© 2015 International Monetary Fund 

IMF Country Report No. 15/170 

UNITED STATES 

FINANCIAL SECTOR ASSESSMENT PROGRAM 

FINANCIAL SYSTEM STABILITY ASSESSMENT 

This Report on the Financial System Stability Assessment on the United States was 

prepared by a staff team of the International Monetary Fund. It is based on the 

information available at the time it was completed in June 2015. 

Copies of this report are available to the public from 

International Monetary Fund  Publication Services 

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Price: $18.00 per printed copy 

International Monetary Fund 

Washington, D.C. 

July 2015 
UNITED STATES

FINANCIAL SYSTEM STABILITY ASSESSMENT

 

Approved by José 

Viñals and Alejandro 

Werner

Prepared by

Monetary and Capital 

Markets Department

This report is based on the work of the Financial Sector 

Assessment Program (FSAP) mission that visited the United 

States during October–November 2014 and February–March 

2015. The FSAP findings were discussed with the authorities 

during the Article IV Consultation mission in May 2015. 

Further information on the FSAP can be found at 

http://www.imf.org/external/np/fsap/fssa.aspx

 The FSAP team was led by Aditya Narain (mission chief), and comprised Martin Čihák and 

Simon Gray (deputy mission chiefs), Ana Carvajal, Marc Dobler, Dale Gray, Eija Holttinen, 

Benjamin Huston, Nigel Jenkinson, Darryl King, Ivo Krznar, Fabiana Melo, Nobuyasu Sugimoto,

Jay Surti, Constant Verkoren, and Froukelien Wendt (all IMFMCM); Deniz Igan and Juan Solé

(IMFWHD); Ross Leckow, Steve Dawe, Gianluca Esposito, and Alessandro Gullo (IMFLEG); Timo 

Broszeit, Philipp Keller, John Laker, Göran Lind, Masakazu Masujima, Lyndon Nelson, Till Redenz, 

Malcolm Rodgers, Christine Sampic, and Ian Tower (all external experts). The team worked 

under the guidance of Christopher Towe. The mission built on other relevant ongoing 

multilateral and bilateral surveillance work done within the IMF. The report incorporates inputs 

by other IMF staff in MCM, WHD, LEG, STA, SPR, and other departments. 

 FSAPs assess the stability of the financial system as a whole and not that of individual 

institutions. They are intended to help countries identify key sources of systemic risk in the 

financial sector and implement policies to enhance its resilience to shocks and contagion. 

Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk 

related to fraud, are not covered in FSAPs. 

 The United States is deemed by the Fund to have a systemically important financial sector 

(Press Release No. 14/08, January 13, 2014), and the stability assessment under this FSAP is part 

of bilateral surveillance under Article IV of the Fund’s Articles of Agreement.

 This report was prepared by Aditya Narain, Martin Čihák, and Simon Gray, with contributions 

from the FSAP mission members. It draws on the three Detailed Assessment Reports published 

on April 2, 2015 (Basel Core Principles for Effective Banking Supervision, IOSCO Principles, and 

IAIS Core Principles for Effective Insurance Supervision), and three Technical Notes (Review of 

the Key Attributes of Effective Resolution Regimes for the Banking and Insurance Sectors; Stress 

Testing; and Systemic Risk Oversight and Management) that accompany this report.

June 2015
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CONTENTS

GLOSSARY _______________________________________________________________________________________ 4

EXECUTIVE SUMMARY__________________________________________________________________________ 7

STEPS HAVE BEEN TAKEN TO ENHANCE STABILITY... ________________________________________ 9

...BUT NEW VULNERABILITIES ARE EMERGING________________________________________________ 9

A. Households and Nonfinancial Firms: Pockets of Weakness ________________________________ 10

B. Banks: Progress in Balance Sheet Repair ___________________________________________________ 11

C. Insurance Companies: New Risks Emerging________________________________________________ 13

D. Asset Management: Challenges in Market-Based Financing _______________________________ 13

E. Financial Markets: Stretched and Vulnerable to Bouts of Volatility _________________________ 15

F. Cross-border Interconnectedness and Spillovers ___________________________________________ 17

G. Stress Tests: Illustrating the Fault Lines ____________________________________________________ 19

...CALLING FOR A STRONG RESPONSE________________________________________________________23

A. Macroprudential Policy ____________________________________________________________________ 23

B. Supervision and Regulation ________________________________________________________________ 25

C. Market-based Finance and Systemic Liquidity _____________________________________________ 29

D. Financial Market Infrastructures ___________________________________________________________ 31

E. Housing Finance ___________________________________________________________________________ 32

F. Financial and Market Integrity______________________________________________________________ 33

G. Financial Inclusion, Literacy, and Consumer Protection ____________________________________ 33

...AND FOR REINFORCING SAFETY NETS AND THE RESOLUTION FRAMEWORK ___________34

A. Liquidity Backstops ________________________________________________________________________ 34

B. Crisis Preparedness and Management _____________________________________________________ 34

C. Resolution _________________________________________________________________________________ 35

D. Deposit Insurance _________________________________________________________________________ 36

BOXES

1. Financial Sector Sensitivity to Interest Rate Increases _________________________________________ 21

2. Time-Varying Macroprudential Policy: An Illustration _________________________________________ 25

FIGURES

1. Household Sector Soundness _________________________________________________________________ 10

2. Nonfinancial Firms: Leverage and Issuance____________________________________________________ 11
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3. Bank Soundness_______________________________________________________________________________ 12

4. Financial Cycle and Credit-to-GDP Gap _______________________________________________________ 12

5. SRISK Market Implied Capital Shortfalls _______________________________________________________ 12

6. High-Yield and Emerging Market Assets Managed by U.S. Open-Ended Mutual Funds ______ 14

7. Financial Markets _____________________________________________________________________________ 16

8. Interconnectedness and Spillovers ____________________________________________________________ 17

9. Stress Testing Results _________________________________________________________________________ 22

TABLES

1. Key Recommendations_________________________________________________________________________ 8

2. Compliance with International Standards _____________________________________________________ 27

APPENDICES

I. Financial System Profile________________________________________________________________________ 37

II. Financial Soundness Indicators vs. Peer Countries_____________________________________________ 47

III. Risk Assessment and Stress Testing __________________________________________________________ 48

IV. Key Regulations Where Implementation is Ongoing _________________________________________ 53

V. Report on the Observance of Standards and Codes __________________________________________ 54
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Glossary

ABS Asset Backed Securities

ACH Automated Clearing House

AML/CFT Anti Money Laundering and Combating the Financing of Terrorism

ATS Alternative Trading System

BCBS Basel Committee on Banking Supervision

BCP Basel Core Principles

BDs Broker-dealers

BHC Bank Holding Company

CCA Contingent Claims Analysis

CCAR Comprehensive Capital Analysis and Review

CCB Countercyclical Capital Buffer

CCP Central Counterparty

CDS Credit Default Swap

CELM Current Expected Loss Model

CFPB Consumer Financial Protection Bureau

CFTC Commodity Futures Trading Commission

CHIPS Clearing House Interbank Payment System

CLS CLS Bank International

CME Chicago Mercantile Exchange

CP Core Principles

CPO Commodity Pool Operator

CPSS Committee on Payment and Settlement Systems 

CRA Credit Rating Agency

CSD Central Securities Depository

CTAs Commodity Trading Advisors

DCMs Designated Contract Markets

DEA Direct Electronic Access

DIF Deposit Insurance Fund

DFA Dodd-Frank Wall Street Reform and Consumer Protection Act

DTC Depository Trust Company

DTCC Depository Trust & Clearing Company

DTI Debt-to-Income

ECN Electronic Communication Network

ELA Emergency Liquidity Assistance

EM Emerging Market

ETF Exchange Traded Fund

FATF Financial Action Task Force

FAWG Financial Analysis Working Group

FBA Federal Banking Agencies

FBO Foreign Bank Organization

FCM Futures Commission Merchant

FDIC Federal Deposit Insurance Corporation

FHA Federal Housing Administration

FHFA Federal Housing Finance Agency

FHLB Federal Home Loan Bank

FICC Fixed Income Clearing Corporation

FINCEN Financial Crimes Enforcement Network

FINRA Financial Industry Regulatory Authority
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FIO Federal Insurance Office

FMI Financial Market Infrastructure

FMU Financial Market Utility

FRB Federal Reserve Board

FSAP Financial Sector Assessment Program

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FSSA Financial System Stability Assessment

FX Foreign Exchange

GAAP Generally Accepted Accounting Principles

GAO Government Accountability Office

GFC Global Financial Crisis 

GFSR Global Financial Stability Report (IMF)

GSIB Global Systemically Important Banks

GSIFI Global Systemically Important Financial Institutions

HOLA Home Owners’ Loan Act

HY High-Yield

IAs Investment Advisers

IAIS International Association of Insurance Supervisors

IASB International Accounting Standards Board

ICE Intercontinental Exchange Clear Credit L.L.C

ICP Insurance Core Principles

ICPF Insurance companies and pension funds

IOSCO International Organization of Securities Commissions

IRRBB Interest Rate Risk in the Banking Book

KA Key Attributes of Effective Resolution Regimes for Financial Institutions

LCR Liquidity Coverage Ratio

LTV Loan-to-Value

MBS Mortgage Backed Securities

MMMF Money Market Mutual Fund

MMOU Multilateral Memorandum of Understanding

MOU Memoranda of Understanding

MFs Mutual Funds

NAV Net Asset Value

NAIC National Association of Insurance Commissioners

NBFCs Non-Bank Financial Companies

NBFI Nonbank Financial Institution

NCUA National Credit Union Administration

NFA National Futures Association

NPL Nonperforming Loan

NRSROs Nationally Recognized Statistical Rating Organizations

NSCC National Securities Clearing Corporation

OCC Office of the Comptroller of the Currency

OFR Office of Financial Research

OLA Orderly Liquidation Authority

ORSA Own Risk and Solvency Assessment

OTC Over The Counter

P&C Property and Casualty Insurance

PCAOB Public Company Accounting Oversight Board
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PEPs Politically Exposed Persons

PFMI CPSS-IOSCO Principles for Financial Market Infrastructures

QE Quantitative Easing

QM Qualified Mortgage

QRM Qualified Residential Mortgage

RBC Risk-Based Capital

RTGS Real Time Gross Settlement

SEC Securities and Exchange Commission

SEF Swap Execution Facility

SIFI Systemically Important Financial Institution

SIPC Securities Investor Protection Corporation

SLHC Savings and Loans Holding Companies

SMI Solvency Modernization Initiative

SRO Self Regulatory Organization

TBTF Too Big to Fail

TLAC Total Loss Absorbing Capital

TPR Tri-Party Repo
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EXECUTIVE SUMMARY

Welcome steps have been taken in strengthening the financial system. The Financial Stability 

Oversight Council (FSOC) now provides a useful forum for coordination; the regulatory perimeter has 

expanded; information sharing among agencies has improved; supervisory stress testing is leading 

changes in risk measurement and management; and new resolution powers have been established. 

But before the memory of the crisis begins to fade, it will be important to complete the 

reform agenda and resist attempts to overturn previously agreed measures. It is, therefore, 

critical that rulemaking under the Dodd-Frank Act (DFA) should be completed and implementation 

of several other agreed measures should begin. The regulatory landscape remains fragmented 

resulting in gaps, overlaps, and the potential for delayed responses to emerging risks, and should be 

simplified over time. While the FSOC has taken important steps in dealing with the ‘Too-Big-To-Fail’ 

problem, the enhanced standards for systemic non-banks need to be put in place. Key fault lines in 

housing finance, money market mutual funds, and the triparty repo and securities lending markets 

need to be addressed. 

Meanwhile, new pockets of vulnerabilities have emerged, partly in response to the continuing 

search for yield. While most indicators suggest that risks to financial stability have receded, 

potential areas of concern remain. Large and interconnected banks dominate the system even more 

than before. Risks are elevated in the non-bank sector, where “run” and “redemption” risks are 

increasing as a result of leverage and maturity transformation, and deeply interconnected wholesale 

funding chains. Insurers have taken on greater market risk and could be faced with negative equity 

in a downside scenario. 

This requires a continuing focus on strengthening the micro- and macro prudential framework. 

The FSOC should be strengthened with member agencies being given an explicit financial stability 

mandate. The comprehensive data needed to build a clear view of systemic risks and 

interconnections must be collected. An independent national regulator is an imperative for the 

insurance sector to address gaps with international standards (including weaknesses in valuation and 

solvency requirements) and to ensure consistency in regulation and supervision. Bank supervisory

guidance for concentration, operational, and interest rate risk needs to be updated. Outstanding 

rulemaking in the securities and derivatives space should be completed and emerging issues in 

effective market functioning should be tackled. The supervision of asset managers needs to be 

enhanced including explicit requirements on risk management and internal control and a structured 

effort to stress test the industry. Risk management standards for Financial Market Infrastructures 

need to be fully implemented. 

Finally, the responsibility for system-wide crisis preparedness and management needs to be 

clearly defined. The FSOC is the natural candidate for this role. Developing credible resolution plans 

for all systemically important financial institutions and infrastructures will be an important 

component of this work. 
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Table 1. Key Recommendations

Macroprudential framework and policy

Provide an explicit financial stability mandate to all FSOC member agencies [para 32]. 

Include in FSOC Annual Report specific follow-up actions for each material threat identified [para 32].

Publish the current U.S. macroprudential toolkit and prioritize further development [para 33].

Expedite heightened prudential standards for designated non-bank SIFIs [para 34].

Improve data collection, and address impediments to inter-agency data sharing [para 34].

Regulation and supervision

Give primacy to safety and soundness in the supervisory objectives of Federal Banking Agencies [para 38]. 

Strengthen the banking supervisory framework and limit structures for related party lending and concentration risk; and 

update guidance for operational and interest rate risk [para 39].

Set up an independent insurance regulatory body with nationwide responsibilities and authority [para 45]. 

Implement principle-based valuation standard for life insurers consistently across the states [para 43].

Develop and implement group supervision and group-level capital requirements for insurance companies [paras 42-43].

Provide needed resources to the SEC and CFTC and enhance their funding stability [para 49].

Increase examination coverage of asset managers [para 49].

Introduce explicit requirements on risk management and internal controls for asset managers and commodity pool 

operators [para 47].

Complete the assessment of equity market structure and address regulatory gaps [para 48].

Stress testing

Conduct liquidity stress testing for banks and nonbanks on a regular basis; run regular network analyses; and link 

liquidity, solvency, and network analyses [para 30].

Develop and perform regular insurance stress tests on a consolidated group-level basis [para 27].

Develop and perform regular liquidity stress tests for the asset management industry [para 28]

Market-based finance and systemic liquidity

Change redemption structures for MFs to lessen incentives to run; move all MMMFs to variable NAVs [paras 53-54].

Complete triparty repo reforms and measures to reduce run-risk, including the possible use of a CCP [para 52].

Enhance disclosures and regulatory reporting of securities lending [paras 56].

Strengthen broker-dealer regulation, in particular liquidity and leverage regulations [para 55].

Improve data availability across bilateral repo/triparty repo and securities lending markets [para 57]. 

Liquidity backstops, crisis preparedness, and resolution

Revamp the Primary Credit Facility as a monetary instrument [para 68].

Enable the Fed to lend to solvent non-banks that are designated as systemically important [para 69]. 

Assign formal crisis preparedness and management coordinating role to FSOC [para 72].

Extend the Orderly Liquidation Authority powers to cover systemically-important insurance companies and U.S. 

branches of foreign-owned banks [para 75–76].

Adopt powers to support foreign resolution measures; extend preference to overseas depositors [para 75].

Finalize recovery and resolution plans for SIFIs, agree cooperation agreements with overseas authorities [para 74].

Financial market infrastructures (FMIs)

Identify and manage system-wide risks related to interdependencies among FMIs, banks, and markets [para 59]. 

Offer Fed accounts to designated FMUs to reduce dependencies on commercial bank services [para 60].

Housing finance

Reinvigorate the momentum for comprehensive housing market reform [para 64].
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STEPS HAVE BEEN TAKEN TO ENHANCE STABILITY...

1. Since the 2010 FSAP, important steps have been taken to restore macroeconomic and 

financial stability. By 2011, the economy had recovered from one of the deepest recessions in the 

post-war period, and staff projections have the economy returning to potential in 2017. Bank and 

insurance capitalization is stronger, household balance sheets are healthier, and progress has been 

made in addressing key regulatory fault lines. Also, major reforms of financial regulation and 

supervision have been implemented, and work is ongoing on addressing the misaligned incentives 

that led to excessive risk taking. The creation of the FSOC has helped coordinate the work of a large 

number of regulatory agencies and aims to ensure an effective macroprudential response to risks. At 

the international level, too, the U.S. authorities have played a major role in promoting the post crisis 

reform agenda and in the discussions on strengthening the global financial system.

...BUT NEW VULNERABILITIES ARE EMERGING

2. Although systemic risks appear to have eased since the height of the crisis, a number 

of indicators bear close attention, especially since the protracted low-interest rate 

environment is again driving a search for yield.

 Credit risk measures have improved, driven by strengthened bank fundamentals and 

declining household delinquency; but corporate-sector indicators are less encouraging. 

There have been large increases in new issues of corporate debt—particularly speculativegrade—and risk spreads suggest overvaluation in some asset-market segments. 

 Market liquidity has declined according to some metrics, raising concerns that trading 

liquidity could be severely constrained in the event of a market disruption. 

 Equity prices also are approaching levels that may be hard to sustain given profit forecasts 

and an eventual interest-rate normalization. 

 Spillover risks also remain elevated. The U.S. financial system is closely interconnected with 

the rest of the global financial system, and asset price co-movements are well above precrisis levels. 

3. The locus of financial stability risks has moved to nonbank financial institutions and 

markets. Nonbanks now account for more than 70 percent of U.S. financial sector assets, reflecting 

an increasing amount of maturity and liquidity transformation taking place via managed funds. 

Moreover, nonbank financial institutions (including insurance companies) appear to be taking on 

higher credit and duration risk, and concern remains about the relative opacity of the leverage and 

other risks embedded in securities lending and cash reinvestment. Indeed, staff analysis illustrates 

that insurance companies, hedge funds, and other managed funds contribute to systemic risk in an 

amount that is disproportionate to their size.
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A. Households and Nonfinancial Firms: Pockets of Weakness

4. Household balance sheets appear less stretched than at the crisis onset, but pockets of 

risks have built up. Household debt has been falling since the beginning of the crisis (Figure 1), and 

household net worth has risen as a share of disposable income, but the improvement has been 

concentrated in the top two deciles of the income distribution. Housing price indicators are in line 

with their long-term trends. Households’ delinquency rates have dropped amid a stronger economy 

and job growth, but are more of a concern for the growing student loans and auto loans. For 

student loans, risks to lenders are mitigated by factors such as the federal government’s

extraordinary collection authority on loans it originates and guarantees; but the strong growth in 

student loan debt—which has trebled over the past 10 years to some $1.2 trillion—suggests this 

could become an important contingent liability for the government. Moreover, high student-debt 

burdens can limit access to other forms of credit, such as mortgages.

Figure 1. Household Sector Soundness

1. Leverage in households has declined since the 

crisis

2.Student loans have increased as a share of 

consumer loans

Sources: Bloomberg, Datastream, Federal Reserve, Haver Analytics, and IMF staff calculations.

5. Nonfinancial corporate balance sheets have become more leveraged, and the ability to 

cover debt service is a concern, especially for smaller firms (Figure 2). 2014 was a record year of 

issuance for U.S. investment-grade corporate bonds and collateralized loan obligations (CLOs) and a 

near-record year for high-yield corporate bonds. While large companies appear capable of 

sustaining increased debt loads, smaller corporations appear more vulnerable, especially once 

interest rates rise. Moreover, surveys show an easing in underwriting standards. Supervisors have 

taken steps to rein in excessive risk taking, particularly in banking books. Nonetheless, the search for 

yield has continued, and covenant-lite loans now account for two-thirds of new leveraged loan 
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1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

2003 2005 2007 2009 2011 2013

Net Debt to EBITDA

(median) Small firms

Large firms

issuance. Other types of lower-standard loans, such as second-lien loans, are also at near-record 

issuance rates. Rising leveraged buyouts and mergers and acquisitions activity also remain a 

concern. Relatively easy financing conditions and slowing earnings growth could encourage further 

deals at higher leverage. 

Figure 2. Nonfinancial Firms: Leverage and Issuance

1. Leverage and repayment capacity in 

nonfinancial firms

2. Commercial credit underwriting trends

(Percentage of Responses)

Sources: Bloomberg, Datastream, Federal Reserve, Haver Analytics, Barclays indices, and IMF staff calculations.

B. Banks: Progress in Balance Sheet Repair

6. Bank balance sheet and income positions have improved. Compared to the pre-crisis 

period, banks have strengthened their capital positions, including relative to their international 

peers, hold more liquid assets, and are less levered (Figure 3 and Appendix II). Net income has 

almost doubled in recent years, helped by lower provisions. The nonperforming loan ratio has fallen 

to just over 2 percent, half the level at its peak in 2010, and the coverage ratio has also improved. 

However, although the return on assets and return on equity have also strengthened, they are lower 

than pre-crisis.

7. Most measures point to a reduction in the systemic risks of banks. Financial cycles and 

credit-to-GDP gap indicators (Figure 4) do not signal excessive leverage, and indicators of distress 

based on market prices also provide an encouraging picture. For example, measures of the banking 

system’s market-implied capital shortfall (Figure 5) suggest that systemic risk posed by banks is 

declining towards its pre-crisis average.
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-50

0

50

100

150

200

-1000

-500

0

500

1000

1500

2000 2007 2009 2010 2014

Income statement of the banking sector, 2000-2014

(Billion US$)

Interest income Interest expense

Provisions Non-interest income excl. trading income

Trading income and securities gains Non-interest expense

Taxes, extraordinary gains Net income- right

Figure 3. Bank Soundness

Tier 1 common capital ratios Revenue, expense and net income trends

Source: SNL Financial Source: FDIC

Note: 2014 is 2014Q3 annualized.

Figure 4. Financial Cycle and Credit-to-GDP Gap

Source: IMF staff calculations.

Note: Financial cycles are computed using the BIS bandpass filter methodology and capture the co-movement between bank credit 

growth and residential property prices. The credit-to-GDP gap is defined according to current Basel Committee on Banking 

Supervision guidance as the difference between the credit-to-GDP ratio to its long term trend, calculated using a one-sided 

Hodrick-Prescott filter with a smoothing parameter of 400,000. 

Figure 5. SRISK Market Implied Capital Shortfalls

Source: NYU Stern Volatility Lab, as of end 2014Q

Note: SRISK is an estimate of the capital that a financial firm would need to raise if a severe financial crisis were to occur.

0

0.2

0.4

0.6

0.8

1

1996 1999 2002 2005 2008 2011 2014

Cycle Amplitde

Financial Cycle Position

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

1996 1999 2002 2005 2008 2011 2014

Deviation from Trend

Credit-to-GDP Gap

United States SRISK (USD Billions)

U.S. cycle inflection point

0

4

8

12

16

20

Tier 1 common capital

Non-common tier 1 capital

TARP

Tier 1 Common Capital Ratios at CCAR Institutions

(percent of risk-weighted assets)

Source: SNL Financial. 
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C. Insurance Companies: New Risks Emerging

8. Insurance companies, hurt by the prolonged period of low interest rates, are taking on 

greater risks. The industry continues to consolidate, with many firms exiting the market, and a few 

firms failing. Searching for yield, some insurers have invested more in private equity, hedge funds, 

longer duration and lower credit corporate bonds, and real estate related assets. Some life insurers 

have increased their securities-lending and cash collateral reinvestment activities. Large life 

insurance groups in particular have expanded nontraditional business, provide complex guarantees, 

and remain exposed to macroeconomic risks. 

9. There are important handicaps to assessing the sector’s health. Capital adequacy at legal 

entity level, measured by the regulators’ risk-based capital (RBC) requirements, has increased since 

the crisis, and the number of companies breaching regulatory levels has declined. However, capital 

adequacy ratios are hard to interpret due to valuation rules, regulatory arbitrage via captives, and 

lack of regulatory capital adequacy measures at group level.

D. Asset Management: Challenges in Market-Based Financing

10. Maturity and liquidity transformation in short-term wholesale funding markets 

outside banks is substantial, though it remains hard to measure. Funding comes primarily from 

Money Market Mutual Funds (MMMFs) and securities lenders reinvesting cash collateral. Borrowing 

demand comes mostly from broker-dealers and short-term corporate finance. Much of it is 

intermediated through the repo markets.

11. The systemic importance of mutual funds (MFs) has grown since the crisis. Assets under 

management have increased, especially in corporate high-yield (HY), and emerging market (EM)

bonds and debt funds (Figure 6). There is evidence that herding behavior among U.S. MFs is 

intensifying, particularly in smaller less liquid markets, and in retail markets. MFs could act as 

amplifiers to shocks to the financial system through asset liquidation (investors may rush to redeem 

their shares, while the funds may be invested in illiquid assets) and through direct exposures (funds 

may exit from risky assets and limit their willingness to fund other key players in the system). 
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Figure 6. High-Yield and Emerging Market Assets Managed by 

U.S. Open-Ended Mutual Funds 

(in US$ billions)

Sources: CRSP, IMF staff calculations.

Note: Covers assets held by dedicated high-yield and EM mutual funds, and excludes these asset types that may be held by other 

types of mutual funds.

12. Open-ended MFs and underlying asset markets could be vulnerable to sudden shifts 

in investor sentiment. MFs have a regulatory obligation to meet redemption demand in cash 

within 7 days, which at times of stress they may be unable to meet, given limited liquidity buffers or 

access to safety nets. Cash and other liquidity buffers are limited, at least for passive MFs, by their 

need to minimize tracking error; and there are potential problems in borrowing to fund redemptions 

(see paragraph 53). Some investments appear to be moving to the edges of the regulatory 

perimeter, for example, into separate accounts and trusts.

13. Liquidity risks in the exchange traded fund (ETF) sector are also on the rise. The 

traditional U.S. ETF, offering passive equity indexation with physical replication, combines exchange 

trading and market-maker arbitrage incentives with redemption in-kind to provide liquidity. Investor 

perception of ETF-structure liquidity appears to have combined with the low-for-long interest rates 
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environment to facilitate rapid growth in fixed income ETFs specializing in EM and HY corporate 

debt and bank loans, despite the lower liquidity of the underlying assets and limited arbitrage 

incentives of market makers.

14. Pension funds may also give rise to systemic risks in the U.S. financial system. While 

many funds are shifting towards defined contribution, defined benefit plans still remain almost half 

of the industry, and about 20 percent of multi-employer pension funds are underfunded. Pressure to 

improve returns could spur undue risk taking, whether via direct credit exposure or through 

securities lending and cash reinvestment. As noted in the 2015 FSOC Annual Report, the transfer of 

pension risk to the insurance industry, through ‘longevity swaps’ and other insurance products,

increases the interconnectedness of the system. 

E. Financial Markets: Stretched and Vulnerable to Bouts of Volatility

15. Market valuations are beginning to appear stretched (Figure 7). Stock prices reached alltime highs in early 2015, and measures such as Shiller’s cyclically-adjusted price-to-earnings (P/E) 

ratio suggest that the stock market is around 1 standard deviation above historical norms. Margin 

borrowing as a percentage of market capitalization is higher than during the 1990s stock market 

bubble, and is more worrisome given the decline in market liquidity. The search for yield has also 

compressed risk premiums across most fixed income classes. 
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0

5

10

15

20

25

30

35

40

45

50

1993 1996 1999 2002 2005 2008 2011 2014

Shiller P/E 1-year trailing P/E 1-year forward P/E

Long-term averages

Figure 7. Financial Markets

S&P 500 Price-to-Earnings Ratio (Percent)

Cyclically-Adjusted Equity Yields in U.S. and Other 

Countries

Implied Bond Term Premiums in U.S. and Other 

Countries

Source: IMF staff calculations; cut-off date for data is March 2015.

Notes: The implied real equity yield is the cost of capital for equities (or the required return to hold stocks), expressed as the number of 

standard deviations from the country-specific long-term average. The implied bond term premium is defined as 5y5y rates (local 

currency terms) minus 5y5y survey-based expectations for real GDP growth and inflation, expressed as the number of standard 

deviations from the country-specific long-term average. Data start in 1989 (1953 for the United States). 

16. Important interconnections exist among banks, nonbanks, and financial markets. Banks 

and nonbanks have substantial holdings of domestic securities that could be subject to heightened 

volatility in the transition as monetary policy moves to a tightening cycle. Another material 

transmission channel relates to MMMFs and their sponsors (asset managers and banks), some of 

which have in the past provided support by lending or by purchasing fund assets, even if not 

formally obliged to do so. Other important developments include transfers of pension risks by 

corporate-sponsored pension plans to insurance companies and derivatives markets. The FSAP 

team’s analysis (see Stress Testing Technical Note) brings out many of these interconnections, as do 

recent reports by the OFR and the FSOC. However, there are still critical data limitations that the 

authorities need to address to improve the understanding of interconnectedness.
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17. The interconnections would amplify shocks, for example, in the case of sizeable 

interest rate shocks. The system appears able to withstand moderate increases in interest rates, 

such as those expected in an interest-rate normalization. In fact, a “low-for-long” scenario is more

troublesome for financial stability, particularly the life insurance sector, than orderly interest rate 

increases. However, in the event of “disorderly” interest rate increases, parts of the system—such as 

some managed funds and life insurance companies—would be affected materially (Box 1). The 

team’s stress tests illustrate that cross-sector spillovers amplify the effects of shocks, as U.S. banks, 

insurers, and other non-bank financial institutions tend to be adversely affected by credit risk shocks 

originating in other domestic sectors (Stress Testing Technical Note), while a combination of factors 

has left markets less able to manage swings in interest rates and liquidity.

Figure 8. Interconnectedness and Spillovers

Cross-border interconnectedness Banks’ external positions

Source: IMF, 2014, “Mandatory Financial Stability Assessments under 

the FSAP: Update” www.imf.org/external/np/pp/eng/2013/111513.pdf

Note: The four global financial networks are based on different types 

of bilateral cross-border linkages: direct exposures (bank, debt, and 

equity claims) and price contagion (a matrix of cross-correlations of 

domestic stock market returns). The bilateral exposure and correlation 

matrix data are weighted by: (i) PPP GDP, to capture size, and (ii) the

gross derivatives exposures vis-à-vis BIS reporting banks, to capture 

the complexity of financial sectors. The U.S. financial system is at the 

core of all four networks.

Source: International Monetary Fund, Bank for International 

Settlements, IMF staff calculations.

Note: data in billion USD.

F. Cross-border Interconnectedness and Spillovers

18. The interconnectedness of the U.S. system with the rest of the world remains key for 

global stability (Figure 8). U.S. GSIBs account for 22 percent of total GSIB assets; the U.S. insurance 

market is the largest in the world with premium volume accounting for a third of the global market 

and the three U.S. G-SIIs account for a third of total G-SII assets; and the U.S. derivatives market also 

represents one third of the world market. The U.S. banks’ external positions remain sizeable even 

after the crisis. The U.S. financial sector is one of four jurisdictions at the core of the world’s bank 

network, as well as at the core of the equity market, debt market, and price correlations networks. 

