GOVERNMENT SUPPORT 

FOR BANK HOLDING 

COMPANIES 

Statutory Changes to Limit 

Future Support Are Not 

Yet Fully Implemented 

Statement of Lawrance L. Evans, Jr., Director

Financial Markets and Community Investment

Testimony

Before the Subcommittee on Financial 

Institutions and Consumer Protection, 

Committee on Banking, Housing and 

Urban Affairs, U.S. Senate

For Release on Delivery 

Expected at 10:00 a.m. EST

Wednesday, January 8, 2014

GAO-14-174T

United States Government Accountability Office
 

Page 1 GAO-14-174T 

Chairman Brown, Ranking Member Toomey, and Members of the 

Subcommittee:

I am pleased to be here today as you examine issues related to 

government support for large bank holding companies. The federal 

government maintains programs—frequently referred to as safety nets—

to reduce the vulnerability of depository institutions to runs that could 

threaten the health of the banking system and the broader economy.1

Two programs are generally considered to form the core of these safety 

nets: the Federal Reserve System’s discount window and Federal 

Deposit Insurance Corporation (FDIC) deposit insurance.2

My remarks today are based on our November 2013 report, entitled 

Government Support for Bank Holding Companies: Statutory Changes to 

Limit Future Support Are Not Yet Fully Implemented (

By making 

emergency liquidity available to solvent depository institutions through the 

discount window and reducing incentives for depositors to withdraw their 

funds, these safety nets were intended to help ensure that depository 

institutions could continue to lend and provide other important services, 

even during turbulent economic conditions. In addition to these safety 

nets, the federal government extended unprecedented support to 

financial institutions to stabilize financial markets during the financial 

crisis. 

GAO-14-18). This 

report was the first of two reports we will issue on the economic benefits 

that the largest bank holding companies have received as a result of 

actual or perceived government support.3

Our November 2013 report examined (1) actual government support for 

banks and bank holding companies during the financial crisis, and (2) 

 

1

This inherent vulnerability arises from the role of banks in using deposits that are 

available upon demand to fund long-term, illiquid loans. 

2

The Federal Reserve System consists of the Federal Reserve Board—a federal 

agency—and 12 regional Reserve Banks. The Federal Reserve Board has delegated 

some of its responsibilities for supervision and regulation to the Reserve Banks. The 

Federal Reserve Act authorizes the Reserve Banks to make discount window loans to the 

extent authorized by the Federal Reserve Board. Pub. L. No. 63-43, §§ 10B, 13, 38 Stat. 

251 (codified at of 12 U.S.C. §§ 347b(a), 343). 

3

Perceived government support refers to support that market participants may expect the 

federal government to provide to these institutions in the event that they suffer large 

losses that threaten them with failure. 
 

Page 2 GAO-14-174T 

recent statutory and regulatory changes related to government support for 

banks and bank holding companies. To address the objectives for this 

report, we reviewed relevant statutes, regulations, agency documents, 

related studies, and prior GAO work; analyzed program transaction data; 

and interviewed regulators, representatives of financial institutions, 

academics, trade associations and others. While this report addressed 

benefits that bank holding companies and their subsidiaries received 

during the crisis from actual government support, our ongoing work on 

this issue includes a consideration of any benefits banks may have 

received from any expectations of future government support. 

Specifically, in a second report to be issued in 2014, we will examine any 

funding or other advantages the largest bank holding companies have 

received as a result of implied government support. Our work for the 

November 2013 report on which this statement is based was conducted 

in accordance with generally accepted government auditing standards. 

Further details on our scope and methodology are included in the 

November 2013 report.

During the financial crisis of 2007-2009, the federal government extended 

unprecedented amounts of assistance to financial institutions to stabilize 

financial markets and the broader economy. This support included the 

creation of temporary programs that extended more than $1 trillion in 

loans, provided hundreds of billions of dollars of capital, and guaranteed 

hundreds of billions of dollars of other liabilities for participating financial 

institutions. While these government interventions helped to avert a more 

severe crisis, they raised questions about moral hazard and the 

appropriate scope of government safety nets for financial institutions.4

We found that from 2007 through 2009, the federal government’s actions 

to stabilize the financial system provided significant funding support and 

other benefits to bank holding companies and their subsidiaries. The 

In 

particular, extraordinary support for troubled financial institutions led to 

debate about how to decrease the likelihood of future rescues of failing 

institutions and limit the potential for federal safety nets intended for 

insured depository institutions to provide a backstop for activities 

conducted outside these institutions.

