Dodd-Frank Regulations: Agencies Conducted Regulatory Analyses and Coordinated but Could Benefit from Additional Guidance on Major Rules
Published: 2013-12-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 2010 Dodd-Frank Act requires or authorizes various federal agencies to issue hundreds of rules to implement reforms intended to strengthen the financial services industry. As amended by Public Law No. 112-10, the act also mandates that GAO annually study financial services regulations. This report examines (1) the regulatory analyses agencies conducted in their Dodd-Frank rulemakings; (2) interagency coordination on such rulemakings and by CFPB in its supervision activities; and (3) the possible impact of selected Dodd-Frank provisions and related rules and agency plans to assess Dodd-Frank Act rules retrospectively. GAO identified and reviewed 70 Dodd-Frank rules that became effective from July 24, 2012, through July 22, 2013, to determine whether the required regulatory analyses and coordination were conducted; examined CFPB's policies, procedures, and other materials; developed indicators on the impact of the act's systemic risk-related provisions and rules; conducted a regression analysis to assess the act's impact on large bank holding companies; and interviewed federal financial regulators and officials from the U.S. Department of the Treasury, the Financial Stability Oversight Council, and OMB.
section_title: What GAO Found
paragraphs: Federal agencies conducted the required regulatory analyses for all rules issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that GAO identified and reviewed. However, the Office of Management and Budget (OMB), in coordination with the agencies, may not be consistently determining which rules are considered major rules under the Congressional Review Act (CRA). Under the act, Congress is allowed to review major rules before they become effective. The act outlines criteria for determining whether a rule is major, such as whether it will result in an annual effect on the economy of $100 million or more. OMB is responsible for determining which rules are major under CRA but relies on agency analyses to help make the determination. OMB guidance does not address whether independent agencies should submit all rules for review or how they should apply major rule criteria. GAO found that some independent agencies submitted all their rules to OMB, but others did not. GAO also found inconsistencies in how these agencies applied the CRA criteria. For example, GAO found rules issued by different agencies that had similar economic impacts but were not similarly classified as major. These issues raise the risk of some rules not being properly classified as major, limiting Congress's ability to review these rules before they become effective.
Federal regulators coordinated on 49 rulemakings pursuant to the Dodd-Frank Act or voluntarily. As required by the act, the Consumer Financial Protection Bureau (CFPB) established a framework to coordinate its supervision activities with prudential regulators and is establishing a similar framework to coordinate with state regulators. In May 2012, CFPB and prudential regulators entered into an agreement that specifies how they plan to meet the act's coordination requirements for the supervision of large banks (i.e., more than $10 billion in assets). CFPB has entered into similar agreements with state regulators to coordinate examinations of banks and nonbank financial entities.
The Dodd-Frank Act has not been fully implemented and its full impact remains uncertain. Using recently released data, GAO updated its prior report's indicators monitoring certain risk characteristics of large U.S. bank holding companies. Although changes in the indicators are not evidence of causal links to the act's provisions, some indicators suggest these companies, on average, have decreased their leverage and enhanced their liquidity since the act's passage. Moreover, GAO's updated regression analysis suggests that the act continued to have little effect on the funding costs of large U.S. bank holding companies but may have helped improve their safety and soundness. Based on its analysis of the act and market data, GAO also developed new indicators for this report to monitor the extent to which certain of the act's swap reforms are associated with their intended outcomes. These indicators establish baselines for measuring future changes. Finally, GAO examined federal financial regulators' plans to conduct retrospective reviews of their Dodd-Frank rules. Executive Order 13,579 asks independent agencies, including federal financial regulators, to develop plans to conduct retrospective reviews of existing rules that may be excessively burdensome or costly. Regulators have varied in their approaches and progress in developing and implementing such plans. Given the importance of such reviews, GAO recommended in 2011 that the regulators determine how they will measure the impact of Dodd-Frank regulations in their plans, but they have not done so to date. GAO maintains that doing so would position the regulators to make their future retrospective reviews as robust as possible.
section_title: What GAO Recommends
paragraphs: GAO recommends that OMB issue guidance to help standardize CRA processes. OMB disagreed such guidance is needed, in part because GAO did not identify inconsistencies in major rule designations. GAO maintains that the identified process inconsistencies could lead to differing designations under CRA, and its recommendation helps ensure consistency in designating major rules.

section_title: Letter
paragraphs: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) of 2010 requires federal agencies to issue hundreds of  regulations to implement the act’s requirements. The act responds to the  2007-2009 financial crisis that disrupted the U.S. financial system and  threatened not only the solvency of some large financial institutions but  also the health of the U.S. economy. Although the financial services  industry, academics, and others generally have supported the Dodd- Frank Act’s goal of enhancing the stability of the U.S. financial system,  the act’s provisions and their implementation have been subject to  debate. For example, no consensus exists on the extent to which the act  will help reduce the likelihood and severity of future financial crises or on  the magnitude of the costs that the act and its regulations—individually  and cumulatively—will impose on U.S. financial institutions and the  economy. Additionally, some market observers have raised concerns  about the pace of reform, with some suggesting that reform is occurring  too slowly and others arguing that it is moving too quickly.
Federal rulemaking is subject to multiple statutory requirements and  executive orders. However, the extent to which the federal financial  regulators and other federal agencies are subject to these requirements  varies. For example, the Paperwork Reduction Act (PRA) and the Regulatory Flexibility Act (RFA) impose regulatory analysis requirements  on federal agencies, including the federal financial regulators. PRA  requires agencies to justify collection of information from the public to  minimize the paperwork burden and estimate the time and expense  needed to comply with the paperwork requirements contained in their  rules. RFA requires agencies to assess the impact of their regulation on  small entities and consider regulatory alternatives to lessen the regulatory  burden on small entities. Under the Congressional Review Act (CRA),  before rules can take effect, federal agencies, including the federal  financial regulators, must submit their rules to Congress and the  Comptroller General, and rules deemed major by the Office of  Management and Budget (OMB) generally may not become effective until  60 days after the rules are submitted. For agencies subject to Executive  Order 12,866 (E.O. 12,866), such major rules would be considered  significant regulatory actions and as such would be subject to formal  benefit-cost analysis. However, as independent regulatory agencies, the  federal financial regulators are not required to comply with executive  orders.
Section 1573(a) of the Department of Defense and Full-Year Continuing  Appropriations Act of 2011 amends the Dodd-Frank Act and mandates  that GAO conduct an annual study of financial services regulations,  including those of the Consumer Financial Protection Bureau (CFPB).  We issued our first two reports under this mandate in November 2011  and December 2012.regulatory analyses conducted by federal agencies in their Dodd- Frank rulemakings, including their assessments of which rules they  considered to be major rules;  interagency coordination by federal agencies in their Dodd-Frank  rulemakings and by CFPB with other agencies in its supervision  activities; and possible impact of selected Dodd-Frank provisions and their  implementing regulations and agency plans to assess such  regulations retrospectively.