Market-price based calculations (see Stress Testing Technical Note) indicate that distress in the U.S. 
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financial system may have strong effects on distress in foreign financial institutions, while the 

“spillback” is limited. It is hence important that authorities continue to participate actively in the 

ongoing monitoring and assessment of the impact of regulatory reforms at the global level in order 

to promote safe and transparent markets and to address any material unintended consequences 

should they be identified.

19. Recent years have provided examples of cross-border spillovers from, and spillbacks 

to, the U.S. financial system. For instance, the direct exposure channel stemming from MMMFs

was highlighted during the European sovereign crisis, when U.S. MMMFs cut their exposures to 

European banks, resulting in severe dollar shortage for those banks. This dollar shortage was also 

visible in a large increase in euro-dollar basis swaps, until the ECB and the Fed reintroduced 

USD/EUR swaps in November 2011. More recently, the announcement of the ECB’s QE program has 

had a measurable impact on long-term U.S. yields.

20. This highlights the importance of cross-border information sharing, cooperation and 

coordination in regulation, supervision, enforcement, resolution and crisis management. The 

U.S. authorities are actively engaged in promoting international regulatory coordination, though 

there remain a few gaps to be addressed. 

 In banking, there is a comprehensive framework of policies and processes for cooperation 

and exchange of information between the FBAs and foreign supervisory authorities, though 

state banking agencies with Foreign Banking Organization (FBO) presence do not always 

inform or coordinate enforcement actions with home supervisors. 

 The SEC and CFTC are signatories to the IOSCO Multilateral MOU (MMOU) and also have 

several bilateral MOUs with foreign authorities, and have responded to a significant number 

of information requests from foreign authorities. 

 In insurance, the U.S. authorities’ approach to cross-border coordination and crisis 

management is at an early stage of development, reflecting the recent establishment of 

colleges of supervisors for the IAIGs and CMGs for the NBFC-led firms. 

 Further efforts are also needed in coordinating cross-border resolution, which is complicated 

by the depositor preference rules as well as potential ring-fencing of foreign-owned 

uninsured bank branches.

 A solution for mutual recognition of CCPs and a common approach on margin requirements 

and other risk management requirements, which will help to reduce duplication of rules, 

regulatory gaps and inconsistencies, is still outstanding, though work is continuing to 

support the application of deference to foreign regulatory regimes for OTC derivatives.
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G. Stress Tests: Illustrating the Fault Lines1

21. Stress tests were used to quantify the potential impacts of risks and vulnerabilities in 

banks and nonbanks (Figure 9). A broad evaluation of potential risks is embodied in the Risk 

Assessment Matrix (Appendix Table 2). The FSAP team conducted top-down solvency tests for bank 

holding companies (BHCs) and insurance sectors, liquidity risk analysis for BHCs and mutual funds, 

and market-price based stress tests. The exercise was informed by top-down stress tests performed 

by supervisors for the BHCs and insurance companies, and bottom-up stress tests run by BHCs.

22. The results of the 2015 supervisory and company-run stress tests (DFAST) required by 

the authorities suggest that the banking system is resilient to severe shocks. Even in a “severely 

adverse” scenario resembling the 2008–09 crisis, all 31 BHCs have sufficient capital to absorb 

losses—the first time since the start of annual stress tests in 2009 that no firm fell below any key 

capital threshold.

23. The staff’s analysis benefitted from the relatively wide range of publicly available data, 

but was nonetheless subject to data constraints. Insurance sector data are limited by the 

fragmentation of insurance sector oversight between state and federal entities, lack of a 

consolidated view of companies’ global activities, complexity of U.S. valuation practices, complexity 

of the insurance business, and absence of group-level risk-based capital. Moreover, banking 

supervisors were limited in their ability to share confidential supervisory information that could 

better inform the team of institutional interconnectedness, and liquidity and interest rate risks. 

24. For banks, the staff’s solvency stress tests are largely in line with DFAST results, but do 

point to potential strains which could impact the economic recovery. In the first year, the 

system-wide CET 1 ratio would fall by 21⁄2 percentage points, but no BHCs would fall below the 

hurdle rates, reflecting banks’ already high capital positions. Two BHCs would breach the minimum 

capital requirement in 2016 and an additional eleven BHCs thereafter, with a total capital shortfall

that peaks in 2019 at the equivalent of 1 percent of 2019 GDP. To a large extent, the shortfalls reflect 

the staff’s assumption of continued loan growth even in the face of the adverse shock and 

impending breaches of regulatory thresholds. Thus, the results are more illustrative of the difficulty 

that banks would face in contributing to a recovery rather than systemic risk.

25. Network analyses also illustrate the potential for spillovers among the largest 

domestic institutions. Due to data limitations, the exercise focused on six large BHCs, accounting 

for some 50 percent of the banking system’s total assets. The results indicate that contagion risks 

among these institutions are contained, since their direct exposures are not large relative to their

initial capital levels. Nonetheless, the calculations also suggest that risk transfer mechanisms, such as 

credit default swaps, alter significantly the risk profile of financial institutions, illustrating the 

importance of expanding the data on such exposures.

 

1

This section summarizes the analysis and findings of the accompanying Technical Note on Stress Testing.
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26. Staff’s liquidity risk analysis suggests that most BHCs now have sufficient liquid assets 

to meet a shock similar to the 2008/2009 event. A few BHCs would face liquidity pressures due to 

deposit outflows in the short run and large unused commitments over a longer horizon. In the 

absence of supervisory data, historical run-off rates and quarterly published data were used in the 

analysis. However, if run-off rates similar to the ones in the LCR are used then liquid assets for many 

BHCs would be insufficient to meet liquidity needs due to the large withdrawal of wholesale funding. 

27. On the insurance side, stresses may have a significant impact, especially in life 

insurance. The analysis—which covered 43 insurance groups—was handicapped due to data

limitations, but still suggested that life insurers would suffer a substantial reduction of shareholder 

equity if a “fully market-consistent” valuation was applied (16 life insurers and 1 credit insurer fell 

into “distressed” levels in the adverse scenario). The current valuation regime would only recognize 

the impact of these asset shocks over time. Indeed, when the exercise is performed on a statutoryaccounting basis, the results appear more benign and are broadly in line with top-down stress tests

performed by the NAIC, but mask the economic impact. The authorities are encouraged to develop 

and perform insurance stress tests on a consolidated, group-level basis.

28. Quantitative analysis highlights the potential for market stress from heightened 

redemption pressures at mutual funds. The analysis measured whether, in the face of severe 

redemption pressures wherein open-ended mutual funds are forced to liquidate positions, markets 

would have enough trading liquidity to absorb the asset sales. The analysis compared assets sold by 

mutual funds hit by a redemption shock with position data on dealer inventory. It covered some 

9,000 mutual funds representing around 80 percent of the industry. Results suggest that municipal 

bonds and corporate bonds markets may face significant stress in the face of such shocks. This 

exercise is only preliminary, and the authorities are encouraged to start conducting regular topdown analysis to provide a more holistic picture of the industry’s contribution to systemic risk.

29. Market equity-price based stress tests illustrate the importance of cross-sectoral 

spillovers under stress. In very active markets such as the U.S. ones, market equity price based 

stress tests can provide a useful complement of the accounting-data based stress tests. Under the 

baseline scenario, estimated distress probabilities are expected to either remain stable or trend 

slightly downward to their pre-crisis levels. Under the stressed scenario, estimated distress 

probabilities are expected to rise in a manner which is broadly commensurate with—but milder 

than—the increase in the 2008 financial crisis. The tests suggest that a severely adverse change in 

the macroeconomic environment would significantly increase the probability of distress of all sectors 

of the U.S. financial system. Importantly, cross-sector spillovers amplify the effects of shocks. U.S. 

banks, insurers, and other non-bank financial institutions tend to be adversely affected by credit risk 

shocks originating in other domestic sectors. Spillovers from the United States to the rest of the 

world can be large; spillbacks from the rest of the world appear to be relatively modest.

30. The exercise suggests scope for enhancement in the authorities’ stress tests. While the 

authorities’ solvency stress tests for BHCs are state-of-the art in many respects, enhancements are 

needed, especially in nonbank stress tests. Improvements include addressing data gaps by collecting 

interbank exposures for a fuller sample of banks; conducting a network analysis on a regular basis; 
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reexamining some of the solvency stress test assumptions to ensure consistency with historical 

evidence; implementing both solvency and liquidity stress tests not only for banks but also for 

nonbanks (such as insurance companies, mutual funds, and pension funds); linking liquidity, 

solvency, and network analysis in a systemic risk stress testing framework; and examining the 

spillover risks between nonbanks and banks.

Box 1. Financial Sector Sensitivity to Interest Rate Increases

Effects of interest rate hikes would differ across sectors, but appear manageable if the hikes are orderly. 

The long period of low interest rates has impacted sectors differently, depending on their business models and 

“search for yield.” Orderly increases in interest rates are likely to have a relatively small overall impact, although 

parts of the financial system are likely to be affected substantially, especially if interest rates rise rapidly (see 

Stress Testing Technical Note).

Life insurance would be materially affected, if rate hikes were “disorderly.” The market value of bond 

portfolios would decline, especially for longer duration instruments, but the impact would be mitigated by the 

fact that these are typically carried on an amortized cost basis. A dramatic rise in interest rates could also 

increase policy surrenders and drive up funding costs for those issuing bonds. Conversely, high rates would 

reduce the existing large gap between the market and actuarial rate used to discount liabilities. On balance, 

the IMF’s stress tests suggest that the effects of higher interest rates, in themselves, would be manageable, if 

the effects on risk spreads are contained, since economic valuations of assets and liabilities would move in the

same direction. A “low-for-long” scenario would be more worrisome because of the continued erosion of life 

insurance company capital.

Large banks seem well positioned to withstand an interest rate shock. IMF staff calculations for 31 BHCs 

suggest that even a 4.5 percentage point increase in the 3-month Treasury yields would have only a marginal 

impact on CET1, because higher losses on credit and AOCI would be largely offset by retained earnings and 

reduced growth rates of assets. These calculations do not incorporate broader macroeconomic effects of 

higher interest rates. Authorities’ own calculations suggest that a mild recession with a sharp increase in short 

term rates (“DFAST adverse scenario”) would lead to only moderate declines in capital ratios of the 31 BHCs.

Small banks could be affected more. They are particularly exposed to interest rate risk as their asset 

maturities have become longer and liability maturities shorter. This is particularly relevant in the context of the 

BCP finding that the regime for interest rate risk in the banking book needs updating (Appendix V). 

Some managed funds could face difficulties. Redemption demand could jump if there were a disorderly rise 

in rates, and some funds exposed to leveraged borrowers could also face major losses. Turbulence in longerterm yields could result in significant market risk; if forced to sell assets to meet strong redemption demand, 

or in the event of default by a repo borrower, managed funds exposed directly or indirectly to longer-term 

bond yields could suffer losses.

The Fed’s balance sheet would be impacted by a sharp increase in short-term rates and normalization of 

term yields as QE unwinds. However, its balance sheet is robust to yield curve changes, and the 

implementation of monetary policy would not be affected.
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Figure 9. Stress Testing Results 

Impacts on banks’ CET1 capital ratios appear manageable

Life insurance companies most affected in the stress test

Market Price Based Stress Testing: (Forecasted 1-Year Ahead Estimated Distress Probabilities)

Note: Blue lines indicate 25th and 75th percentile values of the distribution of historical estimates of U.S. institution 1-year ahead 

default probabilities. The dashed black line denotes the median value of the distribution of historical estimates of U.S. institution 1-

year ahead default probabilities. The solid red and black lines denote median 1-year ahead default probabilities projected by the 

CCA stress tests under the stress and baseline scenarios, respectively. To better show projection details, the y-axis has been 

truncated for the U.S. financial system, domestic banks, insurers, asset managers, and NBFIs. The blue lines denoting the 75th 

percentile reached maximum values of 2.5%, 4%, 6.5%, 2%, and 16%, respectively, for these five sectors in 2008-2009. Only 

projections for the overall U.S. financial system model explicitly take into account changes in the estimated default probabilities of 

other sectors. Individual sector projections were generated exclusively using macroeconomic and connectivity factors. 

Source: IMF staff estimates based on data from SNL Financial, Bloomberg, Datastream, and Moody’s KMV. Note: For details, see 

Technical Note on Stress Testing.
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...CALLING FOR A STRONG RESPONSE

A. Macroprudential Policy

31. The United States has taken important steps to establish a macroprudential 

framework. The FSOC provides a key framework for systemic risk oversight, and a critically 

important forum for collectively identifying risks and encouraging individual agencies to respond. 

Important progress has been made in defining which entities should be subject to enhanced 

prudential standards and assigning overarching responsibility for their oversight to the Fed. The 

efforts by the Office of Financial Research (OFR) to collect data and monitor risk are promising.

32. The FSOC’s governance could be strengthened to ensure timely responses to systemic 

risk. Operational independence of member agencies is important, but it creates challenges for the 

operation of the Council. To address these challenges, three steps are recommended:

 Provide an explicit financial stability mandate to all FSOC member agencies. Several 

agencies have no explicit legal mandate to support financial stability, which complicates 

their input to the FSOC, and potentially undermines the agency response to FSOC 

recommendations and macroprudential coordination. 

 Publish specific follow-up actions to address financial stability threats identified by the 

FSOC. These recommendations should identify timelines and responsible agencies.

 Reinforce the collective ownership of the FSOC. It would be helpful to appoint Chairs for 

each of the supporting staff committees, drawing upon the expertise of the member 

agencies.2 Moreover, members should consult FSOC as standard practice on the 

development and implementation of major regulatory rules that could impact financial 

stability.

33. The macroprudential toolkit needs to be developed further; additional tools to 

strengthen market resilience to run risks and fire sales should be a high priority. Progress has 

been achieved in building structural resilience of banks. But “time-varying” tools to address a buildup of financial stability pressures (Box 2) still need to be developed further and implemented. The 

multiplicity of regulatory agencies with overlapping sectoral mandates underscores the importance 

of the FSOC in identifying when such tools are needed, and promoting the implementation of 

effective system-wide ‘time-varying’ macroprudential tools. Importantly, in the present conjuncture, 

developing additional tools to strengthen market resilience to run risks and fire sales should be a 

high priority. FSOC could take a more assertive line in promoting a coherent approach to tackling 

these risks (see paragraphs 52–56), including plans for using existing tools and finalizing the 

preparation of new instruments for macroprudential purposes. In particular, it will be important to

 

2

Charters for each committee were published in May, but they do not provide for a Chairperson.
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complete the necessary final steps on application triggers required to implement the countercyclical 

buffer; examine the scope to alter risk weights on particular types of lending; and consider how 

macroprudential tools could be used in the real estate sector e.g. by varying maximum LTVs and DTI 

ratios (paragraphs 62, 64).

34. In addition:

 Initiatives to address the TBTF problem need to be sustained. Strides have been made in 

addressing the TBTF issue through the DFA Title I designation process, and the requirement 

to elaborate robust living wills. This is supported by enhancements to resolution capabilities, 

but it remains a work in progress, and major financial institutions have continued to grow in 

size. Higher prudential standards have been set for large banks, but heightened standards 

for designated nonbanks are still not in place.

 The response to identified threats should be more robust. Progress has been slow in 

some areas. In relation to MMMFs, a strong initial stance has thus far resulted in planned 

changes to a part of the market by end-2016, with full implementation nearly 10 years after 

the initial problems with MMMFs arose in 2007. 

 Further action is needed to address data gaps and impediments to data sharing. There 

are shortfalls in collection, availability, and ease of manipulation of data. Data gathering on 

bilateral repo, securities lending, and asset management is at early stages, despite DFAmandated action to address important gaps. Outstanding obstacles to interagency data 

sharing need to be reduced. 3

 Systemic risk oversight of FMIs should be expanded.

4

It will be important to cover 

identification and management of interdependencies and interconnections between the 

FMIs as well as stand-alone risks. Regulations governing FMIs should be completed and 

implemented consistently by the relevant agencies.

 

3

An example would be follow-up on issues complicating information sharing highlighted by the efforts to diagnose 

the causes of the October 15, 2014, “flash rally”.

4

This report follows international usage with the term ‘financial market infrastructure (FMI)’ to refer to ‘financial 

market utility’ - a term used in the United States only. FMIs that are designated as systemically important by the 

FSOC are referred to as ‘designated FMUs’ in line with the DFA.
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Box 2. Time-Varying Macroprudential Policy: An Illustration

To illustrate the possible effects of time-varying macroprudential policies in the United States, a 

hypothetical path of a countercyclical capital buffer (CCB) was estimated using the BCBS formula.

Three measures of credit were considered: (i) private sector loans of total financial system; (ii) private 

sector debt; and (iii) private sector loans of all U.S. chartered depository institutions. In line with the BCBS 

methodology, a one-sided Hodrick-Prescott filter was used to extract the trend and calculate the credit 

gap. It was assumed that the CCB increases linearly for a credit gap between 2 and 10 percent. Growth 

rates of house prices and banks’ stock prices (two standard deviations from the mean) were used as 

indicators for the CCB release 

phase.

The CCB could have had 

significant mitigating effects. 

If the BCBS proposal had been 

in place since 1995 (text chart), 

the buffer would have built up 

to its maximum 2–4 years before 

the financial crisis (using the first 

two measures of credit). A 

calculation based on 2008 Tier 1 

capital shows that the additional 

buffer would have saved up to 

40 percent of the fiscal costs 

(equivalent to US$250 billion) of 

the financial crisis. While this is 

only a hypothetical exercise that 

has the benefit of hindsight, the 

savings could be even bigger, 

because the calculation does 

not consider the likely effect of 

the buffer on bank lending behavior: requiring additional capital before the crisis could have discouraged 

bank lending and mitigated the housing price boom.

Source: IMF staff calculations based on U.S. banking system data.

Note: For further discussion and other country examples for CCB, see IMF, 2013, 

“Key Aspects of Macroprudential Policy—Background Paper” 

(http://www.imf.org/external/np/pp/eng/2013/061013C.pdf ). Jurisdictions can 

impose a CCB higher than 2.5 percent, but mandatory reciprocity will not apply to 

the additional amounts.

B. Supervision and Regulation

35. The complex regulatory framework continues to present challenges for coordination 

and group-wide supervision. An opportunity was missed to consolidate the landscape, which 

consists of a number of overlapping federal agencies and several hundred state regulatory agencies, 

self regulatory organizations (SROs), and coordinating groups. Consolidation would substantially 

reduce gaps, overlaps, potential delays in regulatory actions, and barriers to data sharing.

36. The prudential oversight of banks, insurance companies, and securities markets has 

been strengthened, but needs to be updated to respond to emerging risks. Some gaps have 

been identified in the assessment of the supervisory and regulatory framework against international 

standards (Table 2). In addition, a key risk faced by the entire financial system is that of loss and 

disruption of activity from cyber attacks, which have increased with several major risk events 
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occurring in recent periods. The regulatory agencies are working with the government security 

establishment to develop and share best practices to deal with such events.

Banking

37. The federal banking agencies have improved considerably in effectiveness, and 

achieve a high degree of compliance with international standards (Table 2). In response to 

global and domestic reforms, they have stepped up their supervisory intensity. There has also been 

a marked improvement in the risk management practices (including stress testing practices) of 

banking organizations. Comprehensive stress testing has been integrated as part of the supervisory 

toolkit. The resolvability planning exercise is also beginning to influence the complexity of banking 

organization.

38. But the existence of a complex, multi-agency framework continues to pose challenges 

for the coordination of timely responses to risk. There is still substantial duplication of 

supervisory effort, and this can result in uncertainty for institutions when rules or guidance appear 

contradictory. It would also be beneficial to redefine the federal banking agencies’ mandates so that 

safety and soundness are given primacy in their supervisory objectives, leaving consumer protection 

to the CFPB. Finally, charter shopping has not been eliminated, the dual banking structure poses a 

challenge for international cooperation, and enforcement actions are not always coordinated with 

home supervisors.

39. There are other pressing gaps in the bank supervisory framework. A clearer delineation 

of the contribution of boards and senior management in supervisory assessments would aid efforts 

to improve risk management. The concentration risk framework needs to be strengthened to cover 

market and other risk concentrations and there remain gaps in the large exposures and related 

parties framework. Supervisory guidance and reporting requirements in operational risk are very 

disparate. The approach to interest rate risk in the banking book is in marked contrast to other risks, 

with no specific capital charges or limits being set under Pillar 2. Differences vis-à-vis Basel III remain 

in the capital adequacy regime as pointed out by the Basel Committee’s Regulatory Consistency 

Assessment Program, and an interagency proposal on compensation reform has yet to take shape 

to supplement supervisory guidance. 

40. The enhanced supervisory focus on large banks is welcome, but should not result in 

supervisors overlooking small deposit takers. Supervisory expectations are tailored to be less 

strict for smaller, non-systemic banks. This proportionate approach is generally appropriate 

although small banks with higher risk activities should be encouraged to adopt better practices in 

corporate governance, risk management, and contingency planning commensurate with their risk 

profile, especially given that previous episodes of crisis have originated in small and medium banks.
Table 2. Compliance with International Standards

IOSCO Securities Regulation and Supervision Insurance Supervision and Regulation Banking Supervision and Regulation

Clear and consistent regulatory process Changes in control and portfolio transfers Independence, accountability, resources

Professional standards and confidentiality Preventive and corrective measures Cooperation and collaboration

Regular review of regulatory perimeter Enforcement Permissible activities for banks

Conflicts of interest and misalignment of incentives Winding up and exit from the market Licensing criteria

Authorization and oversight of SROs Reinsurance and other forms of risk transfer Transfer of significant ownership

Inspection, investigation, and surveillance powers Investment Major acquisitions

Enforcement powers Public disclosure Supervisory approach

Authority to share public and non-public information Countering fraud in insurance Supervisory reporting

Mechanisms to share public and non-public information Information exchange and confidentiality Corrective and sanctioning powers

Assistance to foreign regulators Licensing Home-host relationships

Fair and equitable treatment of securities holders Suitability of persons Credit risk

Accounting standards Risk management and internal controls Problem assets, provisions and reserves

Oversight of auditors Supervisory review and reporting Country and transfer risks

Independence of auditors Enterprise risk management for solvency purposes Market risks

Auditing Standards Capital adequacy Interest rate risk in banking book

Oversight of Credit Rating Agencies Intermediaries Liquidity risk

Oversight of entities offering research and analysis Conduct of business Internal controls

Disclosure to evaluate suitability of a CIS AML and CFT Disclosure and transparency

Oversight of Hedge funds Macroprudential surveillance and supervision Responsibilities, objectives and powers

Entry standards for market intermediaries Supervisory cooperation and coordination Supervisory techniques and tools

Capital for market intermediaries Cross border cooperation and crisis management Consolidated supervision

Managing failure of market intermediaries Objectives, powers and responsibilities of supervisors Corporate governance

Supervision of exchanges and trading systems Supervisor’s Independence, accountability, resources Risk management process

Detection of manipulation and unfair trading practices Corporate governance Capital adequacy

Managing large exposures, default risk, market disruption Valuation Concentration risk and large exposures

Responsibilities of regulators Group-wide supervision Transactions with related parties

Independence and accountability KEY: 

Fully Implemented/Observed/Compliant

Broadly Implemented/Largely Observed/ 

Largely Compliant

Partly Implemented/ Partly Observed 

Partly Compliant 

Source: Detailed Assessments of Observance, published April 2, 

2015 (www.imf.org/external/np/fsap/fsap.aspx)

Operational risk

Monitoring, managing and mitigating systemic risk Financial reporting and external audit

Effective and credible supervisory programs Abuse of financial services

Full, accurate and timely disclosure

Segregation and custody of CIS assets

Asset valuation and pricing and redemption in CIS

Internal controls / risk mgmt/ supervision of intermediaries

Authorization of and requirements for trading systems

Transparency of trading

Adequate powers, resources and capacity of regulators

Standards for Collective Investment Schemes

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Insurance

41. The U.S. insurance supervision framework has been strengthened. State regulators—

under the aegis of the NAIC—have initiated solvency modernization and taken steps to strengthen 

group and international supervision. The newly established Federal Insurance Office (FIO) has 

provided a mechanism for identifying national priorities for reform and development, under the 

umbrella of the FSOC. The extension of the FRB’s responsibilities to cover consolidated supervision 

of certain insurance groups should strengthen oversight of systemic risks. 

42. However, there are important gaps in compliance with international standards, and 

reforms remain a work in progress. At the state level, transition to more principles-based 

regulation and risk-focused supervision is taking time and faces obstacles. Increased emphasis is 

being placed on risk management through the introduction of an Own Risk and Solvency 

Assessment (ORSA) with wide-ranging implications for supervisory work and resourcing. There 

remain differences in independence, accountability and funding of insurance supervisors across 

states, as well as variations in their regulations and supervisory approaches. The FRB’s supervisory 

approach to insurance groups still needs to strike out in its own direction. Staffing regulation and 

supervision with appropriate skills and expertise is a continuing challenge. The approach to 

valuation and solvency regulation could lead to regulatory arbitrage. 

43. The valuation standard should be changed to reflect the economics of the products 

better, and solvency regulation extended to groups. Principles-Based Reserving, part of the 

solvency modernization initiative, would mitigate some of the issues, but its implementation date is 

uncertain. In relation to capital, there are no group-level capital standards in place, whether 

supervised by states or the FRB, including for the three insurance groups designated by FSOC. Active 

usage of affiliate captive reinsurers creates uncertainty whether capital adequacy is sufficient at the 

group level. 

44. And, the regulatory system for insurance remains complex and fragmented. The NAIC 

continues to promote uniform standards of state regulation, but cannot enforce convergence. FIO 

can only highlight issues and lacks powers to bring about convergence. The extension of the FRB’s 

powers to insurance supervision of designated nonbank financial companies has added to the 

challenges of achieving regulatory consistency. FSOC brings together most of the players, but its 

mandate is focused on system-wide stability and its membership does not provide for sector-wide 

coverage of insurance on the same basis as others. 

45. An insurance regulatory body with nation-wide remit is needed to deliver 

enhancements and greater regulatory and supervisory consistency. This agency would require 

sufficient resources, accountability, and independence, and would have the mandate and powers to 

establish national standards, ensure regulatory consistency, and coordinate supervisory actions.
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Securities and Derivatives

46. The securities and derivatives regulatory and supervisory framework has improved

considerably, but would benefit from further enhancements. The regulatory perimeter now 

covers OTC derivatives markets, hedge fund managers, and advisors in the municipal securities 

markets. However, the SEC continues to have limited direct authority over disclosure by issuers of 

municipal securities. The CFTC is well advanced in implementing the new OTC derivatives 

framework, but shortcomings exist in the framework for commodity pool operators (CPOs) and 

advisors in commodity markets. Protection of investors in commodity pools could also be enhanced.

47. Risks in the asset management industry and systemic risk monitoring in general 

require close attention. Explicit requirements on risk management and internal controls do not yet 

apply to asset managers in either securities or commodities markets. Monitoring asset management 

risks requires continued work on improving data availability and risk identification tools. The SEC 

would also benefit from enhancing its mechanisms to ensure a holistic view on emerging and 

systemic risks. The CFTC should continue to work on improving the quality of swaps data.

48. The SEC faces challenges in dealing with the fragmented equity market structure and 

the significant use of automated, high-speed trading technology. This requires analyzing 

whether the degree of dark trading has a negative impact on price discovery and market efficiency. 

The increased automation of trading and differences in the timeliness of data feeds run the risk that 

market participants no longer trade on the basis of the same information. The SEC recently 

established an Equity Market Structure Advisory Committee to advise on these issues.

49. Addressing the gaps requires increasing the SEC’s and CFTC’s resources, and enhanced 

coordination. SEC needs to be equipped to significantly increase the number of asset manager

examinations from the current coverage of only around 10 percent of investment advisers per year. 

CFTC also needs more resources to effectively discharge its mandate (expanded by the DFA), 

including supervision of FMIs, responding to cybersecurity risks, and making the necessary 

investments in technology. Self-funding or multiyear budgeting within the current budget 

framework would enhance the agencies’ ability to decide on their priorities and plan longer term. 

With the current complex regulatory and supervisory arrangements, efficiencies can also be reached 

through enhanced coordination with other agencies and self-regulatory organizations.

C. Market-based Finance and Systemic Liquidity 

50. Although it has reduced from its pre-crisis peak (Appendix Figure 7), market-based 

financing (“shadow banking”) continues to play a very important role in U.S. funding markets.

Its component systems were both sources and transmitters of shocks in the GFC, and there remain a 

number of ways in which the liquidity of these markets could be adversely impacted, either through 

issues of microstructure or even infrastructure of these markets. Identifying, managing and 

regulating risks in these markets is complicated by the entity-based regulatory system—increasing 

the importance of the FSOC oversight and coordination role.
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30 INTERNATIONAL MONETARY FUND

51. The underlying infrastructure of the tri-party repo (TPR) market, a key stress point in 

the GFC, has been improved. The amount of intra-day credit extended to the collateral providers 

has been largely eliminated by modifying the settlement cycle and improving the collateral 

allocation processes. Further, clearing banks are now limited to funding a maximum of 10 percent of 

a dealer’s notional tri-party book through pre-committed lines (incurring a capital charge). 

52. The resilience of the TPR market needs to be enhanced to reduce firesale risk and the 

reliance on the two clearing banks. Market participants are considering the use of some form of 

CCP service for government-guaranteed securities, which could reduce (though not eliminate) runrisk. But the proposals do not cover non-government assets used in TPR, where most risk is 

involved. The authorities should consider how best to address remaining weaknesses: TPR is central 

not only to short-term funding markets, but to the Fed’s own operations with the market.

53. Measures should be taken to reduce the vulnerabilities of open-ended MFs to runs. 

MFs have a regulatory obligation to meet redemption requests within 7 days, and to do so at the 

NAV prevailing when the request is made, rather than at the price at which shares or assets are sold. 

While redemptions can be funded by borrowing, it is the remaining investors that have to take on 

loans to purchase the shares redeemed. A change in settlement price to sales-date NAV instead of 

redemption-date NAV, and to actual sale price (the bid price) instead of mid-price, could reduce run 

risk by placing the cost of exit onto those who are redeeming shares.

54. The introduction of Variable Net Asset Values (NAVs) across all MMMF categories, 

together with changes to investment and redemption rules, would help address important 

structural weaknesses. MMMFs have been made more resilient, but the use of stable NAVs 

persists. Even after 2016, they may apply to over half the funds managed by MMMFs, allowing both 

institutional and retail investors to treat these investments as cash-equivalent despite the greater 

liquidity risks involved than with cash (non-money market open-ended MFs use a variable NAV).

