknowledgments

(250721)
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