To examine agencies’ regulatory analyses and coordination, we focused  on final Dodd-Frank rules that became effective from July 24, 2012,  through July 22, 2013, a total of 70 rules. To identify these rules, we used  a website maintained by the Federal Reserve Bank of St. Louis that  tracks Dodd-Frank regulations. We corroborated the data with the federal  agencies and data from their websites.
In examining the regulatory analyses of the federal agencies in our  review, we reviewed federal statutes, GAO studies, Federal Register  releases, and other material to identify and summarize the regulatory  analyses federal agencies are required to conduct, and conducted, for  Dodd-Frank rulemakings. Of the 70 rules within our scope, 59 rules were  substantive regulations— generally subject to public notice and comment  under the Administrative Procedure Act—and required the agencies to  conduct some form of regulatory analysis. Of the 59 rules, 10 were  classified as major under CRA. For those 10 rules, we compared the  regulatory analyses against principles in OMB Circular A-4, which  provides guidance on the development of such analyses. To examine  how OMB, in consultation with federal agencies, classifies rules as major,  we reviewed CRA, agency analyses, Federal Register releases of Dodd- Frank major rules, GAO reports, and other materials, and interviewed  officials from OMB and federal financial regulators. We relied on our  Federal Rules database to identify all Dodd-Frank rules classified as  major as of July 22, 2013—36 in total (including the 10 from the specified  time period mentioned above).
To examine interagency coordination among the regulators, we reviewed  the Dodd-Frank Act, Federal Register releases, and GAO reports to  identify the interagency coordination or consultation requirements for the  70 rules in our scope. We found evidence of coordination between the  rulemaking agency and other regulators for 49 of the 70 rules. We  reviewed the Federal Register releases of the final rules and interviewed  agency officials to document whether the agencies coordinated with other  U.S., foreign, or international regulators, either as required by Dodd-Frank  or on a voluntary basis. To examine steps CFPB took to comply with  Dodd-Frank requirements for interagency coordination and information  sharing in its supervision activities, we reviewed the act, CFPB  documents, and GAO reports. We also interviewed officials from CFPB  and the prudential regulators about such coordination.
Finally, we took a multipronged approach to analyze what is known about  the impact of the Dodd-Frank Act on the financial marketplace. First, we  updated our indicators monitoring changes in certain characteristics of  systemically important financial institutions (SIFI) that might be affected  by Dodd-Frank regulations. Second, we updated our economic analysis  estimating changes in the (1) cost of credit provided by bank SIFIs and  (2) safety and soundness of bank SIFIs. Third, we developed indicators to  monitor the extent to which certain of the Dodd-Frank’s swap reforms are  consistent with the act’s goals. As new data become available, we  expect to update and, as warranted, revise our indicators and create  additional indicators. Fourth, to assess agency plans to conduct  retrospective reviews of existing rules, we reviewed executive orders;  OMB guidance; Federal Register releases, policies, and other agency  documents; and GAO reports. Finally, we interviewed agency officials  about their plans to conduct retrospective reviews of their Dodd-Frank  rules. For parts of our methodology involving the analysis of computer- processed data, we assessed the reliability of these data and determined  they were sufficiently reliable for our purposes. (See app. I for a detailed  discussion of our objectives, scope, and methodology.)
We conducted this performance audit from January 2013 to December  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Financial Services Regulation
paragraphs: The U.S. financial regulatory structure is a complex system of multiple  federal and state regulators as well as self-regulatory organizations that  operates largely along functional lines. That is, financial products or  activities generally are regulated according to their function, no matter  which entity offers the product or participates in the activity. The  functional regulator approach is intended to provide consistency in  regulation, focus regulatory restrictions on the relevant functional areas,  and avoid the potential need for regulatory agencies to develop expertise  in all aspects of financial regulation.
In the banking industry, the specific regulatory configuration generally  depends on the type of charter the banking institution chooses.  Depository institution charter types include  commercial banks, which originally focused on the banking needs of  businesses but over time have broadened their services;  thrifts, which include savings banks, savings associations, and  savings and loans and were originally created to serve the needs— particularly the mortgage needs—of those not served by commercial  banks; and  credit unions, which are member-owned cooperatives run by member- elected boards with an historical emphasis on serving people of  modest means.
Charters may be obtained at the state or federal level. State regulators  charter institutions and participate in the institutions’ oversight, but all  institutions that have federal deposit insurance have a federal prudential  regulator. The federal prudential regulators—which generally may issue  regulations and take enforcement actions against industry participants  within their jurisdiction—are identified in table 1. Additionally, the Federal  Deposit Insurance Corporation (FDIC) insures deposits in banks and  thrifts, while the National Credit Union Administration (NCUA) insures  deposits in federal and most state-chartered credit unions.
Holding companies that own or control a bank or thrift are subject to  supervision by the Board of Governors of the Federal Reserve System  (Federal Reserve). The Bank Holding Company Act of 1956 and the  Home Owners’ Loan Act set forth the regulatory frameworks for bank  holding companies and savings and loan holding companies,  respectively. The Dodd-Frank Act made the Federal Reserve the  regulator of savings and loan holding companies and amended the Home  Owners’ Loan Act and the Bank Holding Company Act to create certain  similar requirements for both bank holding companies and savings and  loan holding companies.
The securities and futures markets are regulated under a combination of  self-regulation (subject to oversight by the appropriate federal regulator)  and direct oversight by the Securities and Exchange Commission (SEC)  and Commodity Futures Trading Commission (CFTC), respectively.  SEC regulates the securities markets, including participants such as  securities exchanges, broker-dealers, investment companies, and  investment advisers. SEC’s mission is to protect investors; maintain fair,  orderly, and efficient markets; and facilitate capital formation. SEC also  oversees self-regulatory organizations—including securities exchanges,  clearing agencies, and the Financial Industry Regulatory Authority—that  have responsibility for overseeing securities markets and their members;  establishing the standards under which their members conduct business;  monitoring business conduct; and bringing disciplinary actions against  members for violating applicable federal statutes, SEC’s rules, and their  own rules.
CFTC is the primary regulator of futures markets, including futures  exchanges and intermediaries, such as futures commission merchants. CFTC’s mission is to protect market users and the public from fraud,  manipulation, abusive practices, and systemic risk related to derivatives  subject to the Commodity Exchange Act, and to foster open, competitive,  and financially sound futures markets. Like SEC, CFTC oversees the  registration of intermediaries and relies on self-regulatory organizations,  including the futures exchanges and the National Futures Association, to  establish and enforce rules governing member behavior. In addition, Title  VII of the Dodd-Frank Act expands regulatory responsibilities for CFTC  and SEC by establishing a new regulatory framework for swaps. The act  authorizes CFTC to regulate “swaps” and SEC to regulate “security- based swaps” with the goals of reducing risk, increasing transparency,  and promoting market integrity in the financial system.