Limiting MMMF repo lending to securities that MMMFs are allowed to hold outright could reduce 

post-default run-risk by allowing for a gradual and orderly liquidation of securities. Currently, 

MMMFs would be required to sell such assets (mostly, long-term treasury securities) immediately, 

unless a no action letter is issued by the SEC. Other changes to take effect from 2016 will allow 

MMMFs to impose fees and redemption gates in the event of stress, but it is not clear how widely 

these will be used, or whether their potential use could even exacerbate run risks. 

55. The capital and liquidity rules covering broker-dealers should be enhanced. Post crisis, 

the major broker-dealers fall under BHCs, which are subject to FRB consolidated supervision. More 

recently, the assets of those outside this perimeter have been increasing, though they are still small 

in absolute terms. Over time, there could be a greater expansion of firms not subject to these tighter 

controls on BHCs that provide opportunity for regulatory arbitrage. It is thus important that 

regulations governing all broker-dealers be introduced soon to address the weaknesses revealed 

during the GFC, including in the area of leverage and liquidity. 

56. More also needs to be done in the area of securities lending and cash collateral 

reinvestment, to ensure that risks are properly appreciated and managed. Since the crisis, 
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investors—whether mutual funds, insurance companies or pension funds—have taken an active 

interest in requiring safer mandates from asset managers. Repo placements with broker-dealers are

no longer an easy option, as the latter are less willing to accept short-term placements on account 

of their regulatory requirements. Asset managers have reportedly redirected cash collateral raised 

from securities lending activities into investments in MMMFs. But while on the face of it, this reduces 

maturity and credit risk entailed in securities lending, the risks may be masked rather than removed. 

MMMFs themselves can only earn a return on re-investing the funds by taking some credit and/or 

liquidity risk. Comprehensive disclosure requirements should be placed on funds’ securities lending 

activities, in the absence of which it is impossible to understand fully the extent and nature of 

financial risks to investors in the funds and to markets.

57. The U.S. authorities recognize that data limitations prevent a consolidated assessment 

of trends and risks across repo as well as securities lending markets. The OFR, the FRB, and the 

SEC are working on pilot surveys for bi-lateral repo and securities lending activities that cover a 

selection of broker-dealers and agent lenders. These initiatives could be complemented by 

publishing more granular data on TPR repos.

D. Financial Market Infrastructures 

58. U.S. FMIs are among the largest in the world and many are globally systemically 

important. Most global systemically important financial institutions are among their participants, 

and these participants represent thousands of customers, including correspondent banks, 

investment companies, and nonfinancial corporations, both domestic and foreign. Multiple 

memberships of U.S. banks in CCPs around the world further interlink the U.S. and global financial 

systems. Disruption of critical operations at one of the U.S. FMIs could have serious systemic 

implications. The DFA helps reduce systemic risks related to U.S. FMIs, but implementation is still in 

progress and it is important to promptly complete the rules applicable to designated FMUs and 

ensure their enforcement.

59. System-wide risks related to interdependencies and interconnections in the U.S. FMI 

landscape could be further identified and managed. Issues to be analyzed by the relevant 

authorities include (i) dependency of FMIs on banking services of only a few G-SIBs; (ii) membership 

of banks in multiple FMIs; (iii) pro-cyclicality of margin calls; and (iv) cross-margining arrangements. 

Identification of system-wide risks, for example, inclusion of FMIs in the network analysis efforts of 

the OFR, would further improve the understanding of exposures among financial firms and potential 

channels of contagion.

60. The provision of Fed accounts to designated FMUs could reduce their dependency on 

commercial banks’ services by allowing settlement in central bank money. Concentration of 

service provision by G-SIBs poses a potential threat to the stability of FMIs. The authorities are aware 

of this risk and are further increasing the number of service providers. Still, given the current systemwide concentration of service provision by only a very few G-SIBs, the default of one of these banks

could have system-wide repercussions. The Fed is therefore encouraged to provide accounts to 

designated FMUs, as permitted by the DFA. 
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32 INTERNATIONAL MONETARY FUND

61. Given the increased systemic importance of CCPs, it is crucial to pursue work on 

further risk mitigation. The U.S. authorities are encouraged to continue efforts to increase the

robustness of CCPs. Several issues identified at the domestic and international levels warrant further 

attention, such as cyber resilience, standardized stress testing, harmonized margin requirements, 

implementation of recovery and resolution regimes, the adequacy of CCPs’ loss absorbing capacity 

in resolution, and continued coordination between the supervisors of CCPs and their main clearing 

members.

E. Housing Finance

62. Mortgage markets—at the epicenter of the 2008–09 crisis—continue to benefit from 

significant government support. Important steps, such as the QM and QRM rules, have been 

taken to help address the structural weaknesses exposed by the crisis, but Government-Sponsored 

Enterprises reform remains the largest piece of unfinished business. There is still no clarity as to 

when Fannie Mae and Freddie Mac will exit conservatorship or consensus on the shape of a 

reformed housing finance system. The federal government backs 80 percent of new single-family 

home loan originations—a high figure. One in five loans originated is insured by the FHA, although 

it falls short of its capital requirements, which creates fiscal and financial risks due to moral hazard, 

the distorted competitive landscape, and large subsidies for debt-financed homeownership.

63. The systemic importance of mortgage markets stems from several features. Home 

mortgages, at some $10 trillion, are the largest component of nonfinancial private sector debt, and 

most are securitized, generating strong interconnections not only with the rest of the U.S. financial 

system but also with the rest of the world. The system also facilitates continued provision of 30-year 

fixed-rate mortgages with no prepayment penalty—unusual by international practice, not needed by

borrowers (who nearly all refinance in under 10 years), and imposing unnecessary risks and 

complexity on the financial system. 

64. As called for in the 2010 FSAP, it is important to complete the reform of the U.S. 

housing finance system. Public policy objectives—such as affordable housing for the less welloff—would be better served by targeted subsidies, rather than insurance and securitization activities 

which dominate the national market, distorting economic incentives. Key features of a future 

housing finance system, with an appropriate role for and supervision of the private sector (including 

the resumption of Private Label Securitization)

5

, should include: 

 Winding down the Fannie Mae and Freddie Mac investment portfolios within a well-defined 

time period and supervising them commensurate with their systemic importance in the 

interim; 

 Leveraging the government’s role in the market to support standardization and 

computerization of mortgage data;

 

5

PLS largely falls under state-based supervision.
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INTERNATIONAL MONETARY FUND 33

 Introduction of a sizeable first-loss risk borne by private capital, with a public backstop that 

is strictly limited to catastrophic losses and is funded by risk-based guarantee fees;

 Ensuring the maintenance of appropriate incentives for loan originators and those involved 

in the securitization chain, including ‘skin in the game’;

 Clear separation of regulatory roles for promoting access to credit and ensuring the stability 

and safety of the mortgage market; 

 Reduction in cross-subsidization and market distortion by charging separately and 

appropriately for prepayment of fixed-rate mortgages.

F. Financial and Market Integrity

65. The U.S. authorities have played a key role in the ongoing international review of 

financial benchmarks to reinforce market integrity. They have pledged to fight market abuse, 

including benchmark manipulation. They have been active participants in the multilateral 

engagement on benchmark reform and are exploring options for strengthening major interest rate 

benchmarks with the private sector, including both rates incorporating bank credit risks and risk-free 

rates. 

66. Work is underway to strengthen financial integrity, but more rapid progress is needed 

to enhance transparency. Draft regulations have been produced to strengthen financial 

institutions’ obligations to identify and verify the identity of beneficial owners; and policy intentions 

announced to improve the authorities’ access to information on the beneficial ownership and 

control of U.S. companies. But these measures—to address deficiencies identified in the last 

Financial Action Task Force (FATF) mutual evaluation report of June 2006—are progressing slowly. 

Even when completed, the intended changes may not address fully all of the deficiencies identified 

in the last FATF mutual evaluation report.

6

The lack of sufficient transparency may impact the 

authorities’ effectiveness in identifying and prosecuting persons who commit money laundering 

using U.S. companies and trusts, including laundering associated with taxes evaded in the United 

States and abroad, by U.S. citizens and foreigners respectively, and to cooperate effectively with 

their foreign counterparts in this regard.

G. Financial Inclusion, Literacy, and Consumer Protection

67. Promoting greater financial inclusion should feature more prominently on the policy 

agenda. The Global Findex survey ranks the United States only 27th out of 147 countries in terms of 

the percentage of adults with a bank account in a formal financial institution, and a 2013 FDIC 

survey finds that some 20 percent of U.S. households are “underbanked” and 8 percent are 

“unbanked”. More work is needed to identify barriers to inclusion. The enhanced focus on consumer 

 

6

The next FATF AML-CFT peer review is due in 2016.
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34 INTERNATIONAL MONETARY FUND

protection, including the setting up of the CFPB, is an important part of the crisis response, and is 

beneficial for both financial stability and financial inclusion. Improving financial literacy will also 

support these goals, and the activities of the Financial Literacy and Education Commission are 

welcome steps in this direction.

...AND FOR REINFORCING SAFETY NETS AND THE 

RESOLUTION FRAMEWORK

A. Liquidity Backstops

68. The Primary Credit Facility could be repackaged to clarify that it is a monetary 

policy/payments system facility. The history of the ‘Discount Window’ (which in 2003 was split 

into Primary and Secondary Credit Facilities) means that depository institutions may be reluctant to 

use the Primary Credit Facility. The goal of the repackaging would be to remove the risk of stigma 

from the Primary Credit Facility, which serves primarily to cover unanticipated end-of-day liquidity 

shortfalls, and to distinguish it more clearly from the Secondary Credit Facility. The latter would 

remain as a short-term lender of last resort facility for (solvent) banks, and so involve regulatory 

intervention as well as carrying a more penal interest rate.

69. Consideration should be given to relaxing the restrictions that the DFA places on the 

Fed’s ability to provide liquidity to designated nonbank institutions. The DFA strictly limits Fed 

support to programs or facilities with “broad-based eligibility,” but this could constrain the Fed from 

taking action to avoid or minimize contagion. At minimum, the authorities are encouraged to 

consider enabling the Fed to provide liquidity support—subject to appropriate conditionality—to 

solvent non-banks that have been designated as systemic by the FSOC.

70. The DFA permits the Fed to provide liquidity backstopping to designated FMUs; any 

technical obstacles to this should be removed. Private sector backstops should be the first line of 

defense for any FMI; Fed support to designated FMUs should be at its discretion and, as with any 

other lender of last resort support, only to solvent and viable institutions, against good collateral.

71. The Federal Home Loan Banks (FHLBs) were an important source of funding (doubling 

to some $1 trillion) during the crisis. The FHLBs benefit from an implicit government guarantee 

and from a super lien over the assets of borrowers, and their loans to borrowers receive favorable 

treatment under the LCR. Regulators should review the liquidity and capital requirements imposed 

on FHLBs, given an apparent increase in the interconnectedness between the FHLBs and their 

members.

B. Crisis Preparedness and Management

72. Agencies have taken steps to enhance crisis preparedness and management, but more 

formal arrangements should be established and the FSOC assigned responsibility for systemwide coordination. While the response to the 2008–2009 crisis was flexible, it suffered from a lack 
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INTERNATIONAL MONETARY FUND 35

of preparation in some respects. Agencies have since then developed strategies for handling the 

failure of individual systemic institutions, but there are no formal arrangements at a system-wide 

level. Several contingency planning exercises have been conducted. However, existing inter-agency 

crisis preparation arrangements remain informal, with the risk that inter-linkages and gaps may not 

be fully covered on a systematic basis, possibly hampering system-wide crisis management. 

Coordinating work could be undertaken by one of the FSOC committees under the oversight of the 

Council, building on rather than replacing existing practices and efforts made by individual agencies.

C. Resolution

73. The resolution regime for financial institutions has been significantly strengthened. 

Title II (“Orderly Liquidation Authority”, OLA) of the DFA sets forth a new resolution regime for 

“covered financial companies”, granting resolution powers to the FDIC. The OLA powers are 

extensive, align broadly with best international practice, and reflect experiences obtained over many 

years by the FDIC in resolving banks. The FDIC has published a top down or “single point of entry 

strategy” as one option for resolving covered financial companies and their groups using these 

powers. Under such a strategy, loss absorbing creditors would be bailed-in to recapitalize a bridge 

bank and capital and liquidity streamed down to entities within the group, including overseas. 

However, effectively resolving large, complex, cross-border financial firms, entails significant 

challenges that continue to warrant further attention.

74. Effective planning and significant efforts at the group level are required to implement 

orderly resolution. The DFA requires certain financial companies to prepare plans for their orderly 

resolution under ordinary insolvency law in the event of material financial distress or failure, but the 

agencies’ review of the plans of the largest domestic banking groups and FBO’s highlighted 

significant shortcomings. As a result, the FRB and the FDIC reported in August 2014 and March 

2015, respectively, that the plans failed to address significant structural and organizational 

impediments to orderly resolution—prompting a need for further actions to improve resolvability. In 

addition, and in accordance with emerging international consensus, minimum levels of total loss 

absorbing capital (TLAC) need to be put in place, at the right levels in systemic groups, to enable 

effective resolution.

75. Further improvements are needed with respect to cross-border issues. Notwithstanding 

the progress made, a number of critical aspects are not in place, including statutory powers to give

prompt effect to actions taken by foreign resolution authorities. The deposit preference rules 

applicable to insured depository institutions under the Federal Deposit Insurance Act, as well as

ring-fencing of foreign-owned uninsured bank branches can complicate effective coordination by

typically ranking claims of creditors in the United States above those abroad. Efforts to enhance 

resolution preparedness, including by coordinating—to the maximum extent possible—institutionspecific resolution strategies on a cross-border basis are ongoing. The finalization of such

agreements, setting out the process for information-sharing before and during a crisis as well as the 

progress on effective group-wide resolution plans and enhancing resolvability, will mark important 

progress.
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36 INTERNATIONAL MONETARY FUND

76. Not all financial firms that could be systemic are subject to effective resolution 

regimes or planning. U.S. insurance companies cannot be resolved using the full OLA powers and 

the fragmented state based resolution regimes lack important tools necessary to deal effectively 

with a systemic entity. Furthermore, some potentially systemic firms such as asset managers are not 

yet subject to DFA’s Title I resolution planning requirements, and may not be resolvable effectively 

using OLA powers. Finally, U.S. agencies are currently discussing how FMIs would be resolved in the 

event of a failure.

D. Deposit Insurance 

77. Welcome measures have been enacted to strengthen deposit insurance for banks.

7

Deposit insurance funds were substantially depleted during the crisis. The DFA increased the 

minimum reserve ratio for the FDIC fund and removed its hard cap. The FDIC Board set a higher 

target at 2 percent of insured deposits—although on current plans this may not be reached before 

the end of the next decade. Consideration should be given to raising assessments, as bank 

profitability recovers, to reach the target sooner.

78. Measures should also be taken to strengthen the funding and coverage of the deposit 

insurance scheme for credit unions. In the case of credit unions, which have a separate fund, a 

much lower amount is paid-in (as the first one percent is structured as deposits from members), a 

hard cap of 1.5 percent remains, and membership is not compulsory. With some credit unions 

potentially becoming systemic, there is a need to enhance the deposit insurance regime by

removing the cap, targeting a significantly higher level of paid-in funds, and making membership 

mandatory for all credit unions.

 

7 Deposit insurance coverage is high by international standards. Some 99 percent of bank account balances are fully 

covered by the current limit which, at some five times per capita GDP, is significantly above the level in most other 

developed countries. Moreover, the U.S. treatment allows multiple different types of accounts of the same client to 

benefit from the $250,000 coverage.
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Appendix I. Financial System Profile

Appendix Table 1. Financial System Assets, 2002–2014
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38 INTERNATIONAL MONETARY FUND

0

200

400

600

800

1000

1200

1400

Germany Italy Australia U.S. Canada France Japan UK

Size of financial sector assets, as % of GDP

0

100

200

300

400

500

600

U.S. Australia Canada Italy Japan France UK

Size of banking sector assets, as % of GDP

Appendix Figure 1. Financial System Size 

(% of GDP)

 

Source: Flow of Funds. Data in the bottom chart are for 2013, except for the United Kingdom (end 2012).
UNITED STATES

INTERNATIONAL MONETARY FUND 39

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014q1 2014q2 2014q3

Pension Funds: Structure of Household Retiments Assets 

(Billion US$)

Defined Benefits pension funds financial assets Defined contributions pension funds financial assets

Individual Retirement Accounts Life Insurance Pension Entiltements

Appendix Figure 2. Pension Funds

 

Source: Haver Analytics.
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40 INTERNATIONAL MONETARY FUND

0

2000

4000

6000

8000

10000

12000

14000

16000

1992199319941995199619971998199920002001200220032004200520062007200820092010201120122013

2014q3

Number of banks- FDIC insured

Federally chartered State chartered

0%

20%

40%

60%

80%

100%

84:4 86:4 88:4 90:4 92:4 94:4 96:4 98:4 00:4 02:4 04:4 06:4 08:4 10:4 12:4 14:3

Distribution of banks by size

Assets > $10 Billion Assets $1 Billion - $10 Billion

Assets $100 Million - $1 Billion Assets < $100 Million

Appendix Figure 3. Banks: Number and Distribution by Size

 

Source: FDIC
UNITED STATES

INTERNATIONAL MONETARY FUND 41 5%1%

18%

4%

61%

1%4%

1%2%04%

4% 2%

15%

5%

60%

1%

7%

1%0%

3% 4%

Cash 

12% Interest-bearing 

balances 

11%

Securities 

21%

Federal funds sold 

& repos

2%

Net loans & leases 

52%

Loan loss 

allowance 

1%

Trading account 

assets 4%

Bank premises and 

fixed assets 

1%

Other real estate 

owned 

0%

Goodwill and 

other intangibles 

2%

All other assets 

5%

2000

2007

2014Q3

Assets

(Percent of total assets)

7% 66%

3%

11%

1%3%

9%

65%

6%

3%

12%

1%

3%

10%

Total deposits 

75%

Fed. funds 

purchased & 

repos

2%

Trading liabilities 

2%

Other borrowed 

funds 

6%

Subordinated debt 

1%

All other liabilities 

2%

Total equity 

capital 

11%

2014Q3

2007

2000

Liabilities

(Percent of total liabilities)

-5 0

0

5 0

100

150

200

-1000

-500

0

500

1000

1500

2000 2007 2009 2010 2014

Income statement of the banking sector, 2000-2014

(Billion US$)

Interest income Interest expense

Provisions Non-interest income excl. trading income

Trading income and securities gains Non-interest expense

Taxes, extraordinary gains Net income- right

Appendix Figure 4. Banks’ Balance Sheets and Income Statement

Source: FDIC

Note: 2014 data are 2014/Q3 annualized.
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42 INTERNATIONAL MONETARY FUND

Appendix Figure 5. Bank Funding

1. U.S. banks’ liquidity position vs. global peers 2. Structure of wholesale funding: commercial 

and savings banks

Source: SNL, IMF staff calculations. Note: Data in US$ million unless indicated otherwise.

Source: FDIC.

3. Structure of liabilities: bank holding 

companies

4. Structure of wholesale funding: commercial 

and savings banks

Source: SNL, IMF staff calculations. Source: FDIC, IMF staff calculations.

5. Structure of wholesale funding: bank holding 

companies

6. Structure of wholesale funding: commercial 

and savings banks

Source: SNL, IMF staff calculations Source: FDIC, IMF staff calculations.
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INTERNATIONAL MONETARY FUND 43

0

500

1000

1500

2000

2500

3000

3500

4000

20062007200820092010201120122013

2014q3

Other

Corporate & Foreign Bonds

Municipal Securities and 

Loans

Agency & GSE-backed 

Securities 

Treasury Securities

Open-Market Paper

Fed Funds & Security RPs

Time and Savings Deposits 

MMF assets, billion $US

0

2000

4000

6000

8000

10000

12000

14000

20062007200820092010201120122013

2014q3

Miscellaneous Assets 

Corporate Equities

Other Loans and Advances 

Corporate and Foreign Bonds

Tax-Exempt Securities

Agency & GSE-backed 

Securities

Treasury Securities

Open Market Paper 

Security RPs

Mutual funds assets, billion $US

Appendix Figure 6. Money Market Funds and Mutual Funds

(Billion US$)

 

Source: Federal Reserve (Flow of Funds data).
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44 INTERNATIONAL MONETARY FUND

0

20

40

60

80

100

120

140

160

1983198519871989199119931995199719992001200320052007200920112013

Shadow banking system

(% of nominal GDP)

MMFs ABS Issuers 

GSEs Open market paper 

Net securities lending Overnight repo

0

5000

10000

15000

20000

25000

1983198519871989199119931995199719992001200320052007200920112013

2014q2

Shadow banking system

(Billion US$)

MMFs ABS Issuers 

GSEs Open market paper 

Net securities lending Overnight repo

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1983198519871989199119931995199719992001200320052007200920112013

2014q2

Shadow banking system, structure

(Billion US$)

MMFs ABS Issuers 

GSEs Open market paper 

Net securities lending Overnight repo

Appendix Figure 7. Market-Based Financing: Evolution and Components

 

Source: Federal Reserve ( Flow of Funds data). 
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INTERNATIONAL MONETARY FUND 45

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014q3

Other

Mortgages

Mutual Fund Shares

Equities

Corporate and Foreign Bonds

Agency & GSE-backed Securities

Treasury Issues 

Open-Market Paper

Fed Funds & Security Repos

MMF Shares Outstanding

Financial markets structure, by instruments

Appendix Figure 8. Structure of Financial Markets

 Source: Federal Reserve (Flow of Funds)
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46 INTERNATIONAL MONETARY FUND

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Commercial 

paper

Treasury 

securities

Agency and 

GSE-backed 

securities

Municipal 

securities

Corporate 

and foreign 

securities

Holding companies

ABS Issuers

State and local government

GSEs

Government

Other

Finance companies

ROW

Non-financial corporates

Debt Securities

(Billion US$)

0

2000

4000

6000

8000

10000

12000

14000

16000

20062007200820092010201120122013

2014q

3

GSEs and agency 

and GSE backed 

mortgage pools

Other

ABS issuers

Banks

Mortgage market, billion of $US

Appendix Figure 9. Debt Securities Market

 Source: Fed Flow of Funds

Appendix Figure 10. Mortgage Market

 

Source: Federal Reserve (Flow of Funds)
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Appendix II. Financial Soundness Indicators vs. Peer Countries

Data for 2008–2014, in percent

Source: IMF staff based on country authorities data.

Note: Financial soundness indicators methodology as per http://fsi.imf.org/fsitables.aspx.
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48 INTERNATIONAL MONETARY FUND

Appendix III. Risk Assessment and Stress Testing

To quantify the impact of the threats to financial stability, the FSAP has carried out a set of 

stress tests, focusing spillovers and correlations in the system. The stress tests followed the 

principles of recent FSAPs; used new methodologies from the 2010 U.S. FSAP; and made use of the 

stress testing efforts by the U.S. authorities. The stress testing work was guided by the Risk 

Assessment Matrix (Appendix Table 2). The key features of the stress testing approach are

summarized in the Stress Testing Matrix (Appendix Table 3). 

Stress test scenario design approach followed the principles spelled out in IMF policy papers 

on stress testing and applied in recent FSAPs.1 A baseline and a “stressed” scenario were 

considered. The “severely adverse scenario” in the U.S. authorities’ 2015 Annual Stress Tests under 

the DFA is comparable in terms of severity with what is usually described as “extreme but plausible” 

scenario in FSAPs. Therefore, and for reasons of comparability and simplicity, the FSAP used the DFA 

scenarios as a reference point. Alternative scenarios and single factor shocks, to examine sensitivity 

of results to assumptions, were also introduced, and the calculations covered both solvency and 

liquidity tests. 

Reflecting the authorities’ confidentiality requirements, the analysis—similarly to the 2010 

FSAP—utilized publicly available data. While an impressive range of information is publicly 

available on U.S. financial institutions, the lack of access to more granular supervisory information 

was a constraint. For example, due to the lack of access to comprehensive data on the extent to 

which financial institutions are connected to each other through lending and other relationships, the 

team’s assessment of “interdependencies” and contagion relied largely on statistical models that are 

subject to uncertainty and rely on equity market-based data. These limitations need to be 

understood when interpreting the stress test results. 

To obtain a more comprehensive assessment than possible with any single approach, the U.S. 

FSAP stress tests combined three broad approaches:

 Bottom-up. The FSAP critically reviewed the results of the U.S. authorities’ CCAR and DFA 

stress tests. 

 Top-down cross-check using balance sheet data. Similarly to the 2010 FSAP, this was carried 

out largely by the FSAP team. Resembling in essence the DFA stress test, but relying on 

publicly available data, it modeled the effects of macroeconomic developments on financial 

institutions’ health. In addition to scenario analysis, the calculations included single-factor 

shocks. The modeling took into account methodological improvements since the 2010 FSAP. 

The team considered firm-specific differences in earnings and losses, based on portfolio 

composition and historical performance. The calculations were complemented by a network 

 

1

Particularly relevant is the paper “Macrofinancial Stress Testing—Principles and Practices” by IMF’s Monetary and 

Capital Markets Department, August 22, 2012. 
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analysis based on a matrix of exposures among six large banks. On insurance, the team 

developed an IMF stress tests of major insurance companies. These tests included an 

adverse scenario combining negative shocks to the companies’ assets, a liability-side shock 

impacting variable annuity writers, and major insurance shocks such as catastrophic events 

and pandemics. For consistency and comparability, the macroeconomic parameters of these 

tests were the same as those used for the DFA tests; however, some simplifications had to 

be made to accommodate the lower level of granularity of publicly available information.

 Top-down calculations using market-based data. Calculations by the FSAP team covered

feedbacks among banks and nonbanks, including with entities abroad. The analysis adds

depth by providing estimates of unexpected losses, correlations and potential spillovers. It 

highlights the correlations between banks and nonbank financial sector, between the 

financial and nonfinancial sector, and the international dimension. To do this, the team 

derived measures of estimated probabilities of default from equity market data. The 

methodology followed up and expanded on the techniques used in the first U.S. FSAP. Both 

the “systemic macro-financial stress test framework” and the “contingent claims analysis 

(CCA)” employed in the 2010 U.S. FSAP have been subsequently used in FSAPs for other 

jurisdictions and other IMF work. In the process, both techniques have been further 

strengthened. The equity market-based calculations complemented the balance-sheet based 

approaches by assessing correlations and by using this information to estimate the 

magnitude of potential systemic impact to the financial system.

The stress scenario reflected the severely adverse scenario from the DFA stress test that was 

characterized by a typical post-war U.S. recession.

2

In the scenario the unemployment rate rose 

by 4 percentage points over a two-year period. Real GDP was 4.5 percent lower than the baseline by 

the end of 2015 (GDP growth rates were negative for 5 quarters), equity prices fell by 60 percent in 

one year, house prices declined by 25 percent over the first two years, corporate spreads rose by 

330 basis points, and mortgage rates increased by 80 basis points. The baseline scenario was 

informed by the Blue Chip Economic Consensus and broadly reflected the IMF‘s World Economic 

Outlook projections as of January 2015.

Banking tests covered the largest 31 BHCs (85 percent of sector assets). The institutions were 

subjected to credit and liquidity risks in the context of a tail risk scenario. All tests were conducted 

based on publicly available, consolidated data as of September 2014. The solvency stress tests 

assessed the level of banks’ Basel III Common Equity Tier 1 ratios against a hurdle rate consisting of 

the regulatory minimum consistent with the Basel III transition schedule augmented by the capital 

conservation buffer and a capital surcharge for Globally Systemically Important Banks (GSIBs) which 

are both phased in over the forecast period. 

 

2

The scenarios were taken from the DFA stress test but extended over a five-year horizon.
Appendix Table 2. Risk Assessment Matrix

Nature/Source of 

Risk

Likelihood of Severe Realization of 

Threat in the Next 1–3 Years 

 Expected Impact on Financial Stability if 

Threat is Realized

1. A surge in financial 

volatility

High

Recent compression in volatility and risk premia could unwind. 

Stress in credit markets (especially cov-lite loans) could be 

exacerbated by increased exposure to more risky borrowers, rising 

leverage, and weaker underwriting standards. Impaired trading 

liquidity for high yield issues could aggravate the risks. Bond 

repricing could lead to a run on mutual funds. Run risk may be 

intensified by the increased holdings of retail investors (over the 

past five years, the share of credit instruments held by retail funds 

has increased substantially, to 37 percent of total credit holdings). 

Duration and interest rate risk could materialize, as they are both at 

recent historical highs and financial institutions’ portfolio 

allocations to fixed income instruments remain above the recent 

historical trend.

High

A 50 bps permanent increase in 10-year interest 

rates could subtract about 1⁄2 percent of GDP after 

two years. Sustained spikes in term premia could 

imply greater output losses. Runs from mutual 

funds can lead to a vicious feedback loop between 

outflows and asset performance. 

2. Financial 

imbalances from 

protracted period of 

low interest rates

Medium

Continued search for yield leads to excess leverage, weaker 

underwriting standards and potential mispricing of risk. Low 

interest rates can give rise to new configuration of risk in the 

insurance and pension fund industry. In combination with the 

relatively weaker supervision in the nonbank sector, this can further 

increase intermediation outside the banking system and purchases 

of riskier assets by traditional and market-based financing system 

(e.g. asset managers).

High

If unaddressed, distortions could lead to financial 

instability with significant economic costs and large 

spillovers to the rest of the world.

3. Operational risk Medium 

Operational risk stemming from, for example, software or hardware 

failure, a cyber event, or a major natural disaster.

Medium

Disrupting or destroying a critical infrastructure can 

lead to sizeable impacts on the financial system. 

For instance, if a large solar storm similar in size to 

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Appendix Table 2. Risk Assessment Matrix (Concluded)

the 1859 event hit the world now (an event with an 

estimated 12 percent likelihood in the next 10 

years), cost estimates are 2 trillion dollars with 

power and satellite outages lasting for months. 

4. Protracted period 

of slower growth and 

lower inflation in 

advanced and 

emerging economies

High

Weak demand and persistently low inflation leads to ”new 

mediocre” rate of growth in advanced economies. Maturing of the 

cycle, misallocation of investment, and incomplete structural 

reforms leads to prolonged slower growth in emerging markets.

Medium

Slower growth in advanced and emerging 

economies could subtract about 1⁄2 percent of GDP 

after two years.

5. Political 

fragmentation 

erodes the 

globalization process

Medium

Spillover effects from mounting conflict in Russia/ Ukraine, 

increasing risk aversion; heightened geopolitical risks in the Middle 

East, leading to a sharp rise in oil prices.

Low

Geopolitical tensions would create significant 

disruptions in global financial, trade and 

commodity markets. A rise in oil prices would have 

a negative impact on the U.S. with a possible flight 

to safety resulting in dollar appreciation. A 

sustained 15 percent increase in oil prices above 

baseline would subtract about 0.2 percent of GDP 

after two years.