 

4

Moral hazard can occur when market participants expect similar emergency actions in 

future crises, thereby weakening their incentives to properly manage risks.

Government Actions 

to Stabilize Markets 

Resulted in 

Significant Support 

to Bank Holding 

Companies
 

Page 3 GAO-14-174T 

Board of Governors of the Federal Reserve System (Federal Reserve 

Board), the Department of the Treasury (Treasury), and FDIC introduced 

new programs with broad-based eligibility that provided funding support to 

eligible institutions, which included entities that were part of a bank 

holding company and others. Programs that provided the most significant 

support directly to bank holding companies or their subsidiaries included 

Treasury’s capital investment programs, the Federal Reserve System’s 

lending programs, and FDIC’s guarantee programs. Some large 

institutions benefited from special assistance specific to their institution.

Isolating the impact of individual government interventions is difficult, but 

collectively these interventions likely improved financial conditions by 

enhancing confidence in financial institutions and the financial system 

overall.5

Government entities generally sought to set prices for assistance through 

these programs to be less expensive than prices available during crisis 

conditions but more expensive than prices available during normal market 

conditions. Based on our analysis, we found that emergency lending and 

guarantee programs were generally priced below estimated market 

alternatives that may have been available during the crisis.

Bank holding companies and their subsidiaries, in addition to the 

financial sector and the economy as a whole, benefited from improved 

financial conditions. Bank holding companies and their subsidiaries also 

experienced individual benefits from participating in particular programs, 

including liquidity benefits from programs that allowed them to borrow at 

lower interest rates and at longer maturities than might have been 

available in the markets.

6

 

5

In prior work, we found that the Troubled Asset Relief Program (TARP), along with other 

efforts by the Federal Reserve System and FDIC, made important contributions to helping 

stabilize credit markets. For example, the TED spread—a key indicator of credit risk that 

gauges the willingness of banks to lend to other banks—had narrowed to precrisis levels 

within a year of the October 2008 announcements of TARP, the Temporary Liquidity 

Guarantee Program (TLGP), the Commercial Paper Funding Facility (CPFF), and other 

government actions. 

This result is 

consistent with the programs’ policy goals, which were to stabilize 

6

The market rates used in this analysis provide a general indication of market alternatives 

that could have been available to participants, but for a number of reasons the rates are 

unlikely to reflect available alternatives for all participants at all points in time during the 

crisis and cannot be used to produce a precise quantification of the benefits that accrued 

to participating financial institutions. See appendix III in GAO-14-18 for more details on our 

methodology and limitations for these analyses.
 

Page 4 GAO-14-174T 

financial markets and restore confidence in the financial sector. The 

pricing of emergency assistance below estimated market alternatives is 

also evidenced by the significant participation in these programs. In 

addition, based on analyses of emergency equity support programs we 

reviewed, Treasury purchased equity in financial institutions at prices that 

were higher than estimated market prices. For specific programs, we 

were able to estimate the extent to which participants may have benefited 

from program pricing as well as the extent to which this pricing became 

unattractive in comparison to market pricing during normal and more 

stable credit conditions.

We also found that programs generally were made available to 

institutions of various sizes, and differences in the use of programs by 

institutions of various sizes were driven in part by differences in how 

institutions funded themselves.7 For example, compared to smaller bank 

holding companies, larger bank holding companies relied less on deposits 

as a source of funding and more on short-term credit markets and 

participated more in programs created to stabilize these markets. In 

addition, large bank holding companies were significant users of Federal 

Reserve System programs targeting repurchase agreement markets. At 

the end of 2008, program use—measured for each institution as the 

percentage of total assets supported by the programs—was higher on 

average for banks and bank holding companies with over $50 billion in 

total assets than for smaller firms. For example, total loans outstanding 

from selected Federal Reserve System programs combined were at least 

2 percent of assets on average for banking organizations with $50 billion 

or more in assets and less than 1 percent of assets on average for 

smaller organizations.8

 