Futures commission merchants are individuals, associations, partnerships, corporations,  and trusts that solicit or accept orders for the purchase or sale of a commodity for future  delivery, among other products, on or subject to the rules of any exchange and that accept  payment from or extend credit to those whose orders are accepted. 7 U.S.C. § 1a(28).  Firms and individuals who trade futures with the public or give advice about futures trading  must be registered with the National Futures Association, the industrywide self-regulatory  organization for the U.S. futures industry. provide consumer financial products and services. Certain consumer  financial protection functions from seven federal agencies were  transferred to CFPB. CFPB has authority to supervise companies in the  mortgage, payday lending, and private student lending markets. As such,  CFPB is authorized to supervise certain nonbank consumer financial  service companies and insured depository institutions and credit unions  with over $10 billion in assets and their affiliates for compliance with  federal consumer financial protection laws and related purposes. CFPB  does not have authority over most insurance activities or most activities  conducted by firms regulated by SEC or CFTC.
Financial Stability Oversight  Council (FSOC)
The Dodd-Frank Act established FSOC to identify risks to the financial  stability of the United States, promote market discipline, and respond to  emerging threats to the stability of the U.S. financial system. The Dodd- Frank Act also established the Office of Financial Research within the  U.S. Department of the Treasury (Treasury) to serve FSOC and its  member agencies by improving the quality, transparency, and  accessibility of financial data and information; conducting and sponsoring  research related to financial stability; and promoting best practices in risk  management. FSOC’s membership consists of the Secretary of the Treasury, who chairs the council; the heads of CFPB, CFTC, FDIC, the  Federal Reserve, the Federal Housing Finance Agency, NCUA, the Office  of the Comptroller of the Currency (OCC), and SEC; the directors of the  Office of Financial Research and the Federal Insurance Office;  representatives from state-level financial regulators; and an independent  member with insurance experience.
section_title: Dodd-Frank Regulations
paragraphs: Under the Dodd-Frank Act, federal financial regulatory agencies are  directed or have the authority to issue hundreds of regulations to  implement the act’s provisions. In some cases, the act gives the agencies  little or no discretion in deciding how to implement the provisions. For  instance, the Dodd-Frank Act made permanent a temporary increase in  the FDIC deposit insurance coverage amount ($100,000 to $250,000);  therefore, FDIC revised its implementing regulation to conform to the  change. However, other rulemaking provisions in the act appear to be  discretionary in nature, stating that (1) certain agencies may issue rules to  implement particular provisions or that the agencies may issue  regulations that they decide are “necessary and appropriate;” or (2)  agencies must issue regulations to implement particular provisions but  have some level of discretion over the substance of the regulations. As a  result, for these rulemaking provisions, the agencies may decide to  promulgate rules for some or all of the provisions, and may have broad  discretion to decide what these rules will contain and what exemptions, if  any, will apply.
section_title: Regulatory Analyses in Federal Rulemaking
paragraphs: As mentioned earlier, federal agencies generally must conduct regulatory  analysis pursuant to PRA and RFA, among other statutes, as part of their  rulemakings. PRA and RFA require federal agencies, including financial  regulators, to assess various impacts and costs of their rules. However,  the statutes do not require the agencies to conduct formal benefit and  cost analyses that require identification and assessment of alternatives.
Pub. L. No. 111-203, Tit. X, § 1022(b)(2) (codified at 12 U.S.C. § 5512(b)(2)). a rule should not be adopted if it would impose a burden on  competition that is not necessary or appropriate to the act’s purposes.
The Electronic Funds Transfer Act, as amended by the Dodd-Frank  Act, requires the Federal Reserve to prepare an analysis of the  economic impact of regulations issued by the Federal Reserve that  considers the costs and benefits to financial institutions, consumers,  and other users of electronic fund transfers. The analysis must  address the extent to which additional paperwork would be required,  the effects upon competition in the provision of electronic banking  services among large and small financial institutions, and the  availability of such services to different classes of consumers,  particularly low-income consumers.
Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993). For significant rules, the  order further requires agencies to prepare a detailed regulatory (or economic) analysis of  both the benefits and costs. More recently, E.O. 13,563 supplemented E.O. 12,866, in part  by incorporating its principles, structures, and definitions. Exec. Order No. 13,563, 76 Fed.  Reg. 3821 (Jan. 18, 2011). E.O. 12,866 contains 12 principles of regulation that direct  agencies to perform specific analyses to identify the problem to be addressed, assess its  significance, assess both the benefits and costs of the intended regulation, design the  regulation in the most cost-effective manner to achieve the regulatory objective, and base  decisions on the best reasonably obtained information available. regulatory actions should be measured and reported. Of the federal  agencies included in our review, only FSOC and Treasury are subject to  E.O. 12,866. As independent regulatory agencies, the federal financial  regulators—CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and  SEC—are not subject to E.O. 12,866 and OMB’s Circular A-4. Although  not subject to E.O. 12,866 and OMB Circular A-4, most of the federal  financial regulators told us that they try to follow Circular A-4 in spirit. In  our 2011 report, we found that the policies and procedures of these  regulators did not fully reflect OMB guidance and recommended that they  incorporate the guidance more fully in their rulemaking guidance. Since  then, FDIC, OCC, and SEC revised their guidance as we recommended,  but the other agencies have not.
section_title: Agencies Conducted Required Regulatory Analyses but May Not Be Identifying All Major Rules
paragraphs: In the Federal Register releases of the 59 Dodd-Frank rules that we  identified and reviewed, the issuing federal agencies stated that they  conducted the regulatory analyses required by various federal statutes.As independent regulatory agencies, the federal financial regulators— CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and SEC—are  not subject to executive orders that require comprehensive benefit-cost  analysis in accordance with guidance issued by OMB. Under CRA, OMB  is responsible for determining which rules are major but relies on agency  analyses to help make the determination. However, our analysis showed  that OMB and the agencies may not have applied the CRA criteria  consistently in determining which rules are major rules.
subsections: section_title: Regulators Conducted Required Regulatory Analyses for Their Dodd- Frank Rulemakings
paragraphs: Of the 70 Dodd-Frank rules within our scope, 59 regulations were  substantive—generally subject to public notice and comment under the  Administrative Procedure Act—and required some form of regulatory  analysis. These rules were issued individually or jointly by CFPB, CFTC,  FDIC, the Federal Reserve, NCUA, OCC, SEC, or Treasury. (See app. II  for a list of the regulations in our review.) In examining the regulatory  analyses the regulators reported that they conducted for these 59  regulations, we found the following.
Agencies conducted the required regulatory analyses. The  agencies conducted regulatory analyses pursuant to PRA and RFA  for all 59 rules. In addition, agencies conducted required regulatory  analyses pursuant to other statutes, such as the Unfunded Mandates  Reform Act of 1995, Small Business Regulatory Enforcement  Fairness Act of 1996, and Riegle Community Development and  Regulatory Improvement Act of 1994. Agencies also stated that they  considered the benefits and costs of their rules as required under their  authorizing or other statute. Specifically, CFPB issued 15 rules for  which it considered the potential benefits and costs for consumers  and entities that offer or provide consumer financial products and  services. CFTC and SEC individually or jointly issued 27 rules and  considered their potential impact, including their benefits and costs, in  light of each agency’s required public interest considerations. The  Federal Reserve issued one rule and it analyzed the rule’s economic  impact in consideration of the costs and benefits to financial  institutions, consumers, and other users of electronic fund transfers.