6. Bond market stress 

from a reassessment 

in sovereign risk

Low

Interest rates could spike if the budget or appropriations for FY2016

is not passed or the federal borrowing limit is not raised (owing to 

political gridlock). Protracted failure to agree on a credible plan for 

fiscal sustainability could lead to a rise in the risk premium.

High

The economic cost of a sharp rise in the sovereign 

risk premium could be sizeable. If the impasse lasts, 

it could have severe global spillovers.

A 200bps increase in the benchmark Treasury yields 

would subtract 2.5 and 1.5 percentage points from 

U.S. growth in 2015 and 2016, respectively.

Note: The risks are ordered first by impact (high to low), and second by likelihood (high to low).

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Appendix Table 3. Stress Testing: Overview of Coverage, Scenarios, and Dates

Exercise type Coverage Scenarios Cut-off date; data 

frequency

IMF top down 

(solvency) test 

31 Bank Holding Companies

(6 systemic BHCs for network 

stress testing, covering some 50 

percent of total BHC assets)

Scenarios taken from 

DFAST, extended 

using WEO; 

sensitivity analysis 

and network analysis

2014q3; quarterly 

Bank liquidity risk 

analysis 

31 Bank Holding Companies Range of adverse 

scenarios

2014q3; quarterly 

Insurance stress 

testing

43 insurance groups (20 life, 16 

property & casualty, 5 health 

insurance, and 2 credit and 

mortgage insurance).

Scenarios taken from 

DFAST

End-2014 data 

Mutual fund stress 

testing

9,000 mutual funds Range of adverse 

scenarios

2014q3; quarterly 

Market equity

price based 

network analysis 

and stress testing

210 institutions (U.S. banks, 

insurers, NBFIs, asset managers, 

nonfinancial firms; foreign 

banks and insurers) 

Scenarios taken from 

DFAST, extended 

using WEO

2014q3; 

daily 

Note: for details on the methodologies, see the Stress Test Matrix (Stress Testing Technical Note). The table focuses on IMF-run 

stress tests and does not include the authorities-run and companies-run stress test.
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Appendix IV. Key Regulations Where Implementation is Ongoing

Key reforms/measures Scope and Status Implementation

G-SIB surcharge for capital Global Systemically Important Banks Phased in 2016–19

Capital conservation buffer All banks on advanced approaches Phased in between 2016-

2019

Countercyclical capital buffer All banks on advanced approaches Phased in 2016–19

Supplementary leverage ratio All banks on advanced approaches Jan 2016

Enhanced Supplementary 

leverage ratio

Global Systemically Important Banks Jan 2018

Liquidity Coverage Ratio Full for banks on advanced approach; 

modified for smaller banks

Phased in 2015–2017

Enhanced single counterparty 

exposure rules for systemic banks

To be decided TBD

Higher prudential standards for 

designated nonbanks

Designated nonbanks Proposed standards to be 

promulgated.

Principles based reserving for 

Insurance firms (PBR)

Implementation subject to at least 42 

states with more than 75 % of total 

US premium adopting.

17 states have adopted and another 

13 are planning legislation by 2015; 

still will cover only 60% of premium

Targeted for December 

2015; date unlikely to be 

met

Insurance based capital standards The Insurance Capital Standards 

Clarification Act of 2014 passed to 

clarify that FRB can apply insurancebased capital standards to the 

insurance portion

No deadline proposed for 

rulemaking or 

implementation

NAV amendments and fees and 

gate amendments for MMMFs

NAV amendments (institutional prime 

MMMFs)

Fees and gates (all MMMFs except 

government funds)

October 2016

Implementation of the CPSS

IOSCO Principles for FMIs: CFTC

ICE Clear Credit and Chicago 

Mercantile Exchange

Final rules issued in 2011 and 2013 

Implementation ongoing

Implementation of the CPSS

IOSCO Principles for FMIs: FRB

TCH/CHIPS and CLS 

Final rule to amend Regulation HH 

and Payment System Risk policy 

issued in 2014

From December 2014, with 

a one-year transition period 

for a subset of 

requirements

Implementation of the CPSS

IOSCO Principles for FMIs: SEC

DTC, NSCC, FICC and OCC. Proposed 

rules issued in 2014; public 

consultation finished

No deadline proposed for 

final rule 
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Appendix V. Report on the Observance of Standards and Codes

A. Introduction

This report summarizes the assessments of the current state of the implementation of the 

Basel Core Principles for Effective Banking Supervision (BCP); the IOSCO Principles of 

Securities Regulation and the IAIS Principles of Insurance Supervision in the United States.

These assessments have been completed as part of a FSAP undertaken by the International Monetary 

Fund (IMF) and reflect the regulatory and supervisory framework in place as of the date of the 

completion of the assessment in November 2014. The full Detailed Assessment Report (DAR) has 

been published on April 2, 2015,

1 which also detail the Overview of the Institutional Setting and 

Market Structure and the Preconditions for Effective Banking Supervision. 

B. Basel Core Principles for Effective Banking Supervision

Information and Methodology Used for the Assessment

An assessment of the effectiveness of banking supervision requires a review of the legal 

framework, and detailed examination of the policies and practices of the institutions 

responsible for banking regulation and supervision. In line with the BCP methodology, the 

assessment focused on the three FBAs as the main supervisors of the banking system, and did not 

cover the specificities of regulation and supervision of other financial intermediaries, which are 

covered by other assessments conducted in this FSAP. The assessment did not cover supervision 

conducted by local State regulators,

2

the supervision of credit unions, or the activities of the CFPB.

The assessment was carried out using the Revised BCP Methodology issued by the BCBS (Basel 

Committee of Banking Supervision) in September 2012. The U.S. authorities chose to be assessed 

and rated against not only the Essential Criteria, but also against Additional Criteria. The assessment 

team3reviewed the framework of laws, rules, and guidance and held extensive meetings with U.S. 

officials, and additional meetings with banking sector participants and other stakeholders (auditors, 

associations, etc.). The authorities provided a self-assessment of the CPs, as well as detailed

responses to additional questionnaires, and facilitated access to supervisory documents and files, 

staff, and systems. The very high quality of cooperation received from the authorities is appreciated.

 

1

http://www.imf.org/external/np/sec/pr/2015/pr15152.htm

2

The assessment team did not assess State supervisors, but met with their representatives to hear their views on 

issues such as cooperation, regulatory framework, implementation of reforms, and mandates.

3

The assessment team comprised John Laker (former Australian Prudential Regulatory Authority), Göran Lind 

(Swedish Riksbank), and Lyndon Nelson (Bank of England). Fabiana Melo (IMF) helped coordinate the work of the 

assessors and the drafting of the assessment report.
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Main Findings

The U.S. federal banking agencies (FBAs)

4

have improved considerably in effectiveness since 

the previous FSAP. In response to global and domestic reforms, particularly the Dodd-Frank Act 

(DFA), the FBAs have stepped up their supervisory intensity, especially of large banking 

organizations, putting emphasis on banks’ capital planning, stress testing, and corporate governance. 

To match, the FBAs have also enhanced their supervisory capacity, adding significantly to their 

staffing numbers and skills base. These improvements are reflected in the high degree of compliance 

with the Basel Core Principles for Effective Banking Supervision (BCP) in this current assessment.

The Dodd-Frank reforms have resulted in some rationalization of supervisory responsibilities 

but they did not address, fundamentally, the fragmented nature of the U.S. financial 

regulatory structure. The FBAs are committed to making the arrangements work and cooperation 

has clearly improved. Nonetheless, there is substantial duplication of supervisory effort, particularly 

in respect of entities in major banking groups, and the ongoing risk of inconsistent messages from 

the agencies.

The U.S. prudential regulatory regime is a complex structure of federal statutes, regulations 

and reporting requirements, and policy statements and supervisory guidance. Since the crisis, 

the DFA and other initiatives have introduced various “tiers” of prudential requirements for banks 

and bank holding companies, which underpin the heightened supervisory focus on large banking 

organizations but have added to the complexity of the regime. Many requirements of the BCP are in 

practice, however, determined by the supervisor under a principles-based approach. Such an 

approach provides flexibility for supervisors to tailor their actions to each individual situation and be 

more nuanced in their response. Yet, in many cases, this principles-based approach is reflected in a 

lack of specificity in the regime, for example, the absence of guidelines or supervisory “triggers” for 

various risks. 

Mandate, independence, and cooperation (CP 1-3) 

The U.S. system of multiple FBAs with distinct but overlapping responsibilities continues to 

put apremium on effective cooperation and collaboration. The FBAs will need to ensure that the 

significant improvements in collaboration in recent years become fully engrained in the modus 

operandi of each agency. Internationally, the establishment of supervisory colleges and crisis 

management groups (CMGs) has given greater urgency to information-sharing arrangements, and 

there are no legal or other impediments to the ability and willingness of the FBAs to cooperate and 

collaborate with foreign supervisors. The dual banking structure does pose a challenge for 

international cooperation, and state banking agencies with Foreign Banking Organization (FBO) 

presence do not always inform or coordinate enforcement actions with home supervisors.

 

4

For the purposes of this assessment, the FBAs are the OCC, the Federal Reserve and the FDIC.
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The FBAs are operationally independent, and have clear mandates for the safety and 

soundness of the banking system. However, the FBAs also have other objectives, and the primacy 

of the safety and soundness objective needs to be better enshrined in legislation or mission 

statements to ensure a clear focus on this objective through different phases of the business cycle. In 

principle, the creation of a stand-alone Consumer Financial Protection Bureau (CFPB) should help 

establish a greater delineation between individual consumer issues and prudential issues, and give 

the FBAs a clearer sense of purpose, but the delineation is not yet sharp. There is no evidence of 

direct interference by industry and government in supervisory priorities or decisions. The high level 

of public and congressional scrutiny and resulting sentiment may have an indirect effect in creating a 

perception of “cyclical” supervisory responses.

Licensing, permissible activities, transfer ownership, and major acquisitions (CP 3-6)

The dual banking structure with charter choice adds to the challenge of cooperation and 

collaboration across multiple agencies. Banks may in principle choose to operate under a federal 

or state charter that best accommodates their business or strategic needs. Further, state-chartered 

banks may choose between being supervised primarily by the FDIC or primarily by the Federal 

Reserve as a member bank, in addition to the supervision of their state supervisory authority. 

Concerns have been raised that this choice can give rise to “regime shopping” that can undermine 

the integrity of U.S. regulatory arrangements. The DFA has restricted the ability of weak and troubled 

banks to change charters, but charter conversions of (well-rated) banks and savings associations

continue on a modest scale. The FBAs need to guard against perceptions of differences in 

supervisory style or treatment in their regional offices that could sway the choices made by banks in 

charter conversions.

Supervisory approach, processes and reporting, and sanctioning powers (CP 8-10)

The FBAs have significantly increased their level of resources and intensity of supervision of 

the largest firms, and have articulated a tiered approach built on asset-based thresholds to 

achieve the desired proportionality. The traditional focus on on-site examinations has changed a 

little as there has been a shift towards more stress testing, analysis, and horizontal reviews. Overall, 

the supervisory regime is effective and risk-based, and this is coupled with an increasing focus on 

resolution (for the larger firms). However, there remains scope for better prioritization of matters 

requiring attention and their communication to banks, and for aligning supervisory planning cycles 

across agencies. 

The FBAs have a long-established and effective regulatory reporting framework, with the 

flexibility to expand reporting requirements in response to pressing supervisory needs. There 

are safeguards built in to guard against redundant data items and information overreach. A lacuna is 

that supervisory data is not collected from banks at the solo level (i.e., at the level of the bank 

excluding its subsidiaries), which means supervisors and market participants may not have the 

information to test whether a bank is adequately capitalized on a stand-alone basis. In practice this 

omission has little prudential significance under current circumstances, as bank subsidiaries tend to 

be small relative to the parent bank and can only undertake limited activities that the bank itself 
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could undertake in its own name; but supervisors should closely monitor the development of 

banking groups and consider introducing solo level reporting if the number or size of bank 

subsidiaries were to expand, or banking groups become less transparent. 

The FBAs have a wide range of supervisory actions available to address safety and soundness 

concerns and do not hesitate to use them, although follow-up needs to be stricter. The PCA 

framework is the main plank of the early intervention framework and has clear triggers. The 

authorities could consider implementing rules for promoting early action for other triggers than 

bank capital as well as introduce more explicit rules and processes to deal with ageing of 

MRAs/MRIAs.

Consolidated and cross-border supervision (CP 12-13)

Since the 2010 FSAP, there have been major improvements in the ability of the FBAs to 

implement a comprehensive framework for consolidated supervision. Work still remains 

outstanding, though, on developing regulatory and supervisory rules, guidance, and a formal rating 

system for SLHCs, as well as on developing a capital rule for corporate and insurance company 

SLHCs. 

Reflecting the large cross-border activities of U.S. banks and of foreign banking groups in the 

U.S., there is a comprehensive framework of policies and processes for co-operation and 

exchange of information between the FBAs and foreign supervisory authorities. As noted 

above, this is currently being strengthened by the work in supervisory colleges and in CMGs. The 

authorities should continue their efforts to establish agreements with their foreign counterparts on a 

framework of communication strategies, especially for crisis situations. While national treatment is 

the underlying principle, there remain some instances in which specific rules apply only to foreign 

institutions, such as the shorter run-off period for foreign branches in liquid asset requirements and 

requirements on FBOs to set up intermediate U.S. holding companies. 

Corporate governance (CP 14)

Reflecting a global response to the crisis, major changes have taken place in supervisors ́ 

demands on banks’ corporate governance and in the banks’ own approaches. Laws and 

regulations have gradually raised the requirements and there is clearly heightened focus by boards 

and management on corporate governance issues. The demands on board involvement and skills 

have increased substantially and this has, in many instances, led to changes in board composition 

and calls for wider skill sets of directors. In general, supervisory expectations are tailored to be less 

strict for smaller, non-systemic banks: while this means that there is a shortfall compared with the 

criteria, the assessors judged that this was not sufficiently material to alter their overall conclusions. 

The assessors welcome that supervisors are encouraging medium- and small-sized banks with higher 

risk activities to adopt better practices in corporate governance and risk management that are 

appropriate for the risk profile of these firms, moving them closer to the criteria and some of the 

principles outlined in the requirements for the larger banks.
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Risk management, capital adequacy, and prudential framework (CP 15-25)

There have been substantial improvements in the risk management processes of banks, and 

risk aggregation has been greatly facilitated by the stress testing requirements. Given the 

enormity of the task of achieving and sustaining meaningful risk aggregation across the Global 

Systemically Important Banks (GSIBs), this remains very much work in progress and may take years to 

complete. Other areas in which progress needs to be made are a better delineation in supervisory 

guidance of the responsibilities of the board and management and more emphasis on contingency 

planning, particularly for smaller banks. The level of commitment to stress testing is substantial and 

there is considerable consensus that the outputs and outcomes of that process have improved risk 

aggregation. Supervisors and firms have become more efficient with each iteration and standards 

required were also increasing, although there is some way to go before supervisory led stress tests 

achieve an optimum level of data granularity. There is still room for improvement in firm-led stress 

testing, where firms seem to be struggling to determine the appropriate severity, while maintaining a 

scenario that remains business-relevant.

There is a robust and comprehensive approach to setting capital adequacy requirements,

although the U.S. capital regime is in a state of transition. The FBAs have implemented major 

elements of the Basel II advanced approaches from January 1, 2014 and the U.S. standardized 

approach based on Basel II began to come into effect from January 1, 2015. The broad adoption of 

the Basel III definition of capital, when applicable to most banks from January 1, 2015, will improve 

the quality of bank capital by limiting the extent to which certain intangibles, which had previously 

counted for a high proportion of bank capital, can be included in capital. Stress testing is

entrenching a forward-looking approach to capital needs and engaging boards and senior 

management more fully in the capital planning process. The introduction of risk-based capital rules 

based on Basel standards for most savings and loan holding companies removes an anomaly created 

by the previous case-by-case determination of capital requirements for such companies, although a 

comprehensive capital framework for all savings and loan holding companies is not in place. There 

are a number of differences between the new U.S. capital regime and the relevant Basel framework, 

particularly the absence of a capital charge for operational risk and for Credit Value Adjustment 

(CVA) risk in the U.S. standardized approach, which provides the “floor” for the advanced approach 

banking organizations and applies to all other banking organizations.

The long-established and rigorous process for evaluating banks’ approaches to problem assets 

and the maintenance of adequate provisions and reserves will be bolstered by accounting 

changes currently on the anvil. The FBAs have shown a consistent willingness to challenge 

unrealistic bank estimates of provisions and reserves and to secure increases they judge necessary. 

This steadfastness in approach will be tested as the U.S. economy continues to improve. Supervisory 

judgments in this area have been constrained by the “incurred loss” approach of U.S. GAAP, but the 

introduction of the FASB’s proposed Current Expected Loss Model (CELM) will permit more forwardlooking provisioning. 

The supervisory framework to guard against concentration risk and large exposures needs to 

be strengthened. The FBAs have an effective supervisory framework for dealing with credit 
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concentration risk. Guidance has been issued on specific areas of concentration of credit risk and this 

is followed up in supervisory reviews. Supervisors are also giving more attention to the treatment of 

concentration risk in counterparty credit risk management and stress testing frameworks. However, 

the new BCP methodology has expanded this Core Principle to also include market and other risk

concentrations “where a bank is overly exposed to particular asset classes, products, collateral, or 

currencies.” While there is some evidence of punctual supervisory action on this front (for instance, 

funding concentration), at this point a detailed supervisory framework and supervisory guidance for 

these other risk concentrations is not well developed. Although the widening of the definition of 

large exposures under the DFA has brought the large exposure thresholds more into line with the 

requirements of the BCP, some anomalies and omissions remain. The separate and additional limits 

available to banks for money market investments and security holdings continue to leave open the 

possibility of excessive risk concentrations. The 50 percent limit on exposures to a corporate group is 

also problematic. The authorities are also encouraged to finalize the large exposures framework, with 

legal limits, for large bank holding companies and foreign banking organizations.

In addition, there remain gaps in the related party exposure framework that may heighten 

concentration risk in the system. There are no formal requirements for prior board approval of 

transactions with affiliated parties or the write-off of related party exposures exceeding specified 

amounts, or for board oversight of related party transactions and exceptions to policies, processes 

and limits on an ongoing basis. However, in practice the FBAs expect banks to apply a high degree of 

board oversight and monitoring of affiliate and insider transactions and review this as a matter of 

practice on offsite and onsite examinations. Statutes impose a set of limits on a bank’s exposures to 

affiliates and insiders that, with one exception, are at least as strict as those for single counterparties 

or groups of counterparties. The exception is the aggregate limit for lending to insiders of 

100 percent of a bank’s capital and surplus (and 200 percent for smaller banks). As noted in the 2010 

FSAP, this limit is higher than prudent practices and creates the risk that a small group of insiders 

could deplete the own funds of a bank. There is no formal limit framework for holding company 

transactions with their affiliates or insiders, which is needed for a comprehensive framework for 

transactions with related parties. Finally, the “related party” regime in the U.S. regulatory framework 

does not appear as broad as required by this CP. 

The approach to interest rate risk in the banking book (IRRBB) is in marked contrast to other 

key risks and could be usefully updated, given the current conjuncture. The regimes for market 

and liquidity risks are tiered to support a risk-based approach and are comprehensive and robust, 

though the former would benefit from the introduction of a de-minimis regime for all banks and the 

latter from more granular and frequent reporting. The framework for IRRBB stands out with no 

tiering for example (although supervisory practice seems proportionate to the risk) and the 

philosophy is firmly principles-based. No specific capital is being set aside against a change in 

interest rates, nor are any supervisory limits set. Given the stage of the U.S. economic cycle, the 

inherent interest rate exposure is high and there are particular concentrations in the small bank 

sector. Updating the 1996 guidance to include more quantitative guidance is merited, as the risk of a 

principles-based approach is its inconsistency across a sector and across time; as such banks, or a 

group of banks may be overly exposed. 
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Similarly, the overall regime for operational risk outside the AMA banks has not reached a 

sufficient level of maturity. There is no overall definition of operational risk, or structured guidance 

on identification, management and mitigation of operational risks. Guidance for banks under AMA 

(at the time of this assessment, only 8 banks) is well specified, however for all other bank operational 

risk management falls within the scope of “general” risk management. Guidance for other banks is 

disparate, and the weakness is compounded by the absence of a comprehensive reporting regime. 

There is not a standardized capital charge for operational risk. At the time of the assessment, several 

initiatives were underway. The FBAs are placing increasing emphasis on operational risk issues and 

are coordinating on the production of additional inter-agency guidance, as well as identifying and

seeking mitigation of a number of issues in their vertical and horizontal reviews. They are also alert to 

the changing threat landscape, such as the escalation of fines and other penalties from litigation as 

well as cyber risks. Dealing with cyber risk is a top priority across all agencies and will pose 

coordination and operational challenges given the nature of the risk and the pressing need to 

collaborate with other arms of government. 

Controls, audit, accounting, disclosure and abuse of financial services (CP 26-29) 

The bar for audit and control functions has clearly been raised in the wake of the crisis, while 

further refinements are needed in the framework for abuse of financial services. The internal 

audit function is the subject of greater supervisory attention and expectations have been significantly 

raised though, in contrast, there is little mention of the compliance function except with reference to 

the regime of the Bank Secrecy Act and Anti-Money Laundering. Further, while significant resources 

are deployed by both the authorities and the firms to meet the BSA/AML standards, the attention to 

vulnerabilities to other forms of criminal abuse (e.g., theft, burglary) is more disparate. In addition, 

the regulatory framework at the time of the assessment did not include adequate identification of 

the ultimate beneficiary owner of legal entity clients, or processes for dealing with domestic 

Politically Exposed Persons (PEPs). On the external audit front, there is no requirement for an external 

auditor to report immediately directly to the supervisor, should they identify matters of significant 

importance, although this gap is mitigated by the frequent contact between supervisors and auditors 

in the course of planning and examinations.

The disclosure regime represents best practice in some respects. The public disclosure of 

supervisory call reports promotes market discipline and is worthy of global emulation. There remain 

a few gaps though. Not all banks are required to issue full financial standards that are reviewed by an 

independent accountant in accordance with independent audit requirements and the U.S. definition 

of “reporting on a solo basis” differs in that it does not collect or disclose data on a “bank standalone basis.”
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Summary Compliance with the Basel Core Principles

Appendix Table 4. Summary Compliance with the Basel Core Principles—ROSC

Core Principle Comments

1. Responsibilities, 

objectives and powers

The DFA reforms have resulted in some rationalization of responsibilities in the U.S. 

supervisory structure, with the dissolution of the OTS and the establishment of a 

specialized, stand-alone consumer protection regulator. Nonetheless, the problems 

associated with multiple regulators with distinct but overlapping mandates remain. 

Further effort can be made to clarify the priorities of the FBAs in their mission 

statements and to make the division of responsibilities between the FBAs and the 

CFPB more coherent at the working level. In the assessors’ view, there remains 

further work on making the new supervisory structure more focused and effective.

2. Independence, 

accountability, 

resourcing and legal 

protection for 

supervisors

Since the crisis, the FBAs have strengthened their accountability and transparency, 

and have improved their internal decision-making processes. Further steps could 

be taken to assure the independence of the Federal Reserve’s supervisory role. The 

FBAs have also been able to strengthen their capacities through active hiring and 

training programs. The challenge will be to retain those capacities as U.S. 

economic conditions continue to improve and specialist skills become even more 

attractive to industry. The assessors encourage the FBAs to keep their hiring 

programs flexible and responsive, and their training programs fully funded.

3. Cooperation and 

collaboration

The FBAs have made a substantial effort since the crisis to improve their 

cooperation and collaboration to ensure that consolidated supervision is targeted, 

comprehensive and timely. International cooperation would be further 

strengthened if state supervisory agencies consulted fully, in all cases, with the 

FBAs and foreign supervisors on impending enforcement actions. 

4. Permissible activities There is a well-established framework for defining the permissible activities of 

banks and protecting the integrity of the term “bank”. Though not a specific 

responsibility of the FBAs, it is important that the U.S. authorities closely monitor 

the disclosure practices of “bank-like” institutions to ensure the community is well 

informed about the security of their savings. 

5. Licensing criteria The evaluation processes for banks seeking a national charter and access to the 

deposit insurance fund appear thorough and testing. The DFA has given statutory 

force to interagency initiatives to address inappropriate regime shopping, but 

further guidance could be provided. The FBAs need to guard against creating 

perceptions of differences in supervisory style or intensity in their regional offices 

that could sway the choices made by banks on charter conversions.

6. Transfer of 

significant ownership

The FBAs have comprehensive definitions for “controlling interest”, taking into 

account both quantitative and qualitative factors of control. There are clear rules 

for prior approval or notifications of changes in ownership. Supervisors may deny 

improper changes in ownership and may in certain circumstances require the 

reversal of completed transactions or require other remedial actions. The assessors 

saw evidence of supervisors taking such actions.

The concept of “significant ownership” is not defined per se. However, in practice 

the international practice of a five percent threshold for the reporting of significant 

shareholders is applied.

The assessors saw evidence, including supervisors’ responses to applications for 
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ownership changes, that the above rules and policies are applied in practice.

There is no explicit regulatory requirement for a bank to immediately report if they 

find that a major shareholder is no longer suitable. Nor did the assessors see any 

evidence of such reporting in the written documentation. The assessors 

recommend that such a supervisory requirement is introduced, with the aim to 

ensure that supervisors are promptly informed if a major shareholder is no longer 

suitable, since this might have a negative impact on the safety and soundness of 

the bank. Assessors chose to address this shortcoming under CP 9.

7. Major acquisitions Laws and regulations exist to define which acquisitions and investments that 

require prior approval by the authorities, a notification after-the-fact or may be 

made under general consent. There are also clear criteria by which the authorities 

assess the applications. 

Legislation and regulations also put clear restrictions on the scope of permissible 

investments and acquisitions, such as in non-bank related activities.

Assessors saw evidence, including supervisors’ reports on banks’ applications for 

investments/acquisitions, that the above rules and policies are applied in practice.

8. Supervisory 

approach

The U.S. system of regulation is changing rapidly. These changes have broadened 

the role of supervision and have introduced a greater level of tiering into the 

regime (e.g. Banking Institutions with at least $50bn of Assets).

The assessors find that the net effect of these changes has been positive. The 

supervisory regime is effective and risk-based. There is an increasing focus on 

resolution (for the larger firms). 

However, the agencies need to review approach to communication with firms. The 

system of supervisory issues requiring action (e.g. MRAs) needs to be simplified 

and ideally moved to a common interagency approach. The agencies need to 

continue their efforts in dealing with MRA that have been outstanding for a long 

time.

9. Supervisory 

techniques and tools

The U.S. agencies have an array of tools and techniques to carry out their 

supervisory responsibilities and furthermore that they are also developing new 

techniques, such as stress testing and horizontal reviews. These new techniques are 

altering the balance of the work done by supervisors. The absence of formal 

reporting requirements on banks to inform supervisors of key changes and 

developments is a weakness in the system, which not only could undermine 

monitoring work but also delay supervisory action.

The agencies need to ensure that their intentions for each horizontal review are 

clear from the outset and in particular whether firms are being judged against an 

absolute or relative standard.

Communication with banks also needs to be improved: key messages need to be 

better brought out; the roles and expectations of boards and senior management 

should not be conflated; feedback needs to be appropriately balanced on should 

not stray into excessive praise or excessive reporting on recent history.

Agencies should go further in aligning planning cycles to maximize the 

opportunities of joint working.

10. Supervisory The FBAs have a long-established and effective regulatory reporting framework, 

with the flexibility, demonstrated through the crisis, to expand reporting 
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reporting requirements in response to pressing supervisory needs. With the crisis passed, the 

FBAs are encouraged to review the level of granularity of data collected, 

particularly for stress testing and liquidity analysis purposes, to ensure that data 

continues to be needed at that level. The FBAs do not collect data from banks at 

the solo level (i.e. at the level of the bank excluding its subsidiaries) but the 

assessors understand that, in practice, this omission is not sufficiently material in its 

impact to warrant a lower rating for CP 12 under current circumstances.

11. Corrective and 

sanctioning powers of 

supervisors

The authorities are recommended to consider implementing rules for promoting 

early action also for other issues than bank capital and liquidity

The assessors acknowledge that the U.S. legislation, regulations, and processes for 

taking supervisory action (informal or formal) are robust and have been further 

strengthened in recent years. For instance, the assessors noted earlier cases in 

which the escalation of supervisory measures, when warranted, took longer than 

appropriate given the severity of the deficiency at hand. However, in recent years 

there has been a clear reduction in such cases, reflecting the authorities’ new and 

more explicit rules and stricter implementation. The assessors recommend the 

authorities to continue on this path, for instance by setting even more explicit rules 

for the ageing of MRAs and MRIAs. The evolving practice of setting timelines for 

the completion of remedial actions, and requiring regular reporting of progress, is 

encouraged by the assessors. The assessors also encourage the implementation of 

planned OCC guidance on supervisory practices relating to MRAs.

12. Consolidated 

supervision

A lack of full compliance with this principle is based on the fact that regulatory and 

supervisory rules, guidance, and a formal rating system for SLHCs have not been 

adopted, and on the absence of a capital rule for corporate and insurance 

company SLHCs. Capital standards are not required at the diversified financial 

group level under the Basel capital framework ( which are to be calculated at the 

banking holding group level and banking group level), however the lack of an 

established supervisory assessment framework will likely hamper the supervisors 

in reviewing and taking action at the holding company (SHLC) level As noted in CP 

10, the FBAs do not collect data from banks at the solo level (i.e. at the level of the 

bank excluding its subsidiaries). The assessors are satisfied; however, that in 

practice this omission has no prudential significance under the current 

circumstances as U.S. bank subsidiaries tend to be small relative to the parent bank 

and can only undertake activities that the bank itself could undertake in its own 

name.

13. Home-host 

relationships

Reflecting the large cross-border activities of U.S. banks abroad, and of foreign 

banking groups in the U.S., there exist a comprehensive framework of policies and 

processes for co-operation and exchange of information between the FBAs and 

foreign supervisory authorities. This is currently being strengthened by the work in 

supervisory colleges and in CMGs.

The assessors encourage the authorities to establish agreements with their foreign 

counterparts on a framework of communication strategies, especially for crisis 

situations. International cooperation would be further strengthened if state 

supervisory agencies consulted fully, in all cases, with the FBAs and foreign 

supervisors on impending enforcement actions. The assessors were made aware of 

circumstances where this was not the case. Although this is a clear deficiency in 

cooperation arrangements, the assessors did not judge it as sufficient to lower the 

“Compliant” rating for CP 13, but improvements in such consultations should be a 
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high priority.