7

To compare the extent to which banking organizations of various sizes used emergency 

programs, we calculated the percentage of banking organization assets that were 

supported by emergency programs—either through capital injections, loans, or 

guarantees—at quarter-end dates for 2008 through 2012. Capital provided by emergency 

programs includes capital investments by Treasury under the Capital Purchase Program 

and the Targeted Investment Program. Loans provided by emergency programs include 

Term Auction Facility (TAF), Term Securities Lending Facility (TSLF), Primary Dealer 

Credit Facility (PDCF), and CPFF loans from the Federal Reserve System. Funding 

guaranteed by emergency programs includes deposits guaranteed by FDIC through TLGP 

and debt guaranteed by FDIC through the Debt Guarantee Program. Our analysis of 

institutions receiving support included banking organizations receiving government 

support through these emergency programs for which we could reliably calculate 

consolidated assets. See 

The six largest bank holding companies were 

GAO-14-18 for more information on our analysis.

8

Selected Federal Reserve System programs included CPFF, PDCF, TAF, and TSLF. 
 

Page 5 GAO-14-174T 

significant participants in several emergency programs but exited most of 

the programs by the end of 2009. Differences in program use across 

banking organizations of various sizes diminished as institutions exited 

the programs.

In addition to these programs, the Federal Reserve Board granted several 

regulatory exemptions to requirements under Section 23A of the Federal 

Reserve Act for a range of purposes, such as allowing banks to provide 

greater liquidity support to the nonbank sector.9

Beyond broad-based programs and regulatory exemptions, federal 

government agencies took special actions with respect to individual 

financial institutions on several occasions in 2008 and 2009. While these 

actions were intended to benefit a range of market participants and the 

broader financial system, some large U.S. bank holding companies 

received substantial direct benefits from these actions. Such actions 

included (1) assisting individual troubled financial firms or facilitating the 

acquisition of troubled financial firms whose failures posed significant 

risks to the financial system, and (2) the Federal Reserve Board granting 

bank holding company status to several nonbank financial companies, 

which provided these firms with greater access to emergency government 

funding support.

The number of 

exemptions granted increased significantly during the crisis, and the 

majority of these exemptions were granted to U.S. bank holding 

companies and other firms with $500 billion or more in total assets.

 

9

Section 23A of the Federal Reserve Act imposes quantitative limits on certain 

transactions between an insured depository institution and its affiliates, prohibits banks 

from purchasing low-quality assets from their nonbank affiliates, and imposes collateral 

requirements on extensions of credit to affiliates. 12 U.S.C. § 371c. In letters documenting 

its approval of exemptions to Section 23A, the Federal Reserve Board has indicated that 

the twin purposes of Section 23A are (1) to protect against a depository institution 

suffering losses in transactions with its affiliates, and (2) to limit the ability of a depository 

institution to transfer to its affiliates the subsidy arising from the institution’s access to the 

federal safety net. In other words, these restrictions are intended to protect the safety and 

soundness of banks and to prevent them from subsidizing the activities of nonbank 

affiliates by passing on any benefits they may receive through access to deposit insurance 

and the discount window. 
 

Page 6 GAO-14-174T 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) includes provisions intended to restrict the ability of regulators 

to provide support to financial institutions, among other things.10

The Dodd-Frank Act contains provisions that aim to modify the scope of 

federal safety nets for financial firms, restrict future government support, 

and strengthen regulatory oversight for the banking sector, but 

implementation is not yet complete and the effectiveness of some 

provisions remains uncertain. Agencies have finalized certain changes to 

traditional safety nets for insured banks, but the impacts of provisions to 

limit the scope of transactions that benefit from these safety nets will 

depend on how they are implemented. The act also places restrictions on 

emergency authorities used by regulators during the crisis to assist 

financial firms. For example, the act effectively removes FDIC’s authority 

to provide assistance to a single, specific failing bank outside of 

receivership and grants FDIC new authority to resolve a large failing 

institution outside of bankruptcy.

Nevertheless, market observers have continued to debate whether some 

of the largest and most complex financial institutions—including bank 

holding companies with more than $500 billion in total consolidated 

assets—may continue to benefit from expectations of extraordinary 

government support that could potentially give them funding and other 

economic advantages relative to smaller institutions. 