Agencies identified 10 major rules. Of the 59 rules that were issued  and became effective from July 24, 2012, through July 22, 2013, OMB  identified 10 as major rules under CRA. Specifically, CFPB issued two  major rules; CFTC issued three major rules; SEC issued two major  rules; CFTC and SEC jointly issued one major rule; the Federal  Reserve issued one major rule; and the Federal Reserve, FDIC, and  OCC jointly issued one major rule.  In the 10 major rulemakings, agencies generally addressed the  key elements in OMB’s guidance. In our analysis of the 10 Dodd- Frank rules identified as major we found that the agencies addressed  many of the OMB guidance’s key elements. All of the rules identified  the problem to be addressed. In all but two of the rule proposals, the  agencies identified regulatory alternative approaches that they  considered, and the agencies asked for and received public  comments on alternatives in all of the rules. Based on public  comments and other information, the agencies analyzed the benefits  and costs of the rules, including regulatory alternatives. In 5 of the 10  rules, the agencies explicitly identified the baseline against which they  assessed benefits and costs. In the other rules, the agencies implicitly  identified the baseline, typically as pre-Dodd-Frank Act. However, as  we found in our last review, the agencies quantified certain  compliance costs associated with their rules, such as paperwork- related costs, but generally did not quantify other costs.  Furthermore, none of the agencies quantified any of the benefits, in  part because of stated data limitations. However, all of the agencies  discussed the benefits and costs of their rules, including alternatives,  in qualitative terms.
section_title: OMB Classified a Number of the Dodd-Frank Rules as Major but, along with Federal Financial Regulators, Used Inconsistent Processes in Applying CRA’s Criteria
paragraphs: Since the enactment of the Dodd-Frank Act through July 22, 2013, federal  financial regulators and Treasury issued 36 Dodd-Frank rules that were  classified as major under CRA. CRA, enacted in 1996, provides Congress  with the opportunity to review and disapprove new rules issued by federal  agencies. To that end, the act establishes procedures by which  Congress may disapprove an agency’s rule by introducing a joint  resolution of disapproval within 60 days of receiving the rule that, if  adopted by both houses of Congress and signed by the President, can  nullify the agency’s rule.
Specifically, CRA requires agencies, including independent agencies, to  submit final rules to Congress and the Comptroller General before the  rules can become effective. Rules not classified as major go into effect as  otherwise provided by law after submission to Congress and the  Comptroller General, while rules classified as major take effect on the  later of 60 days after Congress receives the rule report, or 60 days after  the rule is published in the Federal Register, as long as Congress does  not pass a joint resolution of disapproval. During the 60 day period,  Congress may introduce, if desired, a resolution of disapproval prior to  any major rule taking effect. CRA defines a major rule as any rule that the  OMB finds has resulted in or is likely to result in (1) an annual effect on  the economy of $100 million or more; (2) a major increase in costs or  prices for consumers; individual industries; federal, state, or local  government agencies; or geographic regions; or (3) significant adverse  effects on competition, employment, investment, productivity, innovation,  or on the ability of United States-based enterprises to compete with  foreign based enterprises in domestic and export markets. Although OMB  determines whether a rule should be classified as major under CRA,  OMB officials told us that they rely on agency submissions of rules and  analyses to help make the determination.
Federal financial regulators and Treasury jointly or separately issued the  36 rules pursuant to the Dodd-Frank Act that were found to be major  rules. CFPB, CFTC, and SEC collectively accounted for 32 (close to 90  percent) of the rules. (See app. III for a list of Dodd-Frank rules classified  as major.) Based on our review of the analyses provided by the agencies  to OMB, we found that the agencies expect that all 36 rules will or could  meet CRA’s first major rule criterion—that is, result in an annual effect on  the economy of $100 million or more. In addition, and although a rule  needs to meet only one of the multiple criteria in the CRA major rule  definition to be considered major, agencies expect that 6 of the 36 major  rules could cause a major increase in costs or prices and 3 of the rules  could have a significant adverse effect on competition or other activities.
The processes used by federal financial regulators and OMB to identify  rules as major vary and create the potential for OMB to not identify all  major rules. In 1999, OMB issued guidance on implementing CRA that   For rules subject to E.O.  outlined the process for identifying major rules.12,866 review, the guidance instructs agencies, when submitting rules, to  indicate whether they consider the rules major. For rules not subject to  E.O. 12,866 review, agencies are instructed to contact their OMB desk  officer, who has responsibility for certain agencies, in accordance with  their established practice. Because the federal financial regulators are not  subject to E.O. 12,866, they submit rules to OMB per practices  established with their OMB desk officers. Another difference is that  agencies subject to E.O. 12,866 generally would be required to prepare a  comprehensive benefit-cost analysis, quantifying benefits and costs  where feasible, for significant regulatory actions. OMB desk officers can  then use such analysis in determining whether a rule is major under CRA.  In contrast, for rules not subject to the order, the agencies would not  necessarily be required to conduct such an analysis. As a result, OMB  desk officers may have less complete information from which to  determine whether a rule is major under CRA.
We found that regulators’ established practices vary. For example, some  federal financial regulators told us that they submit all of their rules to  OMB for review, but three regulators told us that they submit only those  rules they consider major based on their analyses. OMB officials told us  that their expectation is that independent agencies should send all rules  to their desk officers; otherwise, the desk officers cannot determine  whether the rules are major as required under CRA. The risk of OMB not  identifying a major rule is unknown, but one federal financial regulator we  interviewed said that the agency tries to be conservative in its analyses— tending to overestimate rather than underestimate costs, thereby  reducing the risk that a rule may not be identified as major. Additionally,  OMB commonly relies on the issuing agency’s expertise and analyses to  classify rules as major.
We also found examples that indicate that federal financial regulators and  OMB may not be interpreting CRA’s major rule definition or related OMB  guidance consistently.