There remain some instances in which specific rules apply to foreign institutions, 

such as the shorter run-off period for foreign branches in the liquidity, asset 

maintenance requirements for branches and requirements on large FBOs to set up 

intermediate U.S. holding companies. The mandate of the BCP assessment is 

limited to ensure that prudential rules and supervision are applied to ensure a 

minimum level of safety and soundness of banks. The assessors find that these 

rules are aimed to obtain such effect. The BCP mandate and assessment and do 

not include a judgment of level playing field issues

14. Corporate 

governance

Since the financial crisis of 2008-09 major changes have taken place in supervisors ́ 

demands on banks’ corporate governance and in the bank’s own approaches to 

these issues. Laws and regulations have gradually raised the requirements, 

although from a low level In particular, the expectations have been strengthened in 

those areas: (i) Board involvement in setting the bank’s risk appetite; (ii) the 

establishment of Risk Management Committees and; (iii) the increased frequency 

of Board meetings. The BCP assessors saw evidence of this, for instance in the 

reports from supervisory examinations, including when taking informal supervisory 

actions or formal enforcement actions for non-compliance. Assessors’ discussions 

with banks also indicate a clearly heightened focus by boards and management on 

corporate governance issues. One prominent area concerns the role and mandates 

of banks ́ boards relative to that of the senior management. Until very recently in 

the U.S., there was not a clear distinction between the two; for example the 

assessors saw numerous examples both in regulation and in actual supervision 

where the standard term “board and senior management” was used in situations 

where good current international practices would dictate that only one of the two 

should have the specific role and responsibility. The demands on board 

involvement and skills have increased substantially and this has also in many 

instances led to consequential changes in board compositions and calls for wider 

skill sets of directors. That said, both supervisors and banks agree that further steps 

need to be taken and implemented in the field of corporate governance. For 

instance, the stricter requirements and expectations by the supervisors seem to 

apply primarily to large banks. There seems to be a process of “trickling down”, i.e., 

that strengthened corporate governance practices also reach midsize and smaller 

banks, but this will probably take some more time before reaching desired levels.

Some key regulations, such as the SR 12-17 by the FRB and Heightened Standards 

by the OCC, have only recently come into force and have therefore not yet been 

fully implemented (and, as mentioned above, they primarily refer to large banks.) 

The new requirements will imply a substantial improvement but, in fact, the new, 

higher level is no more than standard practice in some other jurisdictions. In 

addition, there continue to exist areas where the requirements on the roles and 

responsibilities of bank boards fall short of international standards (See for instance 

the comments on CP 20 on Lending to related parties). In addition, the 

requirements that bank informs the supervisors promptly about material 

developments that affect the fitness and propriety of Board directors or senior 

management are defined only for a narrow scope of events and should be 

broadened

15. Risk management 

process

The assessors were able to see substantial improvement in the risk management 

process, but it also has to be acknowledged from a low starting point. Some of the 

changes could only be said to have brought the U.S. up to standard practice in 
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other jurisdictions such as frequency of board meetings, composition of the board 

and the existence of risk committees. 

Risk aggregation has improved.

Risk oversight is still work in progress with much of the guidance being new or yet 

to be implemented. Guidance for Banking Institutions with less than $10bn of 

Assets is needed as the supervision of these fails to meet many aspects of the 

essential criteria, but not sufficient to warrant material non-compliance.

Greater weight in communication needs to be placed on the role of the Board and 

greater efforts should be made to delineate their role from that of senior 

management.

Aspects of the role of the Chief Risk Officer, particularly surrounding their 

departure need to be clarified.

Further work is needed on firm-led stress tests, where firms seem to prefer to 

stretch their scenarios (often beyond the point of credibility) rather than examine 

whether they are producing the appropriate level of losses from a given severity of 

shock.

16. Capital adequacy The FBAs have a robust and comprehensive approach to setting prudent and 

adequate capital adequacy requirements for banks and most holding companies, 

and this approach has been strengthened in response to Basel and DFA reform 

initiatives. In particular, stress testing has now become an essential element of 

capital adequacy assessments for banking organizations with more than $10 billion 

of assets. As well, a number of concerns raised in the 2010 DAO about the quality 

of capital and the coverage of most savings and loan holding companies have 

been addressed in the new regulatory capital rule. However, savings and loan 

holding companies with substantial insurance or commercial activities are excluded 

from the new rule. At the same time there are a number of differences between the 

new capital rule and the relevant Basel framework in terms of definitions of capital, 

the risk coverage and the method of calculation. These differences warrant a 

“Largely Compliant” rating for this CP. Firstly, the risk-based capital requirements 

for internationally active banks under the advanced approaches are different in a 

number of respects to the Basel framework. In addition, the U.S. standardized 

approach, which provides the “floor” for the advanced approaches banking 

organizations and applies to all other banking organizations, does not impose a 

capital charge for operational risk or for CVA risk (and there are also some 

divergences regarding the standardized approach to market risk). This omission in 

risk coverage may be significant for a broad segment of the banking system, and it 

distinguishes the U.S. capital regime from other major jurisdictions. It also makes 

the “standardized” floor less binding than it may appear.

17. Credit risk The U.S. Approach to Credit Risk is exceptionally codified in both regulation and 

guidance and reflects the emphasis placed on this risk by all of the Supervisors. 

Although the agencies do not set limits, the assessors found evidence that such 

limits were in place in the banks themselves and also in no doubt that if they were 

absent the agencies would determine such practice as unsafe and unsound and as 

such would have authority to require such limits and escalation criteria in individual 

cases. 

We would however recommend that the use of limits be considered when the 
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guidelines are next reviewed.

18. Problem assets, 

provisions, and 

reserves

The FBAs have a long-established and rigorous process for evaluating banks’ 

approaches to problem assets and the maintenance of an adequate ALLL. The FBAs 

have shown a consistent willingness to challenge unrealistic bank estimates of the 

ALLL and to secure increases they judge necessary, taking enforcement action if 

required. This steadfastness in approach is likely to be tested as the U.S. economy 

improves. Supervisory judgments in this area, however, continue to be constrained 

by the “incurred loss” requirements of U.S. GAAP, but proposed reforms in this area 

will permit more forward-looking provisioning.

19. Concentration risk 

and large exposure 

limits

The FBAs have a sound supervisory framework for dealing with credit 

concentration risk. Guidance has been issued on specific areas of credit 

concentration risk and this is followed up in supervisory reviews; some 

reassessment of the supervisory force of the thresholds for commercial real estate 

exposures is warranted. However the assessors saw little evidence of a comparable 

supervisory framework and supervisory guidance for other risk concentrations, as 

EC 1 requires. The widening of the definition of large exposures under the DFA to 

include counterparty credit risk from derivatives and securities financing 

transactions has brought the large exposure thresholds more into line with the 

requirements of the BCP. However, the separate and additional limits for money 

market investments and security holdings available to banks (but not federal 

savings associations) continue to leave open the possibility of excessive risk 

concentrations. The 50 per cent limit on exposures to a corporate group also 

appears to be out of line with standard and the Federal Reserve’s proposed large 

exposures framework for large bank holding companies and foreign banking 

organizations.

20. Transactions with 

related parties

The “related party” regime in the U.S. regulatory framework does not appear as 

broad as required by this CP, in terms of the definition of covered transactions, 

affiliates and insiders. In addition, the CP requires a higher degree of board 

involvement and oversight than presently required by U.S. laws and supervisory 

guidance. There are no formal requirements for prior board approval of 

transactions with affiliated parties or the write-off of related party exposures 

exceeding specified amounts (as per EC3) or for board oversight of related party 

transactions and exceptions to policies, processes and limits on an ongoing basis 

(as per EC6). However, the FBAs expect banks to apply a high degree of board 

oversight and monitoring of affiliate and insider transactions and review this as a 

matter of practice. The aggregate limit for lending to insiders of 100 per cent of a 

bank’s capital and surplus (and 200 per cent for smaller banks) does not appear 

consistent with the general intent of this CP and creates the risk that a small group 

of insiders could deplete the own funds of a bank. There are no regulated limits for 

holding company transactions with their affiliates or insiders.

21. Country and 

transfer risks

A robust framework exists for regulation and assessment of country and transfer 

risks and for the allocation of loan loss reserves reflecting country and transfer 

risks.

However:

The rules do not cover savings associations. (Due to their tradition of having 

limited international exposures). The assessors would, however, recommend the 

introduction of a de minimis regime being applied to all categories of banks. 

Nor are U.S. affiliates of foreign banks covered since they are expected to be 
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under consolidated supervision from the home authorities. The assessors find 

this acceptable, provided that there is good cooperation and informationsharing between the FBAs and the relevant foreign supervisory authorities on 

country risk matters as well as consolidated supervision.

Country risk has not yet been specifically tested in the stress tests mandated by 

the FBAs. While it has been covered on a case by case basis by internal stress 

testing conducted by banks, the assessors recommend that guidance and rules 

on stress test specifically include country risk.

22. Market risk The Market Risk regime is comprehensive and understood. 

The assessors found very active engagement from supervisors on implementing 

the regime they have in place and in dealing with material market risk issues, such 

as valuation allowances, profit and loss attributions, etc. They make appropriate 

use of peer-group comparison such as through Hypothetical Portfolio Exercises.

The material weaknesses identified in the 2009 BCP—such as market risk 

monitoring and management—have been significantly improved. The Supervisors 

have implemented much of the Basel II approach and also supplemented that for 

those banks subject to the Market Risk Rule. This improved market risk 

measurement and monitoring processes and models at certain major firms and 

lack of reliable valuation of MTM positions. The Stress Test Regime mandated 

under DFA has also improved the completeness and use of market stress testing.

23. Interest rate risk in 

the banking book

The assessors find the U.S. compliant. The principles-based approach seems to be 

backed by adequate supervision proportionate to the size and complexity of the 

bank and the risk being run. The assessors saw a number of examples of 

supervisors applying the guidance they have.

Given the concentrations that exist in small and community banks, the agencies 

approach would benefit from some tiering (as they do with other risks) and also 

should include quantitative guidelines that would serve as a preventative indicator 

of supervisory risk appetite, provide a quicker route to action and a useful point of 

reference and escalation within the agencies themselves.

24. Liquidity risk The Liquidity Risk Regime for banks below $50bn of Assets is quite high level, but 

the assessors did see numerous examples of supervisory action in support of the 

overall principle. Current levels of reporting for these banks (for example in respect 

of encumbered assets) are inadequate with only one line in the Call Report. The 

Authorities recognize this deficiency and have proposed a greater level of 

reporting depth as part of the implementation of the Liquidity Coverage Ratio. The 

assessors did not see evidence of encumbrance being a particular concern, but 

liquidity issues more generally were prominent in the supervisory actions directed 

at the firms.

For Banking Institutions with at least $50bn of Assets and indeed beyond that level 

those of Global Systemic Importance, the regime (mostly in Regulation YY) is 

comprehensive and robust. Further the regime is supported by extensive reporting.

We would recommend that efforts are extended in developing an interagency 

approach to the implementation of LCR.

25. Operational risk The U.S. Federal Agencies are placing increasing emphasis on operational risk 

issues and are co-coordinating on the production of additional inter-agency 

guidance, as well as identifying and seeking mitigation of a number of issues in 
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their vertical and horizontal issues. They are also alert to the changing threat 

landscape, such as the escalation of fines and other penalties from litigation and 

cyber.

The overall regime, however, has not reached a sufficient level of maturity 

(equivalent to market and credit risk for example). Guidance for banks under AMA 

(at the time of this assessment, only 8 banks) is well specified, however for all other 

bank operational risk management falls within the scope of “general” risk 

management (see CP 15). Guidance for other banks is highly disparate, and the 

weakness is compounded by the absence of a comprehensive reporting regime—

only certain operational risks are covered by GLBA 501(b). It was also noted that 

there is not a standardized capital charge for operational risk.

The absence of a comprehensive reporting regime is also a weakness as so much 

of the assessment of operational risk is assessing what could happen in terms of 

operational events. 

The assessors also noted the priority all of the agencies were attaching to Cyber 

Risk and also the establishments of working groups at the FFIEC, but the assessors 

agree that this will not be an easy task given the challenge of co-coordinating 

across not just the banking agencies but beyond given the nature of the risk.

26. Internal control 

and audit

The Federal Banking Agencies are clearly raising the bar for control functions. In 

respect of this particular Core Principle, this is particularly true of Internal Audit and 

the assessors have seen evidence that the supervisors are finding issues with 

Internal Audit that are classified as Matters Requiring Attention—at the OCC there 

were 405 outstanding at the time of this report. 

By contrast the assessors found very little mention of Compliance except with 

reference to the very robust regime in respect of the BSA and Anti-Money 

Laundering. The vulnerabilities to other forms of criminal abuse (e.g. fraud) are 

more disparate within the regime and within the banks themselves and risk being 

deemphasized. The assessors would recommend that the authorities seek to find 

an appropriate balance in their surveillance and also in their guidance—perhaps by 

consolidating it into fewer places than at present.

27. Financial reporting 

and external audit

Not all banks are required to issue full financial statements which are reviewed by 

an independent accountant in accordance with independent audit requirements. 

There is no requirement for external auditor to report immediately directly to the 

supervisor, but rather through the bank, should they identify matters of significant 

importance.

There is no comprehensive requirement, apart from some provisions, only an 

expectation for non-public banks to rotate their external auditors. 

The supervisor cannot set the scope of the external audit but could encourage the

auditor, after the preliminary audit but before it is finalized, to include new issues. 

(This deficiency does not affect the rating of compliance, since EC 4 only requires 

that “Laws or regulations set, or the supervisor has the power to establish the 

scope...” The U.S. legislation clearly sets out the minimum scope of the external 

audit making the U.S. compliant with this proviso. However, the assessors 

recommend that the FBAs are given legal powers to add issues to the scope of the 

external audit in specific cases in order to address a relevant issue not normally 

covered in an external audit). 
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28. Disclosure and 

transparency

There are no examples of disclosures of information which covers ongoing 

developments during a financial reporting period, except for occasional analytical 

papers. Since the periodicity of the most comprehensive published report is 

quarterly (call reports), the assessors did not consider this deficiency significant. 

Nevertheless, the authorities are encouraged to promote the disclosure of such 

information, where relevant. 

The FBAs do not collect data from banks at the solo level (i.e. at the level of the 

bank excluding its subsidiaries). In principle, this means that regulatory 

requirements such as Basel III capital that are intended to be imposed on a bank on 

both a stand-alone and consolidated basis can only be tracked on the latter basis. 

The assessors are satisfied, however, that in practice this omission has no 

prudential significance. The FBAs have explained that U.S. bank subsidiaries tend to 

be small relative to the parent bank and can only undertake activities that the bank 

itself could undertake in its own name.

29. Abuse of financial 

services

There rules and supervisory expectations on BSA/AML issues are comprehensive. In 

relation to the requirements of the BCP further improvements should be made as 

the assessors did not see evidence that these deficiencies in the legislation were 

compensated for in the supervisory process:

Supervisors should explicitly require, rather than “expect”, that a bank’s decision to 

enter into relationships with high-risk accounts and countries, including with 

foreign and domestic PEPs, should be escalated to the senior management level.

Current legal and regulatory framework does not require the identification of the 

ultimate beneficiary owner of legal entity clients. Proposed amendments open for 

public consultation will introduce requirements to address this deficiency. 

Assessors welcome the proposed rule and understand its approval and 

implementation will improve compliance with this CP.

CP 29 deals with all forms of criminal abuse and the need to protect banks. It is 

clear that there is strong political and supervisory focus on BSA/AML and the 

assessors saw evidence that significant resources are deployed within the 

authorities and banks to meet very stringent standards. The vulnerability to other 

forms of criminal abuse is more disparately addressed within the regime and risk 

being deemphasized. The assessors would recommend that the authorities seek to 

find an appropriate balance in their surveillance and also in their guidance—

perhaps by consolidating the related issues in fewer places than at present.

Recommended Actions 

Appendix Table 5. Recommended Actions to Improve Compliance with the 

Basel Core Principles and Effectiveness of Supervision

Reference Principle Recommended Action 

Principle 1 FBAs revisit their “mission and vision” statements to ensure they give primacy to safety 

and soundness and to clarify that the pursuit of other objectives must be consistent 

with, and if necessary subordinate to, that goal.

FBAs and the CFPB explore ways to reduce duplication of effort, in matters such as risk 

reviews, and over time look to pursue opportunities for a more coherent division of 
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responsibilities between safety and soundness, and consumer protection.

Principle 2 The Federal Reserve further assure the independence of its supervisory role by making 

the governance rules for the boards of Federal Reserve district banks consistent with 

emerging global good practice. 

Principle 3 FBAs ensure that the preparation of supervisory plans is on the same cycle, if 

practicable, and consider other ways of ensuring that collaboration becomes fully 

engrained in the modus operandi of each agency.

Principle 5 Incorporate handover “protocols” that would discourage inappropriate regime 

shopping in the FFIEC Statement on Regulatory Conversions. 

Principle 6 Introduce explicit requirement for banks to immediately report if they find that a 

major shareholder is no longer suitable.

Principle 8 Develop interagency approach to communicate issues of supervisory important to 

banks (MRAs, MRIAs, MRBAs).

Develop interagency method of prioritization of such matters requiring attention.

Principle 9 Introduce requirements for banks to report developments to the supervisor, in 

particular for banks under less intensive supervision.

Develop guidance to clearly distinguish, in supervisory recommendations and matters 

requiring attention, which are of Boards responsibility and which are the responsibility 

of senior management.

Implement interagency guidance with more clarity regarding aging of MRAs.

Carry out a combined interagency planning process for individual firms.

Develop a supervisory best practice approach for horizontal reviews, which includes 

initial statements of expected minimum standards and the expected process of 

feedback to those that participate and the feedback to the wider population of firms 

to which it might be relevant. 

Principle 11 Implement rules/policies promoting early action also for other issues than bank capital 

and liquidity.

Implement more explicit rules for supervisory action, such as setting timelines for 

completion, partially or fully, of remedial action and requiring regular reporting of 

progress.

Principle 12 Develop and implement regulatory and supervisory rules, guidance, and a formal 

rating system for SLHCs.

Principle 14 Introduce clearer expectations and requirements for corporate governance also for 

banks not subject to heightened standards.

On issues where still lacking, clarify supervisory expectations and requirements on the 

role and responsibilities of the bank board versus those of the bank management.

Introduce explicit requirement that banks inform the supervisors promptly about 

material developments that affect the fitness and propriety of Board directors or 
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senior management.

Principle 15 Introduce clear expectations and requirements regarding risk management standards 

applicable to banks with less than $10bn of Assets.

Introduce clear guidance on responsibilities of the Board with regards to risk 

management.

Introduce clear requirements on the arrangements for the removal of CROs.

Introduce clearer supervisory guidance on the severity of scenarios for stress tests run 

by the firms.

Introduce clearer feedback mechanisms to firms on the components of supervisory 

run stress tests.

Principle 16 Introduce a comprehensive capital framework for savings and loan holding companies 

with substantial insurance or commercial activities. 

Clarify requirements for capital to be held against operational risk by non-AMA banks.

Clarify supervisory expectations for capital to be held against interest rate risk in the 

banking book.

Principle 17 Introduce specific requirements that major credit risk exposures exceeding a certain 

amount or percentage of the bank’s capital are to be decided by the bank’s Board or 

senior management. 

Introduce specific requirements that credit risk exposures that are especially risky or 

otherwise not in line with the mainstream of the bank’s activities must be decided by 

the bank’s Board or senior management. 

Principle 19 Reassess the supervisory force of the thresholds for commercial real estate exposures. 

Develop a robust supervisory framework and supervisory guidance for other risk 

concentrations comparable to that for credit concentration risk.

Review the separate and additional limits for money market investments and security 

holdings by banks, with a view to including them within the 15 plus 10 limits. 

Review the 50 per cent limit on exposures to a corporate group, which could result in 

excessive risk concentrations.

The Federal Reserve completes the development of its large exposures framework, 

with limits, for large bank holding companies and foreign banking organizations.

Principle 20 Introduce formal requirements for prior board approval of transactions with affiliated 

parties and the write-off of related party exposures exceeding specified amounts.

Introduce formal requirements for board oversight of related party transactions and 

exceptions to policies, processes and limits on an ongoing basis.

Review the aggregate limit for lending to insiders of 100 per cent of a bank’s capital 

and surplus (and 200 per cent for smaller banks).

Introduce limits for holding company transactions with their affiliates or insiders. 

Amend the coverage and details of the “related party” regime to bring it into line with 
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this CP.

Principle 21 Introduce de minimis regime to be applied to all categories of banks, and include 

savings associations.

Introduce explicit reference to country risk in guidance and rules on stress tests 

guided by the authorities.

Principle 23 Revise the 1996 guidance to include more quantitative guidelines regarding interest 

rate risk in the banking book. 

Principle 25 Introduce guidance on operational risk management and supervisory expectations 

applicable to non-AMA banks.

Introduce appropriate reporting regime regarding operational risk. 

Principle 27 Introduce requirements for all banks to issue full financial statements in accordance 

with agreed accounting standards that are reviewed by an independent accountant in 

accordance with independent audit requirements. 

Introduce requirement for external auditor to report immediately directly to the 

supervisor, should they identify matters of significant importance.

Review supervisory powers to allow the supervisor to set the scope of the external 

audit.

Introduce a requirement for non-public banks to rotate their external auditors. 

Principle 29 Supervisors should explicitly require, rather than “expect”, that a bank’s decision to 

enter into relationships with high-risk accounts and countries, including with foreign 

and domestic PEPs, should be escalated to the senior management level.

Current legal and regulatory framework does not require the identification of the 

ultimate beneficiary owner of legal entity clients. Proposed amendments open for 

public consultation will introduce requirements to address this deficiency. Assessors 

welcome the proposed rule and understand its approval and implementation will 

improve compliance with this CP.

Authorities’ Response to the Assessment

The U.S. authorities strongly support the IMF’s Financial Sector Assessment Program (FSAP), 

which promotes the soundness of financial systems in member countries and contributes to 

improving supervisory practices around the world. The authorities appreciate the complexity of 

assessing the U.S. financial system and the time and resources dedicated by the IMF and its 

assessment teams to this exercise. The authorities commend the IMF on its diligence and 

constructive approach in undertaking the assessment. The U.S. authorities welcome the opportunity 

to provide the following comments.

The IMF rightly holds the United States to the highest and most stringent grading standard, 

given the complexity, maturity, and systemic importance of our financial sector. Despite this 
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higher grading standard, the assessment found the U.S. regulatory system to be very strong and, in 

many ways, more rigorous than international standards.

We are pleased to note that the Report acknowledges that the U.S. federal banking agencies 

have improved considerably in their effectiveness since the previous FSAP was completed in 

2010. This is particularly noteworthy since, compared to the 2010 assessment, the federal banking 

agencies were assessed against four additional Core Principles for Effective Banking Supervision 

(29 total) and significantly more Essential Criteria and Additional Criteria. This assessment also is 

more rigorous than the one completed in 2010 since the revised Core Principles have a heightened 

focus on risk management. The U.S. authorities are pleased that, even under these more stringent 

principles and when applying a higher standard, the IMF’s assessment of the U.S. system broadly 

indicates compliance with the Core Principles. Moreover, while the approach of the federal banking 

agencies is principles-based, the Report reaches its conclusions against the backdrop of an 

assessment regime that places a premium on specificity in regulations. 

The Report recognizes that global and domestic reforms implemented since the 2010 

assessment, particularly the Dodd-Frank Act (DFA), have increased the intensity of the 

supervisory programs of the federal banking agencies. Since the previous review, substantial 

improvements have been made in risk management and the oversight of large bank organizations 

by putting enhanced emphasis on banks’ capital planning, stress testing, and corporate governance. 

The U.S. authorities concede that some reforms are still pending and will take time to fully 

implement. Notably, the Report acknowledges that additional implementation of the reform 

programs will further improve the United States’ compliance with the Core Principles. 

The Report acknowledges that the federal banking agencies are operationally independent 

and have clear mandates for safety and soundness of the banking system. However, it concludes 

there are duplicative efforts by the federal banking agencies and a lack of delineation between safety 

and soundness and other missions. Although there is not a formal statement that safety and 

soundness is the sole or primary mission of a federal banking agency, there is no confusion on the 

part of the agencies, the public, or the industry that the focus of supervision and regulation relates to 

safety and soundness. The U.S. authorities believe that responsibilities, such as assuring compliance 

with consumer laws and taking account of financial stability considerations, in no way conflict with 

the assessment of safety and soundness. Indeed, given the potential high level of operational and 

reputational risk associated with significant consumer compliance weaknesses, considerations related 

to such compliance are part of an overall safety and soundness risk assessment. 

Furthermore, in practice, there is clarity of mission among the agencies. Clear distinctions 

exist between prudential safety and soundness responsibilities and consumer protection 

responsibilities that are shared between the Consumer Financial Protection Bureau (CFPB) and 

the federal banking agencies. In the view of the U.S. authorities, the federal banking agencies have 

met the requirement of collaboration required by DFA and have addressed the issue of duplicative 

efforts by coordinating with each other and the CFPB, as evidenced by interagency Memoranda of 

Understanding. 
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The federal banking agencies have taken a number of substantive actions that are not fully 

reflected in the Report. These include:

 Establishing forward-looking stress testing requirements for banks with less than $10 billion 

in assets. Although banks with assets less than $10 billion are not required to complete 

formal DFA capital stress tests, federal banking agencies require stress testing on certain 

high-risk and volatile activities, and all banks are expected to have appropriate capital 

planning processes.

 Publishing federal banking agencies’ examination manuals and directors’ guides, and 

conducting outreach and training initiatives, which articulate the responsibilities of boards of 

directors. 

 Issuing extensive guidance on business resumption planning, which is included in the Federal 

Financial Institutions Examinations Council’s booklets. 

 Requiring institutions with total assets of less than $500 million in certain instances to have 

an independent audit of their financial statements. 

 Applying stricter regime standards for affiliate transactions, which include, among other 

things:

 tighter U.S. quantitative limits of 10 percent of bank capital for transactions with a single 

affiliate and 20 percent of capital for the aggregate transactions with all bank affiliates, 

instead of 25 percent of the bank’s capital, 

 inclusion of asset purchases by a bank from affiliates in the 10/20 limit structure noted 

above, 

 prohibition on a bank having any unsecured credit exposure to an affiliate, 

 prohibition on a bank purchasing low-quality assets from an affiliate.

Additionally, U.S. authorities not only meet many Basel III international standards, but 

significantly exceed some of the most important ones, especially those related to capital and 

liquidity. Examples include:

 Requiring the largest U.S. bank holding companies to have risk-based capital ratios that 

exceed Basel minimum capital requirements via the Federal Reserve’s Comprehensive Capital 

Analysis and Review and annual stress tests programs.

 Utilizing a Global Systemic Important Bank surcharge to reflect short term wholesale funding, 

which increases banks’ capital conservation buffer.

 Exceeding the Basel standard, the largest, most global, systemic U.S. bank holding companies 

must maintain a supplementary leverage ratio buffer greater than 2 percentage points above 

the 3 percent minimum, for a total of more than 5 percent, to avoid restrictions on capital 

distributions and discretionary bonus payments. Insured depository institution subsidiaries 
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of these firms must maintain at least a 6 percent supplementary leverage ratio to be 

considered “well capitalized.”

The U.S. authorities look forward to continuing a dialogue with the IMF and global 

counterparts to jointly promote the mission of the FSAP to enhance global financial sector 

stability and supervisory practices. In terms of this Report’s recommendations, specifically, the U.S. 

authorities will review them carefully. Action will be taken, where permissible, on items that enhance 

communication and information sharing among the agencies and ensure more effective oversight of 

systemic risk.

C. IOSCO Objectives and Principles of Securities Regulation

Information and Methodology Used for the Assessment

This assessment was conducted on the basis of the IOSCO Principles approved in 2010 and the 

Assessment Methodology adopted in 2011.

5 As has been the standard practice, Principle 38 was 

not assessed due to the existence of separate standards for securities settlement systems and central 

counterparties. A review of the regulatory and supervisory framework in place at the state level was 

outside of the scope of this assessment. Given the relatively limited role played by state regulation 

and supervision (as described below), this limitation in the scope of the assessment has not 

materially affected the overall judgment of the U.S. regime. Given that the IOSCO Principles and 

Methodology do not specifically address over-the-counter (OTC) derivatives, the adoption and 

implementation status of the U.S. OTC derivatives framework has not impacted the grades.

Overview and Institutional Setting 

The regulatory and supervisory arrangements remain quite complex, involving two agencies 

and a number of important SROs. Two federal agencies, the SEC and the CFTC, share the primary 

responsibility for the regulation and supervision of the U.S. securities and derivatives markets. 

Broadly speaking, the SEC is in charge of the regulation and supervision of securities markets and 

single security based options, futures and swaps markets. The CFTC is responsible for the regulation 

and supervision of futures, options and swaps markets (except for narrow-based security indices). 

The SEC’s and CFTC’s mandates were significantly expanded as a result of the enactment of the DFA.

The Act provided the SEC and CFTC with shared responsibility over the swaps markets and brought 

HF managers and municipal advisors under the jurisdiction of the SEC. State securities regulators 

maintain responsibility for issuances that are conducted at the state level only. Both state and federal 

legislation provide a regulatory framework for BDs and IAs, but not for futures and derivatives 

intermediaries. The role of state regulators has recently increased for smaller IAs. 

 

5

The assessment team comprised Ana Carvajal, IMF (currently seconded to the World Bank Group), Eija Holttinen, 

IMF, and Malcolm Rodgers, external expert engaged by the IMF.
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The CFTC and SEC rely to a significant degree on SROs for the regulation of the markets and 

their participants. The SROs include exchanges, clearing organizations, and securities and futures 

associations. There are two registered associations with SRO functions: the Financial Industry 

Regulatory Authority (FINRA) and the National Futures Association (NFA). FINRA has authority over 

BDs, while the NFA has authority over all intermediaries in the futures and swaps markets. 

Membership in an SRO is mandatory for the corresponding intermediaries.

6

In addition to member 

registration and supervision, FINRA also has a role in market surveillance due to agreements with 

different exchanges and for OTC trading. The NFA is developing a similar role for some SEFs.

Criminal enforcement is the responsibility of federal, state and local authorities. The SEC and 

CFTC have significant administrative and civil enforcement powers. In addition, criminal prosecution 

is available by other U.S. authorities to pursue securities and derivatives market violations. Federal, 

state and local prosecutorial authorities play an active role in criminal (and in some cases civil) 

enforcement of securities laws, working both with the regulators and on their own initiative.

Main Findings

Post crisis, the legal mandates of the Securities and Exchange Commission (SEC) and the 

Commodity Futures Trading Commission (CFTC) have significantly expanded. Enhancements 

have been made to prudential requirements applicable to some key regulated entities and the 

agencies are taking an increasingly forward looking risk-based approach to supervision and 

enhancing their risk identification processes and have also worked on improving the use of the

enforcement function. Many of these improvements can also be observed at the self-regulatory 

organizations (SROs). 