11

 

10Pub. L. No. 111-203, 124 Stat. 1376 (2010).

FDIC has made progress toward 

implementing its new resolution authority and continues to work to 

address potential obstacles to the viability of its resolution process as an 

alternative to bankruptcy, such as challenges that could arise when 

resolving more than one large institution concurrently. For example, 

experts have questioned whether FDIC has sufficient capacity to use its 

new authorities to handle multiple failures of systemically important firms 

and thus prevent further systemic disruption. The act also places new 

restrictions and requirements on the Federal Reserve Board’s emergency 

lending authority. While the act allows the Federal Reserve Board to 

continue to use its authority under Section 13(3) of the Federal Reserve 

Act to authorize programs with broad-based eligibility, it sets forth new 

restrictions and requirements for such programs, including a requirement 

that lending not assist insolvent firms.

11§§ 204, 210, 124 Stat. at 1454-56, 1460.

Dodd-Frank Aims to 

Restrict Future 

Government Support, 

but Implementation Is 

Incomplete and 

Effectiveness 

Remains Uncertain
 

Page 7 GAO-14-174T 

While the Dodd-Frank Act requires the Federal Reserve Board to 

establish policies and procedures governing future actions under Section 

13(3) authority, at the time of our report’s issuance the Federal Reserve 

Board had not yet completed its process for drafting these policies and 

procedures and had not set time frames for doing so. A Federal Reserve 

Board official indicated that the Board of Governors has focused first on 

completion of other required regulations that have statutory deadlines and 

the regulations that are specifically directed at enhancing the safety and 

soundness of the U.S. financial system. While the act did not set a 

specific deadline, our report noted that setting time frames could help 

ensure more timely completion of these policies and procedures. 

Moreover, finalizing these procedures could help the Federal Reserve 

Board to ensure that any future emergency lending does not assist 

insolvent firms and complies with other new requirements.

Finally, the Dodd-Frank Act also introduced a number of regulatory 

changes designed to reduce the risks that the largest financial institutions 

pose to the financial system. A notable change is a set of new prudential 

requirements and capital standards designed to strengthen the regulatory 

oversight and capital base of large financial institutions. The Federal 

Reserve Board has made progress towards implementing these 

enhanced regulatory standards, which cover areas such as risk-based 

capital requirements and leverage limits, stress testing requirements, and 

debt-to-equity limits.

In our November 2013 report, we recommended that the Chairman of the 

Board of Governors of the Federal Reserve System set time frames for 

completing its process for drafting policies and procedures governing the 

use of emergency lending authority under Section 13(3) of the Federal 

Reserve Act. This recommendation is intended to better ensure that the 

design and implementation of any future emergency lending programs 

comply with Dodd-Frank Act requirements in a timely manner. The 

Federal Reserve Board accepted this recommendation and noted that it 

has made progress toward completing draft policies and procedures 

governing the use of its emergency lending authority under Section 13(3) 

of the Federal Reserve Act. On December 23, 2013, the Federal Reserve 

Board issued a notice of proposed rulemaking and a request for public 
 

Page 8 GAO-14-174T 

comment on a rule designed to establish the required policies and 

procedures.12

Chairman Brown, Ranking Member Toomey and members of the 

Subcommittee, this concludes my prepared remarks. I would be happy to 

answer any questions that you or other members of the Subcommittee 

may have.

For future contacts regarding this statement, please contact Lawrance L. 

Evans, Jr. at (202) 512-4802 or at evansl@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this statement. Other GAO staff who made key 

contributions to this statement and the report it is based on include: Karen 

Tremba, Assistant Director; Jordan Anderson, Bethany Benitez, 

Stephanie Cheng, John Fisher, Michael Hoffman, Risto Laboski, 

Courtney LaFountain, Jon Menaster, Marc Molino, Robert Rieke, and 

Jennifer Schwartz.

 

12Extensions of Credit by Federal Reserve Banks, Notice of Proposed Rulemaking by 

Board of Governors of the Federal Reserve System, 

http://federalreserve.gov/newsevents/press/bcreg/201312223a.htm (Fed. Reg. publication 

pending) (Dec. 23, 2013). 

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