Applying CRA criteria to indirect consequences. Agencies differed  in the way they treated indirect costs of their rules when considering  whether such rules could have an impact of $100 million dollars or  more annually on the economy. In 2012, CFTC and SEC jointly issued  a rule to further define certain swap terms, including swap and  security-based swap. In its analysis, CFTC noted that the  definitions, by themselves, would not have an annual effect on the  economy of $100 million but will affect a number of other rules,  including rules determined to be major rules. According to CFTC,  these other rules could not be made effective without the final  definitions rule; as a result, it concluded that the definitions rule would  have an annual effect on the economy of more than $100 million.  CFTC and SEC also jointly issued a rule to further define certain  terms including swap dealer and security-based swap dealer. In its  analysis, SEC noted that these definitions, by themselves, would not  impose substantive requirements on dealers or major participants, but  that the rule should be considered major because it would set  boundaries that determine whether entities are subject to other rules,  including ones determined to be major rules. In contrast, in 2012  FSOC issued a final rule on the process it intends to use for  determining whether a nonbank financial company should be  supervised by the Federal Reserve and subject to enhanced  prudential standards. Treasury officials noted that they believed the  rule should not be considered major because the rule did not impose  substantive requirements on any entities, but only laid out the process  by which they could become subject to other rules and regulations.OMB agreed with Treasury’s assessment and determined that the rule  was not major.
Applying CRA criteria to related and jointly issued rules. CFPB  combined two separate but related rules to estimate total costs in its  CRA major rule assessment, but in other cases, agencies issuing  separate but related rules have not combined the rules’ costs or  benefits. In 2013, CFPB issued two separate mortgage servicing rules  that amended Regulation X and Regulation Z. In its CRA analysis submitted to OMB, CFPB estimated that Regulations X and Z would  have an annual burden of $22 million in paperwork-related costs, and  Regulation X would create an additional annual burden of $90 million.
76 Fed. Reg. 42,950 (July 19, 2011). local, or tribal governments or communities.that the $100 million threshold includes benefits, costs, or transfers,  and is identical to the threshold for determining whether a rule is  major under CRA. The guidance highlighted the word “or” to indicate  that benefits and costs should not be combined.
Although OMB issued a memorandum in 1999 to instruct agencies on  how to implement CRA, the memorandum provided little guidance on how  agencies should apply CRA’s major rule criteria—particularly its $100  million threshold. However, as illustrated by our examples, the criteria can  be applied in different ways. The only related OMB guidance on applying  CRA’s $100 million threshold was included in the February 2011  guidance that provided answers to frequently asked questions about the  regulatory impact analysis required by E.O. 12,866 and OMB Circular A- 4, to which independent regulatory agencies are not subject. According to  OMB staff, the guidance was not offered to independent agencies as  additional guidance to implement CRA. Without specific guidance  addressed to agencies that must comply with CRA on how to apply  CRA’s $100 million threshold, federal financial regulators may continue to  inconsistently apply CRA’s major rule criteria and thus, inconsistently  advise OMB on whether to classify rules as major. To the extent that any  major rules are not being classified as such, those rules may become  effective before the end of the 60-day congressional review period  required under CRA. On the other hand, our third example also shows  that some rules may be potentially misclassified as major and may not be  made effective for 60 days after their submission to Congress or  publication in the Federal Register when such a delay is not required.
section_title: Regulators Continue to Coordinate on Rulemakings
paragraphs: Federal agencies coordinated on 49 of the 70 Dodd-Frank regulations  that we reviewed, as required by the act or voluntarily. The act also  requires CFPB to coordinate with federal and state regulators in its  supervision of certain banks and nonbanks that offer or provide consumer  financial products or services. To date, CFPB has established a  framework to coordinate with prudential regulators and is establishing a  similar framework to coordinate with state regulators.
subsections: section_title: Federal Financial Regulators Have Continued to Coordinate on Their Dodd-Frank Rulemakings
paragraphs: Generally, federal financial regulators recognize the importance of  interagency coordination during the rulemaking process. Coordination  during the rulemaking process occurs when two or more regulators jointly  engage in activities for a purpose such as reducing duplication and  overlap in regulations. Effective coordination can help regulators minimize  or eliminate staff and industry burden, administrative costs, conflicting  regulations, unintended consequences, and uncertainty among  consumers and markets. As we reported last year, agency staffs told us  that most interagency coordination during rulemaking largely was informal  and conducted at the staff level. For example, regulators held some  formal interagency meetings early on in the Dodd-Frank rulemaking  process, but subsequent coordination on specific rulemakings was mostly  informal and conducted through e-mail, telephone conversations, and  one-on-one conversations between staff, including several interagency  meetings and teleconferences.
Recognizing the importance of coordination, the Dodd-Frank Act imposes  interagency coordination or consultation requirements and responsibilities  on regulators or in connection with certain rules. Dodd-Frank coordination  requirements include topic-specific, agency-specific, and rule-specific  requirements. For example:
Under Title VII, SEC and CFTC must coordinate and consult with  each other and prudential regulators, to the extent possible, before  starting a rulemaking or issuing an order on swaps or swap-related  subjects. This requirement’s purpose is to assure regulatory  consistency and comparability across the rules or orders. Title VII also  directs CFTC, SEC, and the prudential regulators to coordinate with  foreign regulators, as appropriate, in implementing swap reform  regulations.
Under Title X of the act, CFPB is required to consult with the  appropriate prudential regulators or other federal agencies, both  before proposing a rule and during the comment process, on  consistency with prudential, market, or systemic objectives  administered by such agencies.
Section 165(i) requires certain financial institutions to conduct annual  or semi-annual stress tests and directs regulators to issue consistent  and comparable regulations implementing the stress test requirement  in coordination with the Federal Reserve and Federal Insurance  Office.
Section 201(b) provides that, for the purpose of defining “financial  company,” no company shall be deemed to be predominantly  engaged in activities that the Federal Reserve has determined are  financial in nature or incidental to such financial activities, if the  consolidated revenues of that company from such activities constitute  less than 85 percentage of the total consolidated revenues of that  company, as FDIC, in consultation with Treasury, shall establish by  regulation.
We found evidence of coordination between the rulemaking agency and  other regulators for 49 of the 70 regulations that we reviewed (see app.  IV). We found the act required coordination, or it was unclear whether the  act required coordination, in 39 of these 49 rulemakings.the rulemakings to document evidence of coordination among the  agencies and also interviewed agency staff about their coordination  efforts for the 39 rules. We found the following:
Twelve rules issued by CFTC and SEC implemented provisions in  Title VII related to swaps and, thus, required coordination with each  other and the prudential regulators to the extent possible. For example, CFTC specified that it coordinated with SEC on nine of the  swap-related rules issued solely by CFTC, and with the prudential  regulators, among others, on five of these nine rules.
CFPB indicated that it coordinated with prudential or other federal  regulators, pursuant to Title X of the act, on 17 of its rulemakings  under federal consumer financial laws. CFPB noted that it consulted or offered to consult with the prudential regulators on all 17 rules and  the Federal Trade Commission, the Department of Housing and  Urban Development, or other agencies on many of its rules.
For the other 10 rules where coordination was mandated, we found  that CFTC, FDIC, the Federal Reserve, OCC, or SEC coordinated in  response to rule-specific interagency coordination requirements in the  act.
For 10 of the 49 rules, there was no Dodd-Frank requirement to  coordinate, but we found evidence that the agencies voluntarily  coordinated on the rulemakings. Most federal financial regulatory officials  told us that they generally voluntarily engage in interagency coordination  when their rules affect another agency or its supervised entities or when  another agency has expertise that can inform their rulemakings.