But the level of funding of both the SEC and CFTC is a key challenge affecting their ability to 

deliver on their mandates in a way that provides confidence to markets and investors. Funding 

limitations have impacted the timely delivery of new rules and the implementation of registration 

programs for the new categories of participants. In this context, the number of expert staff in the SEC 

and CFTC does not appear to be sufficient to ensure a robust level of hands-on supervision, which 

has become clear in the case of investment advisers (IAs). Leveraging on technology can mitigate but 

not replace the need for additional human resources. Consideration should be given to making both 

agencies self-funded and allowing for multi-year budgeting.

The fragmented structure of equity markets remains a key challenge for the SEC. The 

framework developed by the SEC has served its purpose of enhancing competition and providing a 

framework for best execution. However, the markets have evolved and the framework needs to be 

updated accordingly to ensure sufficient operational transparency for all types of trading venues as 

well as fair and objective access. At the same time, the SEC needs to remain vigilant about the impact 

 

6 Only IAs are not required to be members of any SRO and are therefore exclusively supervised by the SEC. Municipal 

advisors must be registered with both the MRSB and the SEC.
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dark trading may have on overall price formation. The recently-announced Equity Market Structure 

Advisory Committee is an important step.

It is important that both agencies continue to strengthen their ability to identify emerging and 

systemic risks. This is critical for the effective discharge of their respective mandates, but also to 

enhance their contributions to the mandate of the Financial Stability Oversight Council (FSOC). 

Enhancing mechanisms to ensure a holistic view of risks is recommended, in particular by the 

respective Commission (as a whole) of each agency becoming more involved in the process of 

assessing and monitoring responses to risks. 

Principles for the regulator. The SEC and the CFTC are independent agencies, with clear mandates 

stemming from the law. Both have sufficient powers to fulfill their mandates, including rulemaking, 

registration, examination and enforcement powers. They operate under a high level of accountability, 

which is supported by public transparency of a wide range of regulatory actions and decisions. 

Strong ethics rules apply to Commissioners and staff of both the SEC and CFTC. The agencies are 

taking an increasingly forward looking risk-based approach to supervision and enhancing their risk 

identification processes, which in turn is helping them to contribute more effectively to the FSOC. 

Both have processes to review the perimeter of regulation. However, the current level of resources 

poses challenges for the SEC and CFTC to effectively discharge their functions, particularly in light of 

their expanded mandates.

Principles for self-regulation. The U.S. system relies strongly on SROs, such as FINRA and the NFA,

for supervision of markets and intermediaries. This result in a complex set of arrangements; but SROs 

are subject to oversight, including approval or notification of rules, and ongoing monitoring of their 

self-regulatory activities via reporting and examinations.

Principles for enforcement. The SEC and CFTC have broad inspection powers over regulatees and 

investigative and enforcement powers over regulated entities, regulated individuals, and third 

parties. Both agencies make extensive use of their enforcement powers; and the SEC, the CFTC, and 

criminal authorities are active in pursuing securities and derivatives violations. Overall, the agencies, 

along with the SROs, have put in place robust supervisory programs to monitor ongoing compliance 

by regulated entities and individuals and to monitor market activity. The programs for regulated 

entities are risk-based. In most cases, the coverage of the examination program is such that no entity 

goes without inspection for a long period of time, even if it is low risk. The situation is different for 

IAs, as the coverage of their examination program is more limited—covering only a small percentage 

of the population each year. Market surveillance relies primarily on SROs’ automated tools.

Principles for cooperation. The SEC and CFTC have the ability and capacity to share information 

and cooperate with other authorities domestically and internationally. They are signatories to many 

Memoranda of Understanding (MOU), including the IOSCO (MMOU) and a number of bilateral 

MOUs with domestic and foreign authorities, and have records of active cooperation. The SEC and 

CFTC do not need the permission of any outside authority or an independent interest to share or 

obtain information. Access to the financial records of individuals and small partnerships requires 

notifying the customer; delaying such notice is also possible in certain circumstances. 
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Principles for issuers. Generally issuers of public offerings, including asset-backed securities (ABS), 

are subject to strong disclosure requirements both at the moment of registration and on a periodic 

basis. However, municipal securities are exempt from those registration and reporting requirements.

(While the SEC has established (indirectly) disclosure requirements applicable to issuers of municipal 

securities, it lacks authority to ensure compliance.) The current framework provides reporting 

companies with significant freedom to decide on their structure, and the classes of shares to be 

offered to the public. However, they are subject to strong disclosure obligations, and any limitations 

to the rights of shareholders must be clearly disclosed in the prospectus. Federal laws allow the 

acquisition of control without triggering an obligation to make a tender offer. However, a number of 

features in the legal system, mainly state corporate laws, create disincentives from doing so. The 

current regime requires reporting of insiders’ holdings and substantial holdings, as well as reporting 

of beneficial ownership. The SEC has developed an active program to monitor and enforce issuers’ 

compliance with their disclosure obligations. High quality accounting standards, the U.S. Generally 

Accepted Accounting Principles (GAAP), are set through an open and transparent process. 

Principles for auditors, credit rating agencies, and other information service providers.

Auditors of reporting companies must be registered with the PCAOB. The PCAOB has developed a 

credible examination program for audit firms. Audit standards are considered of high quality. The 

PCAOB is responsible for the enforcement of compliance with audit standards, and the SEC can also 

exercise its enforcement powers over auditors and has done so in an active manner. CRAs that wish 

their credit ratings to be used for regulatory purposes must elect to register with the SEC as 

Nationally Recognized Statistical Rating Organizations (NRSROs). In practice, ratings are currently 

used for regulatory purposes by the SEC in very limited cases, mainly in connection with MMMFs.

The registration process subjects NRSROs to appropriate requirements. The SEC conducts NRSRO

examinations on an annual basis. BDs on the securities side and FCMs, introducing brokers (IBs), 

swap dealers (SDs) and major swap participants (MSPs) on the derivatives side are subject to 

obligations in connection with the provision of research analysis that aim at managing potential 

conflicts of interest.

Principles for collective investment schemes. IAs to MFs, and CPOs, are subject to registration 

with the SEC and CFTC, which focuses mainly on their integrity and disclosure to investors rather 

than on human resources, financial capacity, and internal control and compliance arrangements. MFs 

and commodity pools (CPs) are subject to disclosure obligations both at the moment of registration 

and on a periodic basis. Self-custody and related party custody of MF and CP assets is allowed, 

however additional safeguards apply in the case of MFs. MF and CP assets must be valued according 

to the U.S. GAAP. MF and CP shares and units must be valued at net asset value (NAV), except 

MMMFs. IAs to HFs are subject to registration requirements that are based on disclosure. Standards 

of organizational and operational conduct apply to them. The SEC conducts only limited 

examinations of IAs to MFs, although it has implemented a presence examination program for newly 

registered IAs, including those that manage HFs. 

Principles for market intermediaries. The registration regime combined with the relevant SRO’s 

membership regime subjects all categories of participants—except, importantly, IAs and Commodity 

Trading Advisors (CTAs)—to comprehensive eligibility criteria that include integrity, capital 
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requirements, and adequacy of internal controls. All categories of intermediaries except IAs and CTAs 

are subject to capital requirements and periodic reporting of their financial position and capital 

adequacy. IAs and CTAs’ registration regime is based on integrity criteria and disclosure. They are not

permitted to hold clients assets nor deal on behalf of customers, but they may have discretion to 

make investment decisions. Since in the U.S. context, IAs are typically portfolio managers with 

substantial assets under management, the authorities are encouraged to consider whether there is a 

need to implement more comprehensive internal control and risk management requirements. There 

are well-developed processes to deal with the failure of intermediaries that have been applied in 

practice.

Principles for secondary markets. Exchanges and Designated Contract Markets (DCMs) are subject 

to detailed registration requirements. Alternative Trading Systems (ATSs) are subject to the SEC 

broker-dealer registration and FINRA membership processes along with SEC disclosure obligations. 

Public information available on ATS operations, subscribers and market models is limited. Pre-and 

post-trade transparency requirements apply in both securities and derivatives markets, but subject to 

certain derogations that may lead to less than optimal pre-trade transparency. The authorities should 

review the regulatory framework for bilateral trading systems, enhance the disclosure requirements 

for ATSs, and analyze the risk that the pre-trade transparency of certain order types (including dark 

order types) may adversely impact price discovery. Market abuse is addressed by the Exchange Act 

and CEA and subject to administrative, civil and criminal sanctions. Open positions in commodity 

futures and options markets are closely monitored by the SROs and CFTC, while position information 

is available in securities markets through a DTCC service. Default procedures apply in both clearing 

agencies and Derivatives Clearing Organizations (DCOs) and are disclosed through their rules. Short 

selling is subject to disclosure and “locate” requirements, and the SEC and SROs monitor compliance.

Summary Implementation of the IOSCO Principles

Appendix Table 6. Summary Implementation of the IOSCO Principles

Principle Findings

Principle 1. The responsibilities 

of the Regulator should be clear 

and objectively stated.

The mandates of the SEC and CFTC are stated by law. The agencies can 

and do interpret the laws under their jurisdiction. There is a high level of 

public transparency on interpretations, guidance and no action letters. In 

general, like products and entities are treated in a consistent manner. 

However, the CPO and CTA regimes may lead to different investor 

protection consequences than that applied to IAs. The legal framework 

requires the agencies to consult and coordinate in specific areas. In 

addition, the agencies communicate on a regular basis. In a few areas the 

SEC and CFTC have been able to streamline obligations of dually 

registered entities by establishing single reporting or substituted 

compliance mechanisms. In a few cases, joint inspections in areas of 

common interest have taken place.

Principle 2. The Regulator 

should be operationally 

independent and accountable in 

the exercise of its functions and 

The SEC and CFTC have been established as independent agencies 

separate from any office of the Government. Rules governing the 

appointment of Commissioners seek to balance political affiliations. As 

per judicial precedents, Commissioners can be removed only for cause. 
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powers. The Congressional budget approval process has the potential to 

materially affect the agencies’ ability to decide on their priorities, and the 

annual nature of the budget can affect long term planning. In general, on 

a day to day basis the agencies do not require approval of or consultation 

with other authorities to exercise their functions. There is a strong 

accountability regime to Congress and the public, supported by a high 

level of transparency of a wide range of regulatory actions and decisions, 

as well as judicial review of rules and regulatory decisions.

Principle 3. The Regulator 

should have adequate powers, 

proper resources and the 

capacity to perform its functions 

and exercise its powers.

The SEC and CFTC have sufficient powers to fulfill their respective 

mandates, including rulemaking, registration, examination, investigation 

and enforcement powers. The agencies have been recruiting staff with 

diverse skill-sets. However, the current level of funding poses challenges 

for the proper discharge of their functions, in particular given their 

expanded mandates. 

Principle 4. The Regulator 

should adopt clear and 

consistent regulatory processes.

Requirements for the provision of regulated activities are available on the 

agencies’ websites. The legal framework requires the rulemaking process 

to include public consultation and an analysis of costs. In practice the 

agencies have also used other mechanisms, such as roundtables, to 

gather views from stakeholders on complex topics. Regulatory decisions 

are subject to due process, including generally a need for notice of 

proposed decisions, opportunity for affected parties to be heard, and 

judicial review. 

Principle 5. The staff of the 

Regulator should observe the 

highest professional standards, 

including appropriate standards 

of confidentiality.

The SEC and CFTC are bound by general rules on ethics applicable to 

government officials. In addition, both agencies have established specific 

ethics rules that include additional restrictions for staff, in particular in the 

area of holding and trading securities and commodities. Both agencies are 

subject to strict rules of confidentiality. There are appropriate mechanisms 

to monitor potential breaches of ethics and confidentiality obligations.

Principle 6. The Regulator 

should have or contribute to a 

process to monitor, mitigate 

and manage systemic risk, 

appropriate to its mandate.

The supervisory programs of the different divisions of both agencies to 

monitor entities, products and markets are the main mechanisms to 

identify emerging and systemic risks. At the SEC, regular meetings take 

place between division staff and the SEC Chair, between division staff and 

individual Commissioners, and between the SEC Chair and individual 

Commissioners. Through these meetings, the SEC Chair obtains the views 

of the other Commissioners and informs them on issues of concern, 

including on emerging and systemic risks. Additionally, through these 

meetings the Chair and the other Commissioners are informed by the 

staff, and they share their views with the staff, on these same issues. CFTC 

staff has informal meetings to discuss risk issues. Weekly closed door 

surveillance meetings of staff with the Commission are also scheduled; 

these are used to discuss emerging risks, take decisions on how to tackle 

them, and follow up. Both agencies have made significant improvements 

to data collection and analysis, but enhancements are needed, particularly 

on asset management and swaps data. Through the participation of their 

chairs as voting members at the FSOC and of staff members in the 

subcommittees, the SEC and CFTC contribute to the process of identifying 

emerging and systemic risks in the financial sector. 

Principle 7. The Regulator Various processes allow the SEC and CFTC to review the perimeter of 
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should have or contribute to a 

process to review the perimeter 

of regulation regularly.

regulation, both in regard to a specific sector, entity or product, and in a 

more holistic manner. Examples of the former are reviews prompted by 

concerns identified through their supervisory programs, market events, or 

law. Examples of the latter are the strategic plans the agencies develop on 

a five year cycle, which require them to take a view on priorities. Types of 

action taken to address the regulatory perimeter include taking 

supervisory actions, issuing guidance or new rules, and proposing 

changes to the legal frameworks.

Principle 8. The Regulator 

should seek to ensure that 

conflicts of interest and 

misalignment of incentives are 

avoided, eliminated, disclosed 

or otherwise managed.

The regulatory framework to address issuers’ conflicts of interest is based 

on strong disclosure obligations, including on related party transactions. 

Extensive disclosure obligations apply to the underlying assets of ABS. 

New disclosure requirements for asset level data and retention 

requirements will become effective over the next two years. The regime 

for regulated entities relies on a combination of prohibitions and 

management and disclosure of conflicts of interest. The SEC and CFTC 

monitor compliance primarily through their supervisory programs. 

Principle 9. Where the 

regulatory system makes use of 

Self-Regulatory Organizations 

(SROs) that exercise some direct 

oversight responsibility for their 

respective areas of competence, 

such SROs should be subject to 

the oversight of the Regulator 

and should observe standards 

of fairness and confidentiality 

when exercising powers and 

delegated responsibilities.

The current regime relies extensively on the use of SROs for the 

supervision of the majority of the categories of intermediaries (FCMs, IBs, 

BDs), as well as for market surveillance. There are two main categories of 

SROs: the exchanges and DCMs and associations (FINRA and NFA). All 

SROs are subject to SEC or CFTC ongoing oversight. This includes 

approval or notification of rules, with appropriate tools to prevent rule 

implementation in case of non-compliance with the statutes; reporting 

requirements; and risk-based on-site examinations. 

Principle 10. The Regulator 

should have comprehensive 

inspection, investigation and 

surveillance powers.

The SEC and CFTC have broad powers to inspect all categories of 

regulated entities and individuals, require information from them, and 

conduct investigations into their activities for potential breaches of their 

statutory and regulatory obligations. They also have the power to conduct 

market surveillance. The CFTC and NFA conduct front line surveillance for 

markets under their jurisdiction. For the securities markets, the SEC and 

the SROs work cooperatively to conduct surveillance of those markets. 

Principle 11. The Regulator 

should have comprehensive 

enforcement powers.

The SEC and CFTC have robust powers to access information from any 

person, including subpoena powers over records and testimony, where a 

breach of law is suspected. Both agencies have a wide variety of 

enforcement tools at their disposal, including the use of administrative 

and civil proceedings and the ability to refer matters to the criminal 

authorities. A wide range of sanctions can be sought in administrative and 

civil proceedings, including monetary penalties and disgorgement and, for 

the CFTC, restitution. 

Principle 12. The regulatory 

system should ensure an 

effective and credible use of 

inspection, investigation, 

surveillance and enforcement 

The agencies and the SROs have put in place robust supervisory programs 

to monitor markets and the ongoing compliance of registered entities and 

individuals. The program for regulated entities is risk-based. In most 

cases, the examination program covers all entities so that none goes 

without inspection for a long period of time, even if it is low risk. However, 
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powers and implementation of 

an effective compliance 

program.

the coverage of the IA examination program is limited in spite of the 

importance of the sector. Market surveillance for derivatives markets is 

carried out by the DCMs and directly by the CFTC; for securities markets, 

front line surveillance is largely the responsibility of the exchanges and 

FINRA. Both agencies make extensive use of their enforcement powers. In 

recent years, the SEC has made important improvements to its 

enforcement program, including case management, the use of 

settlements that include an admission of breaches, and the constitution of 

specialized units and task forces. The agencies and criminal authorities are 

active in pursuing securities and derivatives violations.

Principle 13. The Regulator 

should have authority to share 

both public and non-public 

information with domestic and 

foreign counterparts.

Subject to compliance with relevant legal requirements, the SEC and CFTC 

can share information with other domestic and foreign authorities without 

the need for external approval. Access to the financial records of 

individuals and small partnerships covered by the Right to Financial 

Privacy Act (RFPA) requires notifying the customer; delaying such notice is 

also possible in certain circumstances. The IOSCO MMOU requirement on 

prior consultation of the requesting foreign authority before notifying the 

customer is followed.

Principle 14. Regulators should 

establish information sharing 

mechanisms that set out when 

and how they will share both 

public and nonpublic 

information with their domestic 

and foreign counterparts.

The SEC and CFTC have concluded some domestic MOUs and are 

signatories to the IOSCO MMOU. Ad hoc information sharing 

arrangements and access request letters are used in the absence of an 

MOU with sufficient coverage. The agencies also have several bilateral 

MOUs with foreign authorities. Both have responded to a significant 

number of information requests from foreign authorities.

Principle 15. The regulatory 

system should allow for 

assistance to be provided to 

foreign Regulators who need to 

make inquiries in the discharge 

of their functions and exercise 

of their powers.

The SEC and CFTC have assisted foreign authorities on numerous 

occasions through their ability to use their extensive powers to obtain and 

compel documents and testimony. 

Principle 16. There should be 

full, accurate and timely 

disclosure of financial results, 

risk and other information that 

is material to investors’ 

decisions. 

The regulatory regime generally subjects issuers to strong initial and 

periodic disclosure obligations, including the submission of annual reports 

that must contain audited financial statements, quarterly reports, and 

disclosure of material events. However, municipal securities are exempted 

from the registration and reporting requirements. Through indirect 

mechanisms, the SEC has established disclosure obligations applicable to 

municipal securities. The SEC currently lacks direct authority to ensure 

issuers’ compliance with these obligations, except for enforcement 

authority based on antifraud provisions. The current statutory thresholds 

for the suspension of periodic reporting obligations on issuers of publicly 

offered securities are high. The SEC has an active program to monitor 

issuers’ compliance with their disclosure obligations. 

Principle 17. Holders of 

securities in a company should 

be treated in a fair and 

equitable manner.

The current legal and regulatory framework generally allows companies 

significant freedom to decide on their structure, the classes of shares to 

be offered to the public and the rights associated with the shares. 

Reporting issuers are subject to strong disclosure obligations, including 
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requiring disclosure of shareholder rights in the prospectus. This is 

complemented by strong fiduciary duties, and shareholders can (and do) 

exercise actively their private rights in the courts. Federal laws allow the 

acquisition of control of a reporting company without triggering tender 

offer obligations. There are a number of features of the legal system, 

principally state corporate laws, that create disincentives for parties 

seeking to acquire control from doing so other than by negotiating with 

the board of directors or making a tender offer for all shares. The current 

regime requires reporting of insiders’ holdings, substantial holdings (over 

10 percent), and holdings of most beneficial owners within stipulated 

deadlines.

Principle 18. Accounting 

standards used by issuers to 

prepare financial statements 

should be of a high and 

internationally acceptable 

quality.

Reporting issuers must prepare their financial statements in accordance 

with the U.S. GAAP, which are considered of high quality. Foreign issuers 

can use International Financial Reporting Standards (IFRS), and other 

accounting standards, the latter with reconciliation. The U.S. GAAP are set 

by the Financial Accounting Standards Board (FASB), which is overseen by 

the Financial Accounting Foundation (FAF), an independent, non-profit 

organization run by a Board of Trustees. The FASB is funded by fees 

assessed against issuers. The standard setting process is open, provides 

for consultation of stakeholders, and is actively monitored by the SEC. As 

part of its program to monitor issuers’ compliance with their disclosure 

obligations, the SEC examines financial statements and their compliance 

with the U.S. GAAP. The SEC enforcement program has renewed its focus 

on accounting and financial fraud through the creation of a specialized 

task force. 

Principle 19. Auditors should be 

subject to adequate levels of 

oversight. 

Auditors of reporting companies must register with the PCAOB, which was 

created by law as a non-profit corporation under the oversight of the SEC. 

The PCAOB is composed of five members selected by the SEC, including 

two certified public accountants (CPAs). All members serve on a full time 

basis and must be independent from the audit profession. The PCAOB is 

funded by fees assessed to issuers, BDs, and other entities that are 

required to register with it. The PCAOB has established an inspection 

program for audit firms, where the inspection frequency depends on the 

number of issuers the audit firm audits. In addition to remediation of 

deficiencies, the PCAOB can impose enforcement actions on audit firms 

and individual auditors for breaches of their obligations and has done so 

in practice. SEC’s own enforcement actions have complemented PCAOB 

efforts.

Principle 20. Auditors should be 

independent of the issuing 

entity that they audit. 

There are specific SEC rules on auditor independence that impose 

restrictions on financial relations, and address issues such as self-interest, 

advocacy, familiarity, intimidation, provision of non-audit services, and 

rotation of the lead auditor every five years. The PCAOB requires audit 

firms to have a system of quality controls that provides reasonable 

assurance that personnel maintain independence in fact and appearance. 

Audit committees of listed companies are required to oversee the 

selection and work of audit firms. The PCAOB inspection program, along 

with its enforcement actions, is the key external mechanism to monitor 

compliance with the independence obligations. SEC enforcement actions 

over auditors have complemented PCAOB efforts. 
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Principle 21. Audit standards 

should be of a high and 

internationally acceptable 

quality.

Audit standards are set by the PCAOB and are considered of high quality. 

The standard setting process involves public consultation with 

stakeholders. The PCAOB inspection program, along with its enforcement 

actions, is the main mechanism to monitor audit firms’ compliance with 

the audit standards. SEC enforcement actions have complemented PCAOB 

efforts.

Principle 22. Credit rating 

agencies should be subject to 

adequate levels of oversight. 

The regulatory system should 

ensure that credit rating 

agencies whose ratings are used 

for regulatory purposes are 

subject to registration and 

ongoing supervision. 

A U.S. or foreign CRA that wishes its credit ratings to be used for 

regulatory purposes in the U.S. must elect to register with the SEC. In 

practice, credit ratings are currently used for limited regulatory purposes 

by the SEC, most notably in connection with MMFs. The registration 

process and the ongoing examinations of NRSROs address the relevant 

integrity, transparency, timeliness, confidentiality and conflict of interest 

management aspects. The SEC conducts examinations of each NRSRO at 

least annually. If needed, it can recommend remedial action or bring 

enforcement actions against an NRSRO. Sanctions may range from fines 

to suspension or revocation of registration as an NRSRO. In practice the 

SEC has sanctioned at least one CRA. 

Principle 23. Other entities that 

offer investors analytical or 

evaluative services should be 

subject to oversight and 

regulation appropriate to the 

impact their activities have on 

the market or the degree to 

which the regulatory system 

relies on them.

The provision of equity research by BDs is subject to comprehensive SRO 

rules designed to increase an analyst’s independence and manage 

conflicts of interest. The large BDs were subject to a settlement in 2003-

2004 that required them to strengthen the independence of their research 

analysis, including by establishing information barriers. The settlement 

covers BDs accounting for approximately 80 to 90 percent of the U.S. 

equity underwriting business and is still in effect. Both equity and debt 

research are subject to SEC rules that require analysts to certify that their 

reports accurately reflect their views and disclose certain conflicts; in 

addition antifraud provisions apply. On the commodities side, CFTC rules 

impose information barriers and disclosure requirements in connection 

with research analysis conducted by FCMs, IBs, SDs and MSPs.

Principle 24. The regulatory 

system should set standards for 

the eligibility, governance, 

organization and operational 

conduct of those who wish to 

market or operate a CIS.

IAs to MFs and CPOs are subject to registration by the SEC and the CFTC 

respectively; the latter has delegated this function to the NFA. Both 

registration requirements focus on statutory disqualifications and 

extensive disclosure requirements to the regulator and investors. On an 

ongoing basis, IAs to MFs and CPOs are subject to certain organizational 

and operational conduct obligations, in particular the implementation of a 

compliance program. Monitoring of CPOs’ ongoing compliance is 

conducted by the NFA on the basis of a risk-based supervisory program. 

MF boards have the responsibility of selecting and overseeing the IAs and 

in practice exercise this role in a proactive manner both at the moment of 

the initial selection and on an on-going basis through reporting and 

meetings. The SEC has in place a risk-based supervisory program for 

ongoing monitoring of IAs to MFs. However, its coverage is limited 

despite the importance of the sector. 

Principle 25. The regulatory 

system should provide for rules 

governing the legal form and 

structure of collective 

investment schemes and the 

segregation and protection of 

MFs and CPs can adopt different legal structures; these structures and the 

rights of investors must be disclosed in the prospectus. MF assets must be 

segregated. Custody by an IA or related entity is allowed, but in both 

cases additional safeguards apply, in particular the requirement for 

additional inspections by an auditor (two unannounced). In practice few 

MFs have self-custody by the IA or its related entity. The CFTC’s current 
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client assets. regime requires CP assets to be segregated, but does not require the use 

of a custodian or depository. There are no additional safeguards in place 

when assets are held by the CPO or a related custodian. In practice most 

CPs do have separate custodians, which however are often related 

entities.

Principle 26. Regulation should 

require disclosure, as set forth 

under the principles for issuers, 

which is necessary to evaluate 

the suitability of a CIS for a 

particular investor and the value 

of the investor’s interest in the 

scheme.

MFs and CPs that are offered to the public are subject to the Securities 

Act prospectus obligations (MFs are also subject to the ICA). MFs and CPs 

that issue prospectuses are required to provide periodic information to 

investors including both annual and semiannual reports. The CEA 

framework requires CPOs to provide a detailed disclosure document to 

prospective participants. In addition, the CPOs must provide annual 

audited financial statements and an annual report to their participants 

and the regulator. Quarterly or monthly reporting is also required. 

Delegation of activities by IAs and CPOs is permitted, but must be 

entrusted to entities that are also registered with the SEC and/or CFTC.

Principle 27. Regulation should 

ensure that there is a proper 

and disclosed basis for asset 

valuation and the pricing and 

the redemption of units in a CIS.

MFs and CPs are required to value their portfolios according to the U.S. 

GAAP. The MF prospectus and the CP disclosure document require 

disclosure of the frequency, timing and manner in which a participant may 

redeem its units. Sales and redemptions must be effected at the current 

net asset value (NAV). MMFs are not required to price their units at 

market value and may use fixed prices; however strict rules apply on 

eligible assets and duration of the portfolio. Federal laws do not require 

disclosure of NAV to investors on a periodic basis, but the price of MFs 

and CPs offered to the public is generally available through financial 

publications and websites There are no specific requirements that govern 

pricing errors, but market practices on the securities side address 

compensation of losses to investors in certain circumstances. Suspensions 

and deferrals of redemptions are dealt with via disclosure (and pursuant 

to specific rules under the ICA with respect to MFs and MMFs); however, 

the SEC and CFTC have the authority to take action if necessary.

Principle 28. Regulation should 

ensure that hedge funds and/or 

hedge funds managers/advisers 

are subject to appropriate 

oversight.

Federal laws do not define HFs, but HF managers that operate HFs are 

required to register with the SEC and/or the CFTC as IAs or CPOs 

depending on the type of assets that the HF invests in. Similar to any 

other IA or CPO, current registration requirements focus on statutory 

disqualifications and disclosure to investors of extensive information 

about the manager, which must be kept up-to-date. Standards of 

organization and operational conduct apply to both IAs and CPOs of HFs 

on an ongoing basis. HF managers with RAUM above a certain threshold 

are subject to additional periodic reporting obligations to the SEC and 

CFTC on the funds they manage, including their assets, exposures and 

leverage. These reports can be shared with domestic authorities, including 

the FSOC, as well as with foreign regulators under the frameworks 

described in Principles 13-15. Capital requirements and other prudential 

requirements could be established on IAs and CPOs that manage HFs, if 

FSOC designated any such entity as systemically important.

Principle 29. Regulation should 

provide for minimum entry 

standards for market 

The statutory registration regime combined with the SRO membership 

regime subjects all categories of participants except IAs and CTAs to a 

comprehensive set of eligibility criteria that includes integrity, capital 

requirements, and adequacy of internal controls. IAs and CTAs are not 
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intermediaries. permitted to hold customer assets or deal for customers, though they 

may have discretion to make investment decisions. As a result, the 

registration regime focuses on statutory disqualifications and disclosure 

to the regulators and investors of extensive information about the IAs or 

CTAs. Organizational and conduct obligations, including the obligation to 

implement a compliance program, apply on an ongoing basis to IAs and 

CTAs.

Principle 30. There should be 

initial and ongoing capital and 

other prudential requirements 

for market intermediaries that 

reflect the risks that the 

intermediaries undertake.

All categories of intermediaries except IAs and CTAs are subject to capital 

requirements based on a net capital formula. Assets are subject to 

deductions for liquidity and market risks, and additional charges apply to 

concentration risk. Some large BDs apply an alternative net capital (ANC) 

framework that allows them to use models to calculate their haircuts, but 

ANC firms have higher minimum capital requirements, and their use of 

models is approved by the SEC. The ANC framework does not include 

separate concentration charges, but uses value-at-risk to measure 

concentration risk. Intermediaries must report their financial position 

including net capital on a periodic basis, with frequency varying 

depending on the activities of the intermediary. They are also required to 

notify the authorities, if their capital falls below certain thresholds 

established in the regulatory framework. The SEC, CFTC and the SROs 

have mechanisms in place for ongoing monitoring of the financial 

position of firms.

Principle 31. Market 

intermediaries should be 

required to establish an internal 

function that delivers 

compliance with standards for 

internal organization and 

operational conduct, with the 

aim of protecting the interests 

of clients and their assets and 

ensuring proper management of 

risk, through which 

management of the 

intermediary accepts primary 

responsibility for these matters.

With the exception of IAs and CTAs, intermediaries are explicitly required 

to have adequate internal controls and risk management systems. 

Segregation obligations apply to all types of intermediaries. Both in the 

securities and commodity futures side, intermediaries are required to 

know their customers. Intermediaries are required to manage conflicts of 

interest, although in the commodity futures side the framework relies 

more extensively on disclosure. The coverage of the examination program 

for IAs is limited, in spite of the importance of the sector.

Principle 32. There should be a 

procedure for dealing with the 

failure of a market intermediary 

in order to minimize damage 

and loss to investors and to 

contain systemic risk.

The CFTC has a plan to deal with market disruption events, including the 

failure of a firm. The SEC has a clearly defined process to deal with failures 

of regulated entities. In both cases there are early warning systems for 

intermediaries with a minimum capital requirement, which includes 

reporting requirements when their capital falls below certain thresholds. 