Not all rules issued by CFTC or SEC required international coordination under Title VII  of the Dodd-Frank Act. Some of the rules were not related to swaps. For other rules, the  agency issuing the rule determined that international coordination was not necessary. For  example, officials stated or the rules explained that the agencies did not engage in  coordination with foreign regulators because their rules were consistent with rules  promulgated by foreign regulators, recommendations issued by international entities, or  international standards. communication and promote consistency in OTC derivatives reforms.  CFTC and SEC also have developed supervisory cooperation  arrangements or memoranda of understanding (MOU) with foreign  authorities in major jurisdictions where regulated entities are located.
According to CFTC staff, these coordination efforts may inform CFTC’s  rulemaking.
In our November 2011 report, we recommended that FSOC work with the  federal financial regulators to establish formal coordination policies for  rulemaking that clarify issues, such as when coordination should occur,  the process that will be used to solicit and address comments, and what  role FSOC should play in facilitating coordination. While FSOC has a coordination framework, we found at that time that the framework did not  provide, nor according to FSOC staff was it intended to provide, any  specifics about staff responsibilities or processes to facilitate coordination.  To date, FSOC has not implemented this recommendation. According to  FSOC staff, the agency has written protocols for coordinating on rules for  which coordination is required under the Dodd-Frank Act. For these and  other Dodd-Frank rules, FSOC’s Deputies Committee, composed of  senior representatives of its members, and six functional committees,  provide a forum in which agencies can coordinate or consult with each  other. The Deputies Committee meets every two weeks to discuss  FSOC’s agenda and coordinate and oversee the work of the six functional  committees. However, as we previously reported, a number of industry  representatives believe FSOC could play a greater role in coordinating  member agencies’ rulemaking efforts. We further noted that the FSOC  chairperson, in consultation with the other FSOC members, is required to  regularly consult with the financial regulatory entities and other  appropriate organizations of foreign governments or international  organizations on matters relating to systemic risk to the international  financial system. At a March 2013 congressional hearing, an FSOC  official testified that Congress did not provide FSOC or its chairperson  with authority to require its member agencies to coordinate in all cases,  nor did the Dodd-Frank Act change the statutory independence of  FSOC’s member agencies. He noted that FSOC, nevertheless, will  continue to seek to identify ways to further enhance collaboration through  FSOC’s committees and working groups. We continue to maintain that  FSOC, working together with member agencies, should develop formal  coordination policies, which could lead to improved coordination of  rulemakings.
section_title: CFPB Has a Framework to Coordinate with Prudential Regulators and Is Establishing One with State Regulators
paragraphs: Under the Dodd-Frank Act, CFPB is authorized to supervise insured  depository institutions and credit unions with more than $10 billion in  assets (large banks) and their affiliates, and nonbank financial service  providers (nonbanks). The statutory requirements for CFPB supervision  of large banks and nonbanks largely are the same and include (1)  examining such entities to assess, among other things, their compliance  with federal consumer financial laws, (2) coordinating with other federal  and state regulators, and (3) using, where possible, publicly available  information and existing reports from federal or state regulators pertaining  to supervised entities. CFPB launched its large bank and nonbank  supervision programs in July 2011 and January 2012, respectively. CFPB  has established a framework to comply with Dodd-Frank’s requirements  to coordinate supervision with prudential regulators and is establishing a  similar framework to comply with the act’s coordination requirements with  state regulators.
While CFPB oversees large banks—that is, insured depository institutions  and credit unions with more than $10 billion in assets—and their affiliates  for compliance with federal consumer financial laws, prudential regulators  also oversee the same entities for safety and soundness purposes and  compliance with other laws and regulations. CFPB began operating its  large bank supervision program in July 2011 and examining banks shortly  thereafter. As of March 31, 2013, CFPB supervised 112 large banks and  37 affiliated banks.banks, and FDIC, the Federal Reserve, and NCUA are the prudential  regulators for 26, 21, and 4 of the other large banks, respectively.
OCC is the prudential regulator for 61 of the large  The Dodd-Frank Act requires CFPB and prudential regulators to  coordinate their supervision of large banks and their affiliates to minimize  regulatory burden. Specifically, CFPB and prudential regulators must (1)  coordinate the scheduling of examinations of large banks and their  affiliates; (2) conduct simultaneous examinations of large banks and their  affiliates, unless otherwise requested by the institution; (3) share draft  reports of such examinations with each other and provide the other  regulator with at least 30 days to comment on the draft report before  finalizing it; and (4) take into consideration any concerns raised by the   Additionally,  other regulator before issuing the final examination report. the act states that CFPB shall, to the fullest extent possible, use existing  reports of supervised entities that have been provided to a federal or state  regulator and information that has been reported publicly, and coordinate  requirements regarding reports to be submitted by supervised entities.
To meet the statutory requirements for coordination, CFPB has  developed a framework to coordinate its supervisory activities with the  prudential regulators. The framework consists primarily of (1) an MOU  between CFPB and the prudential regulators and (2) CFPB’s examination  tools, which may be used to help ensure the required coordination is  conducted, documented, and reviewed.
CFPB, Memorandum of Understanding on Supervisory Coordination, accessed on  November 13, 2013,  http://www.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf. information that the CFPB and the prudential regulators agree to  share.
According to officials from CFPB and prudential regulators, the MOU  serves as a roadmap to guide supervisory coordination, but its  implementation is a work in progress. Included in the MOU is a provision  under which the agencies agree to review the MOU’s operation after the  first year of its execution and to consider revisions needed to better  accomplish the MOU’s objectives. Officials told us that the review  currently is underway and may become an annual undertaking.
Examination Coordination Tools. CBPB’s Supervision and Examination  Manual informs examiners about coordination requirements throughout  the four phases of CFPB’s examination cycle. For the monitoring phase,  where examiners maintain reasonably current information about a bank’s  activities and risks to consumers or markets, the manual instructs  examiners to review supervisory and public information about the bank,  including prudential and state regulators’ examination reports, and to  contact the bank’s prudential regulator to discuss any new issues raised  by the information. For the pre-examination planning phase, where the  examiner-in-charge collects information necessary to determine the  examination’s scope, resource needs, and work plan, the manual directs  the examiner-in-charge to review and update the monitoring information  and request other relevant information from prudential and state  regulators. In this phase, the examiner-in-charge prepares an information  request for the supervised entity with a tailored list of information to be  provided to examiners at the examination. In preparing this list, the  manual directs examiners to coordinate the request with prudential and  state regulators and keep them abreast of monitoring efforts,  correspondence with the supervised entity, and schedule planning. For  the examination phase, the manual instructs examiners to communicate  regularly with the bank’s prudential regulator. Lastly, in closing an  examination, the manual instructs the examiner-in-charge to share the  examination draft report with the prudential regulator, provide it with no  less than 30 days for review and comment, and consider any concerns  before issuing a final examination report.