Active monitoring of the firms’ financial positions is conducted by both 

agencies and the SROs. To the extent a BD is in or approaching financial 

difficulty, SEC staff informs the Securities Investor Protection Corporation 

(SIPC), so that the SIPC can assess whether it should initiate a Securities 

Investor Protection Act (SIPA) proceeding. If a SIPA proceeding is initiated, 

a SIPA trustee is appointed with power to transfer clients’ accounts. If the 

BD’s assets are not sufficient to cover customers’ claims, the SIPC Fund 

compensates up to a limit. If a failed FCM’s assets are not sufficient to 
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cover all losses, customers are compensated on a pro rata basis. There is 

no equivalent to a SIPC fund. Under the Dodd-Frank Act, systemically 

important intermediaries may be placed into a Title II receivership with the 

Federal Deposit Insurance Corporation (FDIC) as receiver.

Principle 33. The establishment 

of trading systems including 

securities exchanges should be 

subject to regulatory 

authorization and oversight.

Exchanges and boards of trade are required to be registered, and the 

registration criteria and processes are set out in the Exchange Act, CEA, 

and related rules and regulations. Before commencing operations, an ATS 

must register as a broker-dealer, become a member of an SRO (in practice 

FINRA), and file an initial Form ATS with the SEC. Form ATS provides the 

SEC with information on the ATS’ subscribers, access to its services, and 

operations. Fair access requirements apply after an ATS’s market share 

exceeds a five percent threshold; currently there are no such ATS. Limited 

public information is available on ATSs’ order execution rules and 

procedures, subscribers, and market models on the basis of voluntary 

disclosures. 

Principle 34. There should be 

ongoing regulatory supervision 

of exchanges and trading 

systems which should aim to 

ensure that the integrity of 

trading is maintained through 

fair and equitable rules that 

strike an appropriate balance 

between the demands of 

different market participants.

The national securities exchanges and FINRA share the responsibility for 

market surveillance and member supervision in securities markets, while 

the DCMs and NFA carry out these functions for commodity futures and 

options markets. Most SEFs have outsourced their market surveillance to 

the NFA. The SEC and CFTC can investigate improper market conduct 

referred by the SROs or at their own initiative. They supervise exchanges 

primarily through rule approval/review and on-site examinations of 

exchanges’ self-regulatory functions. Examining the exchanges’ 

technological systems and system safeguards has become an increased 

focus of both the SEC and CFTC. 

Principle 35. Regulation should 

promote transparency of 

trading.

The statutory pre- and post-trade transparency requirements in equity 

markets are based on Regulation National Market System (NMS). In 

practice, exchanges’ proprietary feeds are also available to subscribers. 

Pre-trade transparency is not available in case of exchanges’ dark order 

types and trading on dark pool ATS. Post-trade transparency information 

has to be disclosed as soon as practicable, but within a maximum delay of 

10/90 seconds; in practice information is disclosed within milliseconds of 

trades. In commodity futures and options markets, block trades and bona 

fide exchanges of futures for related positions are exempted from pretrade transparency through DCM rules. The block trade thresholds set by 

DCM rules have decreased over the past years. The CFTC regulation on 

harmonized block trade requirements has not been finalized. 

Principle 36. Regulation should 

be designed to detect and deter 

manipulation and other unfair 

trading practices.

Fraudulent and manipulative practices are prohibited in the Exchange Act, 

CEA and SRO rules. Insider trading prohibition applies on securities 

markets. Trading in commodity futures and options on the basis of 

material nonpublic information in breach of a pre-existing duty to disclose 

may be a violation of the CEA. Market abuse is subject to administrative, 

civil and criminal sanctions. The potential for market abuse is monitored 

by the SROs that may take action under their rules or refer cases to the 

SEC, CFTC and criminal authorities. A range of administrative, civil and 

criminal sanctions has been imposed. 

Principle 37. Regulation should 

aim to ensure the proper 

DCMs and DCOs closely monitor open positions in commodity futures 

and options markets. This is complemented by CFTC monitoring. Action 
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management of large 

exposures, default risk and 

market disruption.

can be taken, if a clearing member is not able to meet its obligations or 

post required margin. Individual clearing agencies monitor member 

exposures in securities markets. Cross-market post-trade monitoring is 

facilitated through the DTCC Limit Monitoring system. Default procedures 

are in place in both clearing agencies and DCOs and disclosed through 

their rules. Short selling is subject to disclosure and locate requirements. 

Both the SEC and SROs monitor compliance with the regulatory 

requirements on short selling. 

Principle 38. Securities 

settlement systems and central 

counterparties should be 

subject to regulatory and 

supervisory requirements that 

are designed to ensure that they 

are fair, effective and efficient 

and that they reduce systemic 

risk.

Not assessed.

Recommended Actions

Appendix Table 7. Recommended Action Plan to Improve Implementation of the IOSCO 

Principles

Principle Recommended Action

Principle 1

The SEC and CFTC should continue their efforts to coordinate via joint regulations, 

unified reporting and/or use of substituted compliance as appropriate. 

All regulatory authorities with mandates impacting securities and derivatives markets 

should continue to enhance coordination. 

The CFTC is encouraged to review whether legal changes should be pursued in order 

to subject CPOs and CTAs to a similar standard of care as IAs and to a more 

comprehensive framework to address conflicts of interest.

Principle 2

Consideration should be given to mechanisms to make both the SEC and CFTC’s 

funding more stable, for example by the agencies’ becoming self-funded and/or 

providing for multiyear budgeting.

Principle 3

Additional resources should be provided for the SEC and CFTC commensurate to their 

expanded mandates.

Principle 6

The SEC should continue to work on improving data availability and automated tools 

to identify risks, in particular in connection with asset managers.

The SEC should consider enhancing mechanisms to ensure a holistic view of emerging 

and systemic risk, for example by making more formal arrangements for discussions 

on risk, ensuring participation of the Commission as a whole, and establishing a more 

formal accountability framework. 

The CFTC should continue to work on improving the quality of swaps data and 

expanding current mechanisms to monitor the swaps markets. 
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Principle 8

The SEC is encouraged to review conflicts of interest arising from the participation of 

BD affiliates in an ATS managed by the BD.

The SEC is encouraged to review the impact of order types, order routing, and related 

fee structures in equity markets on conflicts of interest.

The SEC is encouraged to continue its review of the BD and IA models to determine 

whether harmonization of the standards of care is needed, and whether additional 

actions are needed in connection with conflicts of interest, including those arising from 

compensation arrangements for different types of accounts, products or services.

Principles 12, 24 

and 31

The SEC should increase the intensity of its examination coverage of IAs.

Principle 16 

Consideration should be given to making amendments to the federal securities laws to 

grant the SEC direct authority to impose disclosure requirements on issuers of 

municipal securities and to remove the exemption available to non-municipal conduit 

borrowers.

Consideration should be given to reviewing the thresholds that trigger a suspension in 

reporting obligations, in particular for banks and bank holding companies.

Principle 17

The SEC is encouraged to consider reducing the deadline for beneficial ownership 

disclosure as well as for the first report that insiders need to file.

Principle 19

The PCAOB should take forward the implementation of actions to ensure the 

timeliness of its enforcement proceedings.

The SEC and PCAOB are encouraged to further analyze whether PCAOB proceedings 

should be made public. 

Principle 21

The PCAOB should work on ensuring timely advancement of its standard setting 

agenda.

Principle 23

FINRA is encouraged to finalize its rules for research analysis in debt securities, as well 

as rules for research analysis in equity securities to eliminate, where appropriate, 

potential asymmetries between the regime applicable to the firms covered by the 

Global Settlement and the regime applicable to the rest of the industry.

Principle 24

The authorities should consider to explicitly require IAs to MFs and CPOs to implement 

internal controls and risk management.

Principle 25

Consideration should be given to amending the CEA to enable the CFTC to require 

additional safeguards where a CPO or a related entity has possession of pool assets. 

Principle 27

The CFTC or the NFA should adopt a rule providing for the way investors are to be 

treated, if adversely affected by errors in the pricing of interests in a CP.

Principle 28

As the authorities continue to analyze the risks posed by HFs, they are encouraged to 

review whether a comprehensive risk management framework is warranted.

Principle 29

The authorities are encouraged to consider whether to explicitly require internal 

controls and risk management for IAs and CTAs that conduct portfolio management.

Principle 30

The SEC is encouraged to continue its review of the capital and liquidity framework for 

ANC firms. More broadly, the SEC is encouraged to continue reviewing the adequacy 

of liquidity requirements for the larger BDs.
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Principle 33

The SEC should continue to follow the development of bilateral trading systems and, if 

needed, adjust the regulatory framework as appropriate.

The SEC should require the ATSs to disclose their order execution rules and 

procedures.

The SEC should ensure that the regulatory framework enhances the requirement for 

fair access to ATS, including by removing or at least lowering the current five percent 

threshold. 

The SEC and FINRA are encouraged to further ensure that their respective processes 

provide a sufficiently in-depth analysis of the order execution procedures of a new 

ATS, in particular for fairness, and provide specific evidence of a BD’s operational and 

other competence to operate an ATS.

The SEC is encouraged to consider whether additional requirements could be applied 

to exchanges themselves to further enhance their ability to manage the risks arising 

from direct electronic access.

Principle 35

The SEC is encouraged to continue to deepen its analysis of the pre-trade 

transparency impact of various order types and the reference prices dark order types 

are permitted to use to ensure that current derogations do not adversely impact the 

price discovery process.

The CFTC should promptly finalize its block trade rules to provide a regulatory basis 

for assessing pre-trade transparency waivers for block trades.

Principle 37

The authorities are encouraged to review whether the current mechanisms are 

sufficient to provide them with a comprehensive view of the total exposures of market 

participants that are active across various markets (equity, fixed income, commodity 

futures and options).

Authorities’ Response to the Assessment

The Chairs of the SEC and the CFTC appreciate the IMF’s commitment of time and resources to 

the Financial Sector Assessment Program. We would like to express our gratitude to the IMF for 

fielding such a highly professional, hard working, and knowledgeable team of assessors to prepare 

the Detailed Assessment Report. 

As the United States has the largest and most complex financial markets in the world, we 

recognize and welcome the fact that the United States is held to the highest and most 

stringent grading standard. We value the objective assessment conducted of our Commissions’ 

regulatory regimes.

In the aftermath of the financial crisis, our agencies were given new powers and broad new 

responsibilities to make our financial regulatory system stronger, more resilient and more 

effective. We are pleased to see that the Report reflects a recognition that over the past five years 

the SEC and CFTC have harnessed these new powers and seized upon these new responsibilities to 

implement more robust and comprehensive rulemaking, supervision and enforcement programs. As 

just one example, the Report noted that our agencies have introduced comprehensive regulatory 
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reform of the OTC derivatives marketplace, improved supervisory programs to monitor compliance 

by registered entities, and made extensive use of our enforcement powers.

The overall ratings in the Report reflect the SEC’s and CFTC’s regulatory successes, while at the 

same time noting that there is room for improvement. Although staff disagrees with certain of 

the conclusions, recommendations, ratings and interpretations of the IOSCO Principles, we found the 

assessment process to be comprehensive and fair. SEC and CFTC staffs will continue to evaluate the 

Report as a tool for our respective Commissions to enhance their regulatory programs and to 

improve cooperation and coordination in rulemaking and regulatory oversight. 

We look forward to a continuing dialogue with the IMF to advance our shared goal of 

strengthening the U.S. financial regulatory system.

D. IAIS Core Principles for Effective Insurance Supervision

Information and Methodology Used for Assessment

The assessment has been made against the Insurance Core Principles (ICPs) issued by the 

International Association of Insurance Supervisors (IAIS) in October 2011, as revised in 

October 2013. 7The previous assessment, in 2010, was conducted on the observance with an earlier 

version of the ICPs issued by the IAIS in 2003. The ICPs apply to all insurers, whether private or 

government-controlled. Specific principles apply to the supervision of intermediaries. 

The assessment is based solely on the laws, regulations and other supervisory requirements 

and practices that are in place at the time of the assessment in November 2014. While this 

assessment does not reflect new and on-going regulatory initiatives, key proposals for reforms are 

summarized by way of additional comments in this report. The authorities provided a full and wellwritten self-assessment, supported by anonymized examples of actual supervisory practices and 

assessments, which enhanced the robustness of the assessment. 

The assessment addresses insurance regulation nationally and does not assess individual state 

authorities. The principal regulatory responsibilities are shared by the 50 states, the District of 

Colombia and five U.S. territories (hereinafter “states” includes the 50 states, the District of Colombia 

and five U.S. territories, unless the latter two are specifically mentioned), the Federal Reserve Board 

(in respect of consolidated supervision only) and the FIO. Technical discussions with officials from 

federal agencies and bodies (FIO, FRB, FSOC, FinCEN), NAIC and two sample state insurance 

departments (those of the states of New York and Massachusetts), and the independent member 

with insurance expertise of the FSOC also enriched this report; as did discussions with industry 

participants. As the assessment addresses national compliance and the assessors were not able to 

hold discussions or review material from more than a few state authorities (and a selection of Federal 

 

7

The assessment team comprised Ian Tower, Philipp Keller (both external experts engaged by the IMF) and Nobuyasu 

Sugimoto (IMF) in October–November, 2014.
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Reserve banks), reliance has also been placed on the processes and procedures used by the NAIC

(i.e., the commissioners of insurance acting collectively and the staff of the association) in their 

support for state regulators. The assessors are grateful to the authorities and private sector

participants for their cooperation.

Overview and Institutional Setting

Insurance regulation and supervision is a shared responsibility of federal and state authorities.

States are responsible for licensing, supervision and examination of all insurance companies and 

intermediaries (known in the United States as “producers”). As part of the U.S. response to the 2008 

financial crisis, the FRB’s responsibilities for consolidated supervision of groups which include 

insurance companies have been extended to relevant designated non-bank financial groups (NBFCs) 

and savings and loan holding company groups (SLHCs). Its responsibilities now cover around 

30 percent of total premium income in the United States. A new Federal Insurance Office (FIO) has,

amongst other responsibilities, a broad monitoring role for the insurance sector and its regulation. 

Other bodies, both, state and federal, have a role in aspects of insurance regulation, including the 

FSOC (in relation to designation of NBFCs and identification of risks to financial stability), state 

securities regulators and the SEC (and FINRA) in relation to products and practices covered by 

securities laws; the Department of Labor in relation to workplace pension products; and FinCEN and 

the IRS in relation to AML/CFT regulation and supervision.

States generally carry out insurance regulatory functions through insurance departments of 

the state administration. The insurance departments carry out licensing, supervision and 

examination work for insurance companies and intermediaries under powers set out in state 

legislation and in accordance with state budgets. A commissioner heads the department and 

exercises all formal powers. Some commissioners are elected, but most are appointed by the state 

governor. While arrangements vary among states, funding is usually raised from the insurance 

markets via fees and levies. Insurance departments’ budgets are generally subject to the state 

budgeting processes. Insurance departments also collect premium taxes for the states, a significant 

part of state governments’ total revenues. 

The National Association of Insurance Commissioners (NAIC) plays an important role in 

promoting consistency across state regulation. NAIC is a regulatory support organization for state 

insurance supervision. Through the NAIC, state regulators establish model laws, regulations, best 

practices, and examination handbooks, and coordinate their regulatory oversight. Key functions of 

the NAIC are (i) to develop and agree on model laws and regulations, which now total over 200;

(ii) manage the Financial Regulation Standards and Accreditation Program (“the accreditation 

program”), which is a process that develops certain minimum standards in respect to financial 

regulation of multistate companies and reviews state insurance departments for compliance with 

those standards; (iii) the centralized process of financial analysis operated through the mechanism of 

the NAIC’s Financial Analysis Working Group (FAWG), which discusses reports from NAIC staff 

covering all “nationally significant companies” (around 1,600 companies representing 85 percent of 

the market) based on annual and quarterly statements and other information; (iv) the provision of a 
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number of databases covering financial information (most companies submit statements direct to 

the NAIC), data on producers, etc., and support for technical financial analysis. 

State regulators have been enhancing their approach to financial regulation in recent years

though some gaps exposed by the crisis still remain unaddressed. In 2008, the NAIC launched 

the Solvency Modernization Initiative (SMI), a review of financial requirements and are implementing 

a number of key reforms, some of which also reflect the recommendations of the 2010 FSAP. 

However, other issues highlighted by the financial crisis have not been fully addressed. Reforms are 

pending to the requirements applying to financial guaranty (bond insurers—also referred to as 

monoline insurers). Private mortgage insurance companies are not subject to RBC, although NAIC 

and state regulators are working on such changes. Most importantly, group capital requirements 

have not been implemented either by federal or state regulators as yet.

The FRB has responsibility for consolidated supervision of certain groups (17 in total) 

containing insurance companies. The FRB has a role in insurance regulation and supervision 

through its primary federal responsibility for consolidated regulation of: bank holding companies

where there are insurance companies as well in the group (there are no such groups at present);

savings and loan holding companies (SLHCs) under the Home Owners’ Loan Act (HOLA) (to the 

extent that are one or more insurance companies as well as at least one savings and loan company in 

the group—there are 15 such groups at present, including four of the largest insurers in the country); 

and insurance companies which are non-bank financial companies (NBFCs) under the Dodd-Frank 

Act, where the company has been designated for FRB supervision by the FSOC (there are two 

insurance groups at present, AIG and Prudential Financial). 

The FRB’s approach to its new responsibilities is developing. The FRB has been growing its staff 

in the insurance area, drawing on staff from other FRB functions, including banking supervision, from 

state insurance departments and from the insurance sector. This process is on-going, in terms of 

numbers and expertise, including actuarial. The FRB’s regulatory regime is also still developing and it 

has not yet defined a group level capital requirement for insurance groups it regulates. The 

application by the FRB of a supervisory approach developed for large banks has, however, led to 

intensified supervisory work on group-wide governance and risk management issues at FRBsupervised groups.

In addition, the FIO has been established in the Treasury Department and has made a number 

of recommendations on insurance regulation and supervision. While it has no authority to 

license or regulate individual insurance companies or to undertake consolidated supervision, under 

the Dodd-Frank Act FIO has a broad monitoring role for the insurance sector and its regulation, a 

lead role in international aspects of insurance regulation and specific responsibilities in relation to 

systemic risk in the insurance sector. 

Main Findings 

U.S. insurance supervision has been significantly strengthened in recent years and many of the 

recommendations of the 2010 FSAP are being addressed. Insurance has been brought within the 
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scope of system-wide oversight of the financial sector. The establishment of the Federal Insurance 

Office (FIO) has created a mechanism for identifying national priorities for reform and development. 

The extension of the Federal Reserve Board’s responsibilities to cover consolidated supervision of 

insurance groups has strengthened supervision of the affected groups (now covering around 

30 percent of total premium income in the United States) and promises to empower U.S. regulators 

in the negotiation and implementation of new international standards of insurance regulation. State 

regulators have been adjusting to the new regulatory architecture, at the same time progressing 

important reforms such as the solvency modernization initiative and significantly strengthening 

group and international supervision. 

Many of these changes are still a work in progress. At the state level, the transition from a 

strongly rules-based approach to more principles-based regulation and risk-focused supervision is 

progressing but is taking time and faces obstacles. Increased emphasis is being placed on risk 

management through the introduction from 2015 of an ORSA with wide-ranging implications for 

supervisory work and resourcing. The FRB’s supervisory approach to insurance groups has benefited 

from its experience of banking supervision, but still needs to strike out in its own direction; and the 

development of FRB regulation is proceeding slowly. Staffing both regulation and supervision with 

appropriate skills and expertise is continuing. 

Overall, the assessment finds a reasonable level of observance of the Insurance Core Principles. 

There are many areas of strength, including at state level the powerful capacity for financial analysis 

with peer group review and challenge through the processes of the NAIC. Lead state regulation is 

developing and a network of international supervisory colleges has been put in place. Regulation 

benefits from a sophisticated approach to legal entity capital adequacy (the Risk-Based Capital 

approach). Regulation and supervision continue to be conducted with a high degree of transparency 

and accountability. FRB supervision is bringing an enhanced supervisory focus to group-wide 

governance and risk management. Cooperation between state and federal regulators is developing, 

based on the complementarity of their approaches, although it has further to go.

Key areas for development include the valuation standard of the state regulators, especially 

for life insurance, and group capital standards. The standard for valuation of assets and liabilities 

has developed over many years. For life insurers, it is prescriptive and in many cases formula-based. 

As products have become more complex, the prescribed algorithms and formulae used to determine 

reserves have grown in complexity. The standard has varying levels of conservatism, which leads to a 

lack of transparency. It does not give an incentive for appropriate dynamic hedging. Its shortcomings 

are circumvented and mitigated by complex structures that life insurers put in place, including 

transactions with affiliated captive reinsurers. The standard should be changed to reflect the 

economics of the products better. Principles-Based Reserving, part of the solvency modernization 

initiative, would mitigate some of the issues, but its implementation date is uncertain. In relation to 

capital, there are no group-level capital standards in place for groups, whether supervised by states 

or the FRB. States should have the ability to set group-wide valuation and capital requirements, while 

the FRB should develop a valuation and capital standard speedily. RBC should be extended to 

financial guaranty companies, responding to the experience with this sector in the financial crisis.
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There are also gaps in governance and risk management requirements and in market conduct 

and intermediary supervision. Neither state nor FRB supervisors have set insurance-specific 

governance requirements that would hold boards responsible for a governance and controls 

framework that recognizes and protects the interests of policyholders. There are no requirements for 

risk management and compliance functions, although state insurance regulators will require larger 

companies to have internal audit functions from next year. An increasing focus on governance and 

controls in supervision by both states and FRB mitigates the effect of the gap in regulation. However, 

state examinations normally take place only every five years (FRB examinations are more frequent, if 

not continuous). More frequent state examinations of larger companies and reduced reliance on 

outsourcing of the work in some states should be considered. Market conduct supervision, which is 

carried out only by the states, should be strengthened through a risk-focused supervisory 

framework, enhanced analysis of risk (including those due to complex products and commissionbased sales) and supervision of the more significant intermediaries. 

There is a need to review governance and funding arrangements for state insurance 

regulators. The arrangements for appointment and dismissal of commissioners in many states 

expose supervision to potential political influence. The high dependence on state legislatures in 

respect of legislation and resources exposes supervisors both to political influence and to budgetary 

pressures. These risks are mitigated but not eliminated by NAIC processes. There is also a need to 

review levels of skills and expertise, as the technical demands of supervisory work change in line with 

regulatory reforms including ORSA and possible Principles-Based Reserving. 

The objectives of state regulators and scope for conflict between FRB objectives and 

policyholder protection should be reviewed. State regulators’ objectives are not clearly and 

consistently defined in law. The FRB’s objectives in relation to insurance consolidated supervision do 

not include insurance policyholder protection and there is potential for conflict, in times of stress, 

between the expressed objectives of the regulation of savings and loan holding companies and nonbank financial companies, and the interests of insurance policyholders. 

While recent reforms are bringing benefits, the regulatory system for insurance remains 

complex and fragmented and reform should be considered to address the resulting risks. There 

are differences between state insurance regulators and between state and federal regulators, in both 

regulation and supervision. The regulatory system is complex and there are risks from a lack of 

consistency, including the creation of opportunities for unhealthy arbitrage (which accounts in part 

for the growing use of affiliated captive reinsurers, for example); and risks of failure to act on gaps or 

weaknesses in regulation with sector or system-wide implications.

A national-level insurance regulatory body is needed to deliver enhancements and greater 

consistency across states in both regulation and supervision. The current regulatory architecture 

lacks capacity to fully address the resulting risks. The authorities should review the options for 

change, which include strengthening the capacity of the FIO to bring about convergence on uniform 

high standards of regulation and supervision as well as comprehensive market oversight. An agency 

at the national level, with appropriate independence and expertise, should be given a mandate and 

powers to establish national standards, and ensure regulatory consistency and supervisory 
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coordination. Such an agency would require sufficient resources, accountability and independence, in 

line with the expectations of the Insurance Core Principles.8

Summary Observance of Insurance Core Principles

Appendix Table 8. Summary of Observance with the ICPs

Insurance 

Core Principle

Overall Comments

1 - Objectives, 

Powers and 

Responsibilities 

of the 

Supervisor

Insurance regulators are clearly identified in law and have adequate powers, the more so 

when 2010 changes to the holding company system powers are adopted in all states. 

While the FIO has significant powers in relation to oversight of the sector and regulation, 

only the states and FRB have powers over insurance companies and/or their groups. 

While there are limited explicit statements of the objectives of states’ insurance 

supervision in law, the body of state insurance law and the understanding and expression 

by state regulators of the objectives of their work are consistent with the promotion of a 

fair, safe and stable insurance sector for the benefit and protection of policyholders. 

However, states should ensure that the promotion of insurance business and excessive 

focus on affordability of insurance rather than fair treatment of policyholders, are not a 

part of regulatory objectives.

The establishment of the FIO and extension of the FRB’s mandate to the consolidated 

supervision of non-bank financial companies designated by the FSOC has introduced a 

new objective for insurance supervision in relation to the impact on U.S. financial 

stability—in line with a recommendation of the 2010 FSAP. 

The objectives of the FRB, however, do not explicitly include insurance policyholder 

protection. There appears to be scope for conflict, for example in case of stress affecting 

savings and loan company depositors or risks to financial stability. Risks to depositors or 

stability could be mitigated by actions that would be detrimental to the interests of 

insurance policyholders.

2 - Supervisor State insurance regulators generally have a high degree of day-to-day operational 

independence and accountability. They operate within a highly transparent framework, 

with an emphasis on open government, but are also able to protect confidential 

information received from firms and from other authorities. Legal protection of agencies 

and staff is adequate. 

There remain risks to independence in state governance arrangements. While the vesting 

of regulatory powers in the commissioner helps protect departments’ operational 

independence, the arrangements for appointment and dismissal of commissioners in 

many states expose state supervision to potential political influence. Elected 

commissioners may be subject to the pressures of the electoral cycle. 

 

8

The two obvious bodies to take on this role would be the NAIC and the FIO. Extensive expertise has been developed 

in insurance regulation and market oversight by the NAIC, but this is a consensus-based association of insurance 

commissioners, which lacks powers to effect the necessary changes. The FIO has a limited mandate and lacks the 

operational independence and resources to take on this role in its current format. 
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The high dependence on state legislatures in respect of principal legislation and for 

budgetary resources exposes departments both to political influence and to potential 

budgetary pressures. These risks are mitigated but not eliminated by NAIC processes, 

including the accreditation program. 

While states’ financial resources appear broadly adequate for current work programs, 

levels of skills and expertise require development, as the technical demands of 

supervisory work change in line with regulatory reform and as market conduct regulation 

develops. Some departments are dependent on contractual staff for routine examination 

work. The application of statewide remuneration policies constrains departments’ ability 

to hire specialist skills. 

The NAIC accreditation program has served state regulation well. The NAIC could now 

extend its scope, for example to the regulation of captives, market conduct and 

intermediary regulation. They could also introduce an increased focus on the quality of 

supervisory judgments. 

In addition to its need to build expertise in insurance regulation and supervision 

generally, the FRB would benefit from having more staff with understanding of insurance 

issues at senior levels. 

3 - Information 

Exchange and 

Confidentiality 

Requirements

The extent of information exchange involving U.S. supervisors has increased in recent 

years, facilitated by NAIC processes (as well as the accreditation program), the 

development of an extensive network of MoUs and the establishment of international 

supervisory colleges. Seven states have become signatories to the IAIS MMoU with many 

more in the process of applying or considering applying. 

Increased trust appears also to have been developing between supervisors, within the U.S. 

and with foreign regulators, facilitated by greater understanding and confidence in the 

ability of U.S. supervisors to protect confidential information. This process has further to 

go and needs to be actively managed, while there is also scope for broader cooperation 

and collaboration amongst regulators (see ICP25).

4 - Licensing The UCAA process and accreditation standard for licensing (which became part of the 

accreditation process in 2012) cover core requirements and contribute to the consistency 

of licensing requirements across states.

However, inconsistency of requirements and practices remain a perceived opportunity for 

arbitrage, for example, lack of consistency of absolute minimum capital requirements and 

exemption of certain insurance activities. With regard to capital, once a company is 

operating and writing business, RBC becomes more relevant as the higher standard. 

Guidance on business model analysis exists and the accreditation process requires the 

analysis of their appropriateness through on-site reviews. However, documentation about 

business model assessment (such as peer comparison of cost structures, etc.) may not be 

sufficient for the accreditation process to validate appropriate and consistent application 

among states and across business lines.

5 - Suitability 

of Persons

States rely to a high degree on onsite examination to identify and remedy issues with the 

suitability (in particular properness) of key individuals. In addition, existing examination 

practices tend to focus more on compliance (thus more on fitness), and the competence 

and integrity of key individuals are not an area of focus—or at least their assessment is

not sufficiently documented.
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Lack of powers, such as an ongoing approval of Board, Senior Management and Key 

Persons in Control Functions, and other alternative mechanisms, such as disclosure, 

makes it difficult for state regulators to take formal regulatory action rather than applying 

moral suasion, as properness of key individuals tends to be judgemental and strong 

regulatory enforcement action is not appropriate in many cases.

6 - Changes in 

Control and 

Portfolio 

Transfers

Although the 2010 amendment of the Model Holding Company Act has not been 

adopted by all states, all the requirements of the ICP have been adopted by all states.

7- Corporate 

Governance

Neither state nor FRB supervisors have set formal broad-based, insurance-specific 

governance requirements, at legal entity or at group/holding company level. Both state 

and FRB supervisors primarily rely on assessing the risks in individual companies and 

groups, through regular oversight and through the on-site supervisory process. The FRB is 

relying on guidance and a supervisory approach developed for banking groups.

There is a highly structured approach for carrying out state evaluation work on 

governance in preparation for examinations and a thorough process for carrying out the 

examinations themselves, as evidenced in documentation reviewed by the assessors. 

However, reliance on company reporting requirements, examinations work and general 

state corporate governance requirements should be supported by governance 

requirements appropriate for insurance business—and which engage the board of 

directors in particular in overseeing the management of insurance risks, recognizing the 

interests of policyholders. 

The application by the FRB of an approach developed for large banks has intensified 

supervisory work on group-wide governance at FRB-supervised groups. Many 

management and governance issues are common to banks and insurance groups; and 

with only 17 groups to regulate, many of them large, the FRB can take a tailored firm-byfirm approach. However, the development of specific requirements for insurance groups 

is needed to help focus supervisory work on where insurers and banks are different, and

on where the major risks in insurance groups arise.

8 - Risk 

Management 

and Internal 

Controls

Neither states nor the FRB have a comprehensive set of requirements on risk 

management and controls tailored to the business and risks of insurance companies.

In the absence of requirements on firms to have control functions, there is a risk that 

states’ expectations of high standards in these areas are not communicated to and 

understood by companies as clearly as necessary. The thoroughness of the examination 

process, and comprehensiveness of the published examiners guidance, does, however, 

mitigate the risks, as does the framework of requirements introduced for financial 

controls in recent years. The introduction by the states shortly of a requirement for 

internal audit functions at larger firms will extend the framework further, in a 

proportionate way, as will the ORSA requirements in the area of risk management.

The FRB can and does take a tailored approach to risk management and controls, as to 

other issues. However, FRB guidance material and the supervisory approach needs further 

development to address the particular expectations of groups that are mostly engaged in 

insurance business. 

9 - Supervisory 

Review and 

State regulators have a highly developed approach to offsite analysis, drawing on 

comprehensive legal entity reporting and a powerful analytical capacity and peer review 
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Reporting framework led by the NAIC. Their approach has been significantly strengthened by the 

further development of holding company system analysis and the enhanced role of the 

lead state regulator and will be further strengthened by new reporting requirements on 

corporate governance, if agreed at the NAIC.

Financial condition examinations have become more risk-focused, with more attention to 

qualitative issues and forward-looking judgments on “prospective risks”; and they are 

more often coordinated with other states and conducted as examinations of groups. 

Market regulation examinations appear to have further to go in this regard.

Even for financial examinations, there appears to be scope for more confidential 

judgments to be included in management letters. Furthermore, the continued 

requirement for publication of a factual examination report on a legal entity basis absorbs 

significant resource and risks misleading readers where confidential supervisory issues are 

under discussion. The states are, however, considering modifications to the format to 

make it more representative of the work performed under a risk-focused examination. 

A five years maximum examination cycle is long by comparison with financial sector 

regulators in many other countries and other US regulators, especially in respect to larger 

or otherwise higher risk firms. It could be shortened or supplemented with targeted 

examinations for larger groups (not mainly where there are indicators of potential risk, as 

at present), accepting that this would require significant resource reallocation.

The FRB’s approach draws heavily at present on tools and techniques developed for the 

major banking groups. As recognized by the FRB, there is a need to adapt and 

supplement these with supervisory tools that are tailored for insurance groups, to the 

extent that these are the most significant risks in the group, as well as maintaining a focus 

(in the case of NBFCs) on those aspects of the group’s business that may cause financial 

stability risks.

10 - Preventive 

and Corrective 

Measures

States have a full range of powers to intervene, require remediation and to escalate 

their response as necessary and they use these powers in practice. The powers are 

supplemented by specific actions that the FRB may take in respect of holding 

companies subject to their regulation.

In respect to financial conditions, the system of RBC-related company and regulatory 

action levels, the associated triggers and required actions provide for automatic 

intervention ahead of stress, but their extensive financial reporting and financial analysis 

tools, including RBC forward simulations, also equip supervisors with the ability to 

intervene on a discretionary basis and start discussions with senior management at an 

early stage.

11-

Enforcement

States and the FRB have wide range of enforcement measures and use those actively and 

effectively.

12 - Windingup and Exit 

from the 

Market

States have appropriate tools to wind-up insurance legal entities effectively while 

protecting policyholders’ benefits as far as possible. In practice, the level of insolvencies 

has been low, even during the financial crisis, although a significant number of companies 

(136 as of the end 2013) have entered into run-off.

The relatively prescribed system of indicators of financial strain and procedures for 

dealing with troubled companies (including the FAWG process) has meant that 
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interventions have been taken at an early stage. 

13 -

Reinsurance 

and Other 

Forms of Risk 

Transfer

The regulation of reinsurance is comprehensive and supervision practices appropriate, 

with due consideration of risks. The handbooks give detailed guidance on best practices 

and on the evaluation of reinsurance programs.

State regulators analyze material intra-group reinsurance contracts. However, if an 

insurance group or holding has a complex web of retrocessions in place, there can be 

interactions which impact the value and potential performance of retrocessions in place.

14 - Valuation The current valuation standard for life insurers is prescriptive and in many cases formulabased. As insurance products have become more complex, the prescribed algorithms and 

formulae used to determine reserves have grown in complexity accordingly. New 

products often require tailor-made approaches for valuation. Assumptions used for 

reserving are often static and set at the time the insurance products were sold. The 

valuation standard has varying levels of conservatism, which leads to a lack of 

transparency. The valuation standard uses amortized cost for specific assets under a 

hold-to-maturity argument for assets that cover liabilities. This argument breaks down for 

products where appropriate risk management requires a frequent re-balancing of the 

asset portfolio. The valuation standard does not necessarily give appropriate incentives

for dynamic hedging for products where this would constitute appropriate risk 

management.

The shortcomings of the valuation standard are circumvented and mitigated by complex 

structures in which life insurers engage. In some states, affiliated captives can hold fewer 

assets to back reserves. Even at the captive level, the full formulaic reserve is required. 

However, for captives the difference between the full formulaic reserve and the economic 

reserve is allowed to be backed by other assets, which could include letters of credit, 

which do not meet the definition of an asset in GAAP or statutory accounting. 

PBR would reduce many of the shortcomings outlined above. It would be better placed to 

deal with complex products and would reduce the tendency to engage in regulatory 

arbitrage, i.e. via affiliated captive transactions. The supervisory review of PBR will require 

sufficient expertise of the state regulators.

Allowing for conservatism explicitly in a margin over current estimate would increase 

transparency. The explicit decomposition of reserves into a current estimate and a margin 

over current estimate allows assessment of the overall conservatism for different lines of 

products. This would allow a recalibration of the valuation standard for products where 

reserves are overly conservative or not sufficient.

Any capital requirement that the FRB has to develop has to be based on a valuation 

standard. The FRB should consider the development or use of a valuation standard that is 

useful to capture the risk to which SLHCs and NBFCs groups are exposed.

15 -

Investment

The investment limits defined in the model acts, together with the detailed (and public) 

expressed expectation in the Financial Analysis Handbook and the Financial Condition 

Examiners Handbook constitute a sophisticated framework to limit investment risk. There 

is strong focus on liquidity risk and the security, liquidity and diversification of 

investments. Regulators have strengthened their requirements on securities lending. 

There is a strong focus on the liquidity position and overall limits on securities lending 
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have been imposed.

The current low-interest rate environment has already given rise to an increased hunt for 

yield, albeit from a low level. If some insurers increase their investments into more exotic 

asset classes, the NAIC might also consider adapting their definition of investments to 

ensure that insurers properly assign their investments to the appropriate asset classes. 

Although regulatory arbitrage transactions between insurers in different states have not 

been observed, there is a risk of regulatory arbitrage as investment limits of various states 

are not consistent at legal entity level and there is no group wide investment 

requirement.

16 - Enterprise 

Risk 

Management 

for Solvency 

Purposes

The ORSA requirements of the State Regulators are not yet in force. Also, a number of 

requirements of ICP 16 are not strictly satisfied, e.g. requirements for insurers to have a 

risk management policy which includes explicit polices in relation to underwriting risk, but 

will be satisfied in spirit once ORSA is in force. The state regulators have a supervisory 

approach which for qualitative requirements relies less on explicit and detailed rules, but 

on high-level principles and expectations that are formulated in the handbooks for 

examiners and analysts. ORSA will be mandatory for larger companies that cover over 90 

percent of the market by premium income.

The FRB will need to continue to increase its expertise in insurance for the supervision of 

NBFCs and make rules and regulation more specific to insurers. ERM and ORSA require 

expertise on risk to which insurers are exposed not only from the supervised, but also 

from the supervisors. Insurers are not necessarily exposed to similar risks as banks nor do 

they react to adverse events identically to banks. Rules and regulations should reflect 

these differences. 

17 - Capital 

Adequacy

The RBC framework used by state regulators is a sophisticated, risk-based capital 

framework that has been improved continuously since it came into force in the early 

1990s. The basis of the US solvency framework is an amortized cost valuation standard 

that is largely rules-based This results in the RBC formulae becoming increasingly 

complicated as insurance products—in particular life insurance products—become more 

complex.

It would also be useful if the RBC framework were to be documented in a consistent set 

of documents, including its methodology, parameterization and assumptions and 

implementation.

Financial guaranty insurers and mortgage insurers are not subject to the RBC. While they 

are still required to hold minimum capital and surplus requirements, these have been 

shown to be not sufficient by a large margin during the financial crisis. In addition, it is 

not advisable for regulators to solely rely on external ratings, which performed badly in 

the run-up to the financial crisis. 

For groups and conglomerates, the focus on legal entity capital alone is not necessarily 

enough. The NAIC has put in place qualitative requirements. Quantitative group level 

capital requirements would enhance these qualitative requirements and help to increase 

transparency on the risks within a group and also reduce the risk of regulatory arbitrage.

The FRB should develop and formulate its preferred approach to, for example, the 
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underlying valuation standard to be used, the time horizon for capital, the risk measure of 

capital, and the legal entity or legal entities within the groups to which the capital 

requirement would be imposed. 

18 -

Intermediaries

While producer regulation is less uniform than is the regulation for insurance companies, 

all states have requirements in relation to the key expectations of ICP18 - such as 

licensing, requirements in relation to producer skills and expertise, and powers to 

undertake examinations and to take action in case of producer misconduct.

The general legal framework provides safeguards for client money where intermediaries 

act as agents (and this has been tested in numerous cases). There is less uniformity on the 

safeguards applying to money held by brokers, but premiums must generally be held in a 

fiduciary capacity and be accounted for by all agents and brokers. Requirements in 

relation to contingent commissions (such as are paid by insurers to major commercial 

lines brokers based on business volume) have been strengthened through a disclosure 

approach and as a result of New York action. Requirements are not the same in other 

states.

All insurance producers, including the major brokers with large global presences are 

subject to supervision and must comply with state laws. While these institutions should 

clearly not be regulated or supervised in the same way as major insurance companies, 

closer oversight would be appropriate to reflect their high impact on policyholders and 

on market integrity.

19 - Conduct 

of Business

There is an extensive body of requirements in relation to market conduct, much of it 

dating back many years and based substantially on the banning of certain unfair 

practices, requiring disclosure to customers and treating customers fairly; this is 

supplemented with specific requirements across the product range such as assessing 

suitability in relation to advice on sales of complex products.

The comprehensive Market Regulation Handbook encompasses expectations on firms, 

including detailed material by types of insurance product, but does not create binding 

requirements. Market conduct examinations are being carried out, more regularly for 

insurers than for producers, and with a high degree of dependence on consultants to 

carry out the examinations in many states.

There is a developing approach to market conduct risk analysis, although it is relatively 

lightly staffed. The states’ approach remains in large part reactive, with a high degree of 

dependence on lagging indicators such as individual customer complaints. More focus on 

governance, culture (and the effect of incentives) and controls across the range of 

products, would be justified given that the U.S. market features complex products, mixed 

levels of financial literacy and a largely commission-based remuneration model.

Aspects of the states’ approach rely on NAIC processes (although without an 

accreditation process), including market analysis and the coordination of certain 

multistate efforts through MAWG. However, without greater uniformity in other areas 

such as the implementation of model laws, rate and form regulation and use of the 

Market Regulation Handbook, it is hard to assess whether market regulation is adequate 

across the states.

20 - Public 

Disclosure

Publicly disclosed information is extensive and sufficient for sophisticated users (e.g. 

rating agencies and financial advisors) to gain information into the exposure to risks from 

investments and liabilities. Financial statements are filed electronically except for small 
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companies, allowing the efficient analysis of the information. The use of off-balance sheet 

items has to be disclosed in notes. The use of complex structures, i.e. transfer of business 

to affiliated captives, where business is moved off-balance sheet, reduces transparency 

and requires analysis by specialists. However, this is possible in principle.

Insurance groups and insurance holding systems should be required to submit financial 

filings on a consolidated level and this information should be made publicly available. 

This would give additional insight and useful information to the public as well as to 

regulators. While publicly traded groups have to file consolidated financial information on 

a US GAAP basis, statutory accounting would be useful not just for regulatory purposes 

but also for the public as the basis for analysis of exposure to risk.

While public disclosure is extensive, its usefulness for decision making is hampered by the 

valuation standard it is based upon (see ICP 14).

21 -

Countering 

Fraud in 

Insurance

State regulators address fraud-related issues by conducting market conduct examinations 

to ensure that effective Antifraud Plans have been implemented by insurers. The 

availability of data on fraud has been improved significantly with the development of 

databases, which has resulted in number of enforcement actions.

22 - AntiMoney 

Laundering 

and 

Combating the 

Financing of 

Terrorism

While both federal and state authorities have roles in relation to AML/CFT regulation, key 

aspects of the U.S. regime for insurance are set out in the federal Bank Secrecy Act and 

accompanying regulations. FinCEN is the responsible federal authority, with the IRS 

having delegated authority for examinations, although there are plans over time for 

FinCEN to rely more on state regulators’ AML/CFT examinations so as to avoid duplication 

of examination effort, allowing redirection of scarce IRS resources (although it may still 

carry out targeted examinations of insurers), and to recognize state expertise. State 

insurance supervisors already have an awareness of AML/CFT issues, resulting from their 

own supervisory work and liaison with federal authorities. 

Cooperation in practice between federal regulators and the states appears good. FinCEN, 

State Regulators and NAIC have established MoUs and are cooperating to share relevant 

information. There are currently 11 MoUs completed between FinCEN and state 

regulators. FinCEN plans to expand its information-sharing MoU network to additional 

states, supplementing its current outreach action plan and regular attendance at NAIC 

meetings. Exchange of information can and does take place without a MoU, and there are 

no legal restrictions on such exchanges.

23 - Groupwide 

Supervision

Group supervision has been improved and strengthened. The Insurance Holding 

Company System Model Act allows state regulators to supervise insurance groups. The 

FRB exercises consolidated supervision over SLHCs and NBFCs. 

To assess an insurance group as a whole, it can be necessary to analyze the interaction of 

the ownership structure of the entity with the web of intra-group transactions. This 

requires information, which U.S. states can demand of any insurer or its affiliates, and can 

use to take action on the insurer, if the non-insurance entities or holding companies 

create a risk to the insurer.

There are no capital standards in place, either for groups supervised by state regulators or 

for SLHCs and NBFCs supervised by the FRB. The analysis and assessment of a group’s 

financial position in current and in stressed situations requires an appropriate valuation 
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and capital standard, without which the impact of the web of intra-group transactions, the 

transmission of losses through the group and the failure mode of the group cannot be 

evaluated soundly.

Resolution planning might be workable without a sound capital framework since the U.S. 

states can request any information from the group that the state believes is necessary to 

understand the risk the group poses to the insurer. In contrast, a regulatory framework 

that aims for policyholder protection has to consider events that are catastrophic for 

insurance legal entities, which state regulators have the authority to assess under the 

Insurance Holding Company System Model Act.

A stress testing regime for insurance groups and holding companies would support state 

regulators in assessing risks within groups they supervise. In the absence of a group-wide 

valuation and capital standard, stress testing—if defined appropriately—would help state 

regulators to gain insight into the exposures to risk of regulated entities.

There are no group wide investment, market conduct and disclosure requirements in 

place.

24 -

Macroprudenti

al Surveillance 

and Insurance 

Supervision

There are a number of regulatory authorities and other bodies involved in 

macroprudential surveillance and insurance supervision. The sophistication of the 

macroprudential surveillance is not yet congruent with the complexity of the US financial 

sector. There is further scope for the surveillance on interlinkages between financial 

sectors, exposures to systemic risks and interactions of different regulatory systems. The 

insurance industry is highly exposed to system-wide risks, e.g. low interest rates or the 

failure of a systemically important banks, which should be analyzed and appropriate 

macroprudential measures be taken.

The FIO, FSOC the FRB and the NAIC combined constitute a framework for 

macroprudential surveillance and insurance supervision. There are numerous agencies 

and offices analyzing data and engaging in research on systemic risk and macroprudential 

issues. However, macroprudential work relevant to insurance sector is still in a developing 

stage.

The cooperation of different authorities and offices can be improved on macroprudential 

issues relevant to insurance sector. There is likely some duplication of efforts and a 

pooling of resources might increase the overall quality. As an example, the FRB is aiming 

to develop insurance specific stress tests and might in this benefit from closer 

cooperation with the states and the NAIC.

Delivering appropriate representation for insurance at the FSOC has been complicated by 

the fragmentation of responsibilities for insurance supervision and oversight. The Box in 

the introduction to this assessment considers options for a response. 

The concept of systemic relevance for NBFCs should be clearly defined by the FSOC. Such 

a definition would support also the analysis of the FSOC and the OFR on emerging threats 

and the identification of risks to the US financial system. Stress testing and crisis 

management exercises involving the FRB would provide good insight into the systemic 

impact of NBFCs.
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The states and NAIC might consider introducing a stress testing regime. A formal, regular 

stress testing framework for the insurance industry would give valuable information. 

Ideally, for financial market stresses, the framework would be aligned as far as feasible to 

the FRB CCAR framework. This would give additional insights into cross-sectoral 

interlinkages.

25 -

Supervisory 

Cooperation 

and 

Coordination

U.S. insurance regulation has developed a significantly stronger focus on domestic and 

international supervisory coordination in recent years. This reflects the states’ 

development of the holding company analysis framework; the growth in supervisory

colleges under the IAIS framework; and the strengthening of SLHC, and addition of 

group-wide NBFC supervision by the FRB, which has become the lead regulator (GroupWide Supervisor) of the groups which it supervises.

At state level, the lead state concept is now embedded in the regulatory system and is 

delivering stronger coordination, including on troubled companies. However, there 

remain limitations on cooperation between state regulators, which partly reflects the lack 

of uniformity in regulatory approaches.

State regulators’ cooperation with FRB supervisors is developing, based on a 

complementarity of approaches (legal entity and group focus), although the FRB’s role is 

still relatively new and relationships in practice have further to develop for some groups.

The absence of U.S. or global group-wide capital standards (see ICP23) constrains to an 

extent the lead state holding company analysis process as well as the FRB’s group-wide 

supervision and the work of the colleges; but U.S. regulators have not let this prevent the 

establishment and effective functioning of supervisory colleges in an information-sharing 

and coordination role.

26 - Crossborder 

Cooperation

and 

Coordination 

on Crisis 

Management

The U.S. authorities’ approach to cross-border crisis management and coordination is at 

an early stage of development, reflecting the recent establishment of colleges of 

supervisors and, for the two NBFCs, Crisis Management Groups (CMG). The application to 

the NBFCs of much of the same framework as applies to other large financial institutions 

under Dodd-Frank has brought early progress, rigor and consistency to the process for 

resolution plans (“living wills”).

Outside the college framework (which is generally limited to IAIGs), U.S. supervisors have 

coordinated with both foreign and multiple U.S. state jurisdictions in the management of 

a troubled company effectively, although the crisis did not extend to a failure of any 

company involved.

There appears scope for using the colleges (or smaller groups of college members as for 

the CMGs) to undertake crisis preparedness, including more sharing of information on 

group structures, intra-group transactions and potential barriers to effective crisis 

management. 

In relation to resolution, including the operation of Dodd-Frank Act processes for the 

management of a crisis where systemic risk is potentially at issue and there has been a 

systemic risk determination, work is also an early stage. The capacity of the authorities to 

manage a resolution of a cross-border insurance group will need further development.
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Recommended Actions

Appendix Table 9. Recommendations to Improve Observance of the ICPs

Insurance Core 

Principle

Recommendations

1 - Objectives, 

Powers and 

Responsibilities 

of the Supervisor

It is recommended that:

all states adopt the joint statement of the objectives of insurance regulation and 

review their legislation to ensure that it is consistent with the statement (for example, 

that any mandate to promote or develop the insurance sector that could conflict with 

the statement is eliminated); and

regulators undertake analysis of potential conflicts between the objectives of the 

SLHC regime and the objectives of insurance supervision, as set out in the ICPs, and 

recommend changes in the legislation as appropriate, which may include more 

explicit recognition of the objective of insurance policyholder protection. 

2 - Supervisor It is recommended that:

states reform arrangements for the appointment and dismissal of commissioners, 

providing for fixed terms for all, with dismissal only for prescribed causes and with 

publication of reasons; 

state governments increase the independence of insurance departments in relation to 

resourcing, enabling them to determine budgets, set and retain relevant fees and 

assessment income to finance their work and employ appropriate staff as necessary to 

meet their objectives, subject to continued accountability to state legislatures;

the NAIC review the scope and operation of the accreditation program, including the 

potential value of an element of external assessment and a quality assurance element 

to accreditation work; and

the FRB continue to increase its insurance expertise (particularly in the area of 

actuarial methods, insurance accounting and underwriting risk), including in senior 

positions, to ensure the effectiveness of its insurance group supervisory work.

3 - Information 

Exchange and 

Confidentiality 

Requirements

It is recommended that states and the FRB review their internal processes and 

procedures, including staff training, to ensure that supervisors understand the 

importance of sharing information, including proactive sharing, taking into account 

the need to ensure confidentiality. 

4 - Licensing It is recommended that states improve consistency of the licensing requirements 

among the states both at high level (such as the absolute minimum capital level and 

the scope of exemption from licensing) and practical interpretation level (through 

better documentation of analysis and more detailed accreditation review work).

5 - Suitability of 

Persons

It is recommended that:

state regulators adopt and implement the Corporate Governance Annual Disclosure 

Model Act and related regulation and handbooks promptly; and

state regulators require examiners and supervisors to state more clearly their 

observations of properness of key individuals at least in their internal documentations, 

so that appropriate regulatory actions can be followed up.

7 -Corporate 

Governance

It is recommended that states and the FRB develop appropriate standards for 

insurance company governance, to be applied at legal entity and/or group level and 

implement these through the model law process or FRB requirements. 

8 - Risk 

Management and 

Internal Controls

It is recommended that:

after the introduction of the ORSA regime and requirement for an internal audit 

function, the states review the range of their standards on risk management and 
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control functions, assessing whether standards embedded in the ORSA requirement 

should be applied to a wider population of firms and whether to require at least the 

larger firms to have risk management, compliance and actuarial functions; and

the FRB develop and communicate a set of expectations in relation to risk 

management and internal controls for insurance NBFCs and SLHCs.

9 -Supervisory 

Review and 

Reporting

It is recommended that:

the states review the adequacy of reporting on qualitative issues such as material 

outsourcing and adopt the proposed new framework for corporate governance 

reporting;

the states review the scope for a higher frequency of examinations or increased 

targeted examinations between the regular full scope examinations, for the larger 

groups; and consult on whether they should remove the requirement for examination 

reports to be published;

the states review the scope for more coordinated multistate market conduct 

examinations; and

the FRB develop and publish a tailored supervisory framework and appropriate tools 

addressing insurance risks for the supervision of the SLHC and NBFC insurance 

groups, including stress tests that that include insurance risk scenarios such as a major 

pandemic.

12 -Winding-up 

and Exit from the 

Market

It is recommended that the states work closely with federal and International 

regulators, and resolution authorities to improve resolvability of large and complex 

insurance groups.

13 -Reinsurance 

and Other Forms 

of Risk Transfer

It is recommended that:

state regulators analyze the interaction of the web of retrocessions and the group’s or 

holding’s structure in more depth; and

the FRB analyze the interaction of the web of retrocessions in particular for 

systemically important insurance groups.

14 - Valuation It is recommended that:

the NAIC continues to pursue the update of the valuation methodology for life 

insurers based on principles-based reserving;

captives and insurers have to use the same valuation requirements;

the valuation standard is applied consistently across all states;

the valuation standard is consistently defined taking into account how assets that 

cover liabilities are actually managed;

the valuation standard is adapted such that it captures conservatism explicitly in a 

margin over current estimate;

state regulators authorities ensure that they have sufficient expertise in-house to cope 

with principles-based approaches to reserving; and

the FRB defines a valuation standard for their regulated insurance entities.

15 -Investment It is recommended that:

identical investment rules and limits are imposed on affiliated captives to which 

insurance liabilities are ceded to; and

state regulators with cooperation with the NAIC, FRB and FIO to continue to analyze 

investment activities both at legal entity level and group level and address any 

regulatory arbitrage by improving consistency of investment requirements among 

states and federal regulations.

16 -Enterprise It is recommended that:
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Risk Management 

for Solvency 

Purposes

the FRB continues to enhance their expertise in insurance risk and business models;

the FRB adapts its rules and regulation and approaches to take into account the 

specifics of insurers, where warranted; and

the state regulators and the NAIC consider requiring the ORSA for all insurers, 

proportionate to the size and complexity of the firms.

17 -Capital 

Adequacy

It is recommended that:

state regulators and the NAIC develop an RBC requirement for financial guaranty 

insurers, taking into account their specific exposures to risk;

state regulators and the NAIC develop an approach that would allow RBC to capture 

intra-group transactions (IGTs); 

the FRB develops a capital standard for NBFCs and SLHC, with due consideration of 

accounting and actuarial standards, developing its methodology in cooperation with 

state regulators and the NAIC; and

state regulators, the NAIC and the FRB coordinate to develop common or consistent 

capital requirements to avoid regulatory arbitrage between the two capital 

requirements.

18 -

Intermediaries

It is recommended that:

a uniform approach to the regulation of larger business entities, including major 

commercial lines brokers be developed; and 

producers in all states be required to make disclosures to customers of the status 

under which they are doing business, including which insurance companies have 

appointed them.

19 -Conduct of 

Business

It is recommended that:

states further develop market conduct requirements that address the risks of unfair 

policyholder treatment across the range of insurance products and including 

requirements to treat customers fairly, to act with due skill and diligence, give suitable 

advice and to manage conflicts of interest;

states develop a risk-focused surveillance framework specifically for market conduct 

to support proactive, risk-based supervision of market conduct, covering both the 

supervision of individual firms and of issues that arise across the market; 

states review staffing and resourcing models for market conduct regulation of insurers 

and producers, including scope to undertake more examination work using 

employees rather than consultants (see also ICP2 on resources); and 

states continue to give consideration to developing an accreditation program for 

market conduct work (initial discussions have already been held), building on the work 

of the MAWG and on the comprehensive Market Regulation Handbook.

20 - Public 

Disclosure

It is recommended that insurance groups and insurance holding systems are required 

to submit financial filings also on a consolidated level.

22 -Anti-Money 

Laundering and 

Combating the 

Financing of 

Terrorism

It is recommended that to facilitate active and effective information sharing on 

AML/CFT, FinCEN, state regulators and the NAIC continue to expand the network of 

MOUs and speedily implement the ongoing project for electronic information 

exchange.

23 -Group-wide 

Supervision

It is recommended that:

state regulators obtain direct legal authority over the insurance holding company 

(although this is beyond the current ICP);

capital standards are put in place in a consistent manner, for groups supervised by 

state regulators and by the FRB;
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potential conflicts between the objectives of different supervisory authorities are 

addressed;

a stress testing regime for insurance groups and holding companies be implemented;

consolidated financial statements are published by all insurance groups; and

investment activities at the group level are carefully monitored to address potential 

regulatory arbitrage and search for yield at the group level.

24 -

Macroprudential 

Surveillance and 

Insurance 

Supervision

It is recommended that:

different authorities and offices work closer together on macroprudential issues;

the FSOC encourage the FRB to develop stress testing and crisis management 

exercises which are meaningful for the insurance sector; and

the representation of the insurance sector is brought into line with that for other 

sectors on FSOC.

25 - Supervisory 

Cooperation and 

Coordination

It is recommended that:

states and the FRB review how to develop stronger cooperation between U.S. 

insurance supervisors, which could include increased joint working (e.g., on-site work), 

secondments and appropriate training; and the FIO and NAIC work more closely 

together, for example to develop a shared view on priorities for modernization of 

insurance regulation;

state regulators and FRB set objectives for colleges to move to the next level of 

cooperation, including potentially the development of a shared group risk assessment 

and joint working; and consider whether this may require sub-groups of members or 

colleges to meet in a core group format to promote efficient working; and

states fully and effectively incorporate the state regulators’ collective expectations on 

international supervisory colleges into the accreditation program.

26 - Cross-border 

Cooperation and 

Coordination on 

Crisis 

Management

It is recommended that the authorities continue their work in relation to crisis 

preparedness, giving priority to building on the work of the CMGs (and current work 

at the FSB and the IAIS) to develop their planning for a crisis and resolution of a major 

cross-border group. Supervisors should ensure that all internationally-active groups 

have developed contingency plans and are able to deliver information that may be 

required in a crisis in a timely fashion. 

Authorities’ Responses to the Assessment

The Federal Reserve Board (FRB), the NAIC, and the FIO (collectively, the “U.S. authorities”) 

welcomed the opportunity to take part in the second U.S. FSAP and support the objectives of 

the IMF’s FSAP more generally.

The current Insurance Core Principles (ICPs), as amended by the IAIS in 2013, are more 

rigorous and comprehensive than the prior version used for the first U.S. FSAP conducted in 

2010. The U.S. authorities are therefore pleased that the IMF’s current assessment of the U.S. system 

broadly indicates compliance with such principles; that insurance supervision in the United States has 

been significantly strengthened in recent years; that lessons have been learned from the financial 

crisis; and that many of the recommendations of the 2010 FSAP are being addressed. 

The Report recognizes that the implementation of global and domestic reforms, particularly 

the DFA and ongoing enhancements at the state level, has increased the supervisory scope and 
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intensity of insurance supervision and oversight. Some state and federal reforms are pending and 

will take time to fully implement, including at the federal level those related to enhanced prudential 

standards for non-bank financial companies. The Report acknowledges that additional 

implementation of the reform programs will further improve compliance with the ICPs in the United 

States. 

The U.S. authorities are pleased with the Report’s overall evaluation, which concludes as 

follows: 

 Overall, the assessment finds a reasonable level of observance of the Insurance Core 

Principles. There are many areas of strength, including at state level the powerful capacity for 

financial analysis with peer group review and challenge through the processes of the NAIC. 

Lead state regulation is developing and a network of international supervisory colleges has 

been put in place. Regulation benefits from a sophisticated approach to legal entity capital 

adequacy (the Risk-Based Capital approach). Regulation and supervision continue to be 

conducted with a high degree of transparency and accountability. FRB supervision is bringing 

an enhanced supervisory focus to group-wide governance and risk management. 

Cooperation between state and federal regulators is developing, based on the 

complementarity of their approaches, although it has further to go. 

 The Report makes numerous recommendations to increase U.S. compliance with the ICPs. 

The U.S. authorities acknowledge that some continued reforms are worth considering to 

further strengthen certain aspects of the system of regulation and supervision in the United 

States. However, the state regulators disagree with a few of the ratings ascribed to certain 

ICPs and the U.S. authorities do not believe that each of the proposed regulatory reforms 

recommended in the Report is warranted, or would necessarily result in more effective 

supervision, reduced cost and complexity of insurance supervision, or successfully address 

perceived regulatory gaps, especially when compared to functional outcomes. For example, 

the Report expresses concern that the objectives of the respective agencies could come into 

conflict in a crisis situation. In practice, there is clarity of mission among the U.S. authorities 

and, to date, they have resolved potential conflicts through regulatory and supervisory 

cooperation. 

 The U.S. authorities appreciate the work of the assessors and look forward to continuing 

dialogue with the IMF as the authorities consider the recommendations.