CFPB also has created electronic forms that examiners use to facilitate  and document their compliance with the coordination requirements. For  example, in the monitoring phase, examiners must complete or update a  form to document information about CFPB’s coordination with the  prudential or state regulators, including examination schedules. For the  planning stage, CFPB has created an information request form that  includes standardized text to inform the supervised entity that it generally  need not provide documents to CFPB that it has provided to prudential  regulators. According to CFPB officials, examiners also are instructed to  provide the prudential regulator a copy of the information request. In  closing the examination, CFPB has a form for preparing the examination  letter sent to the supervised entity summarizing the examination findings.  The form includes a field for carbon copying the letter to the prudential or  state regulator.
The electronic storage of examination workpapers in CFPB’s Supervision  and Examination System facilitates supervisory review for compliance  with, among other things, coordination requirements. All examination  workpapers and related documentation (including reports and other  information collected from prudential regulators) must be maintained in  electronic form and uploaded to the system. As such, the system  includes records of examination schedules, dates on which examination  report drafts were sent to prudential regulators, and comments received  from the prudential regulators. Examiners-in-charge and, in turn,  management, are required to review and sign off on the adequacy of the  workpapers. Such reviews provide a mechanism to help ensure that  CFPB is complying with its statutory coordination requirements as  delineated in the MOU. In addition, CFPB’s manual notes that  examination workpapers will be reviewed through an internal quality  control process.
Although CFPB has developed these tools to help coordinate  examinations with prudential regulators, some members of Congress  have raised concerns about CFPB’s information collection activities or  practices and the potential for overlap between CFPB’s information  collection efforts and other regulators’ efforts. We have ongoing work  examining these and related issues for several members of Congress.
State-chartered banks are subject to the supervision of their state banking  regulators. Thus, certain large banks and their affiliates may be  supervised by CFPB, a prudential regulator, and a state regulator. In  addition, CFPB may share supervisory jurisdiction over certain nonbank  entities in the mortgage origination and servicing, private education loan,  payday loan, consumer reporting, and debt collection markets with state  regulators overseeing these markets.mortgage lenders, brokers, and servicers and payday lenders in the first   CFPB started examining  half of 2012. Since that time, it has also begun examining nonbanks in the  consumer reporting and debt collection markets.
The Dodd-Frank Act requires CFPB and state regulators to coordinate  their supervision of large banks and nonbanks to minimize regulatory  burden. The act states that CFPB shall coordinate supervisory activities,  including examinations and requirements regarding information requests,  with state regulators. As mentioned earlier, the act also states that  CFPB shall, to the fullest extent possible, use existing reports of  supervised entities that have been provided to federal or state regulators  and information that has been reported publicly. In supervising  nonbanks, CFPB must consult with state regulators on requirements or  systems, including coordinated or combined systems for registration,  where appropriate.
CSBS is the nationwide organization of banking regulators from all 50 states, the District  of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. Besides the MOU, on  December 6, 2012, CFPB also issued a Statement of Intent for Sharing Information with  state banking and financial services regulators that spells out specific items that CFPB  intends to share with state regulators, including examination schedules, examination  reports, consumer complaint information, among others. framework for coordinating supervisory activities. In May 2013, CFPB  and CSBS, on behalf of the state regulators, agreed on a supervisory  coordination framework. As part of the framework, CFPB and CSBS  agreed to establish a State Coordinating Committee that would be in  charge of coordinating with CFPB on nonbank supervision.officials told us that CFPB and state regulators are implementing the  framework but much work remains.
CFPB has not yet undertaken rulemakings to require nonbanks to register  and, thus, has not formally begun efforts to coordinate registration  systems with state regulators. According to its website, the Nationwide  Mortgage Licensing System, owned and maintained by the State  Regulatory Registry, LLC, a wholly-owned subsidiary of CSBS, is the sole  system for licensing mortgage companies for 54 state agencies and the  sole system for licensing mortgage loan originators for 58 state and  territorial agencies. In February 2012, CSBS stated that it intends to expand the system to other markets and, in April 2012, announced that  five state banking agencies were expanding their use of the system to  license and supervise nonbanks beyond the mortgage industry. CFPB  officials told us that the agency has not yet determined when it will issue  rulemakings on registration of nonbanks. They said they have engaged in  discussions with CSBS to determine whether and how CFPB should  leverage that system for registering nonbanks but no determinations have  been made.
section_title: Impacts of the Dodd- Frank Act Are Uncertain, and Regulators Are Developing Plans to Review Rules Retrospectively
paragraphs: Federal financial regulators are continuing to implement reforms pursuant  to the Dodd-Frank Act, but the full impact of the act remains uncertain.  This uncertainty stems from a number of factors. In particular, the  implementation of the reforms is being driven largely by rulemakings or  other regulatory actions, but not all rules are finalized and effective. In  addition, even when the act’s reforms are fully implemented, it will take  time for the financial services industry to comply with the array of new  regulations—meaning additional time will need to elapse to measure the  impact of the rules. Moreover, the evolving nature of implementation  makes isolating the Dodd-Frank Act’s effect on the U.S. financial  marketplace difficult. This task is confounded by the many factors that  can affect the financial marketplace, including factors that could have an  even greater impact than the act.
Recognizing these limitations and difficulties, we developed a  multipronged approach to analyze current data and trends that might be  indicative of some of the Dodd-Frank Act’s initial impacts, as institutions  react to issued and expected rules. First, we updated the indicators that  we developed in our December 2012 report to monitor changes in certain  characteristics of SIFIs, which are subject to enhanced prudential  standards and oversight under the act. Although the indicators may be  suggestive of the act’s impact, they do not identify causal links between  their changes and the act. Further, many other factors can affect SIFIs  and, thus, the indicators. Second, we also updated our difference-in- difference analysis to infer the act’s impact on the provision of credit by  and the safety and soundness of bank SIFIs. The analysis is subject to  limitations, in part because factors other than the act could be affecting  these entities. Third, we developed indicators to monitor the extent to  which certain of the Dodd-Frank Act’s swap reforms are consistent with  the act’s goals of reducing risk. Like our SIFI indicators, our swap  indicators have limitations. For example, they do not identify causal links  between changes in swap markets and the act or its regulations. Finally,  we assessed agencies’ plans to conduct retrospective reviews of their  existing rules.
subsections: section_title: Indicators Suggest Increased Resilience and Size of Large SIFIs between the Third Quarter of 2010 and the Second Quarter of 2013
paragraphs: According to its legislative history, the Dodd-Frank Act contains  provisions intended to reduce the risk of failure of a large, complex  financial institution and the damage that such a failure could do to the  economy. Such provisions include (1) authorizing FSOC to designate a  nonbank financial company for Federal Reserve supervision if FSOC  determines it could pose a threat to U.S. financial stability and (2)  directing the Federal Reserve to impose enhanced prudential standards  and oversight on bank holding companies with $50 billion or more in total  consolidated assets (referred to as bank SIFIs in this report) and nonbank  financial companies designated by FSOC (referred to as nonbank SIFIs in  this report). Federal agencies and regulators have been working to  implement these provisions. For example, in January and December  2012, the Federal Reserve proposed its enhanced prudential standards  rules for certain U.S. and foreign companies operating in the United  States, respectively, and has finalized rules implementing some of these  standards.companies in July 2013 and a third in September 2013. (See app. V for a  summary of SIFI-related provisions and their rulemaking status.)
In addition, FSOC designated two nonbank financial  As we reported last year, the Dodd-Frank Act and its implementing rules  may result in adjustments to SIFIs’ size, interconnectedness, complexity,  leverage, or liquidity over time. We developed indicators to monitor  changes in some of these SIFI characteristics. The size and complexity  indicators reflect the potential for a single company’s financial distress to  affect the financial system and economy. The leverage and liquidity  indicators reflect a SIFI’s resilience to shocks or its vulnerability to  financial distress. Like we did in our last report, we continue to focus our  analysis on bank SIFIs, given that FSOC only recently designated three  nonbank financial companies for Federal Reserve supervision. Our  indicators have limitations. For example, the indicators do not identify  causal links between changes in SIFI characteristics and the act. Rather,  the indicators track changes in the size, complexity, leverage, and  liquidity of SIFIs over the period since the Dodd-Frank Act was passed to  examine whether the changes are consistent with the goals of the act.  However, other factors—including the economic downturn, international  banking standards agreed upon by the Basel Committee on Banking  Supervision (Basel Committee), European debt crisis, and monetary  policy actions—also affect bank holding companies and, thus, the  indicators.Act on SIFIs. Furthermore, because a number of rules implementing SIFI- related provisions have not yet been finalized, our indicators include the  effects of these rules only insofar as SIFIs have changed their behavior in  response to issued rules and in anticipation of expected rules. In this  regard, our indicators provide baselines against which to compare future  trends.
These factors may have a greater effect than the Dodd-Frank  Table 2 summarizes the changes in our bank SIFI indicators from the  third quarter of 2010 through the second quarter of 2013 and allows for  the following observations. (See app. VI for more details on our  indicators.)
First, the total number of bank SIFIs declined by three, including one  large bank SIFI, over the period.share (measured in assets) for large bank SIFIs increased over the  period. Even with one less large bank SIFI by mid-2013, the increase  in the size of large bank SIFIs is consistent with an increase in the  spillover effect posed by such SIFIs—that is, the potential for such a  company’s financial distress to affect the financial system and  economy. In contrast, median assets and median market share  declined for other bank SIFIs over the period; these trends are  consistent with a decrease in the spillover effects of those bank SIFIs.
Median assets and median market
Second, our complexity indicator suggests that large U.S. bank SIFIs  in the second quarter of 2013 continue to be relatively more complex  than other U.S. bank SIFIs, but they generally decreased their total  number of legal entities over the period. In addition, four 2013 large  bank SIFIs decreased their number or percentage of foreign legal  entities, while the number of countries where their foreign legal  entities operated decreased or remained stable over the period. In  contrast, two 2013 large bank SIFIs increased both their number and  percentage of foreign legal entities, and for one of them the number of  countries where its foreign entities operated increased by 50 percent.  Because of the mixed trends, the change in the spillover effects is  unclear.
Third, our indicators suggest that bank SIFIs, on average, have  decreased their leverage from the third quarter of 2010 to the second  quarter of 2013, although one of our measures shows that leverage  for bank SIFIs did not change substantially from mid-2012 to mid- 2013. Similarly, our liquidity indicators show that bank SIFIs improved  their liquidity over the period, although one of our measures shows  that large bank SIFIs’ liquidity deteriorated from mid-2012 to mid- 2013. Despite these recent trends, the changes in our leverage and  liquidity indicators from the third quarter of 2010 through the second  quarter of 2013 are consistent with an improvement in SIFIs’  resilience to shocks or vulnerability to financial distress.
According to our updated regression analysis, the Dodd-Frank Act has  not been associated with a change in the cost of credit provided by U.S.  bank SIFIs, but has been associated with an increase in the safety and  soundness of the SIFIs. As we have noted, the Dodd-Frank Act requires  the Federal Reserve to impose a variety of regulatory reforms on SIFIs,  including enhanced risk-based capital, leverage, and liquidity  requirements. These reforms may affect the safety and soundness of  bank SIFIs and the cost and availability of credit provided by bank SIFIs.  Although capital and leverage requirements may help reduce the  probability of bank failures and promote financial stability, they could  cause banks to raise lending rates and limit their ability to provide credit,  especially during a crisis. Similarly, while stricter liquidity requirements  may help reduce the probability of bank failures and promote financial  stability, banks could respond to these requirements by increasing  lending spreads to offset lower yields on assets or longer maturities on  liabilities. To the extent that they increase the cost and reduce the  availability of credit, these reforms may lead to reduced output and  economic growth.
Our econometric analysis assesses the initial impact of the Dodd-Frank  Act’s new requirements for bank SIFIs on (1) the cost of credit they  provide and (2) their safety and soundness. Our analysis leverages the  Dodd-Frank Act’s requirement that bank holding companies with total  consolidated assets of $50 billion or more are subject to enhanced  regulation by the Federal Reserve but other bank holding companies are  not. Specifically, we compare funding costs, capital adequacy, asset  quality, earnings, and liquidity for bank SIFIs and non-SIFI bank holding  companies before and after the enactment of the Dodd-Frank enhanced  prudential requirements. All else being equal, the difference in the  comparative differences is the inferred effect of the Dodd-Frank Act’s  prudential requirements on bank SIFIs.
Our approach allows us to partially differentiate changes in funding costs,  capital adequacy, asset quality, earnings, and liquidity associated with the  Dodd-Frank Act from changes due to other factors. However, several  factors make isolating and measuring the impact of the Dodd-Frank Act’s  new requirements for SIFIs challenging. The effects of the act cannot be  differentiated from the effects of simultaneous changes in economic  conditions, such as the pace of the recovery from the recent recession, or  regulations, such as those stemming from Basel III, or other changes,  such as in credit ratings that differentially may affect bank SIFIs and other  bank holding companies. In addition, many of the new requirements for  SIFIs have yet to be implemented. For example, the Federal Reserve is  required to implement enhanced prudential standards, including capital  requirements, stress testing, liquidity requirements, single-counterparty  credit limits, an early remediation regime, and risk-management and  resolution planning. Only rules for resolution planning and stress testing  have been finalized. Additionally, the Federal Reserve has proposed to  implement a quantitative liquidity requirement for bank holding  companies, savings and loan holding companies, and depository  institutions with more than $250 billion in total assets and has indicated  that it plans to impose a capital surcharge on the largest SIFIs.  Nevertheless, our estimates are suggestive of the initial effects of the  Dodd-Frank Act on bank SIFIs and provide a baseline against which to  compare future trends.
Our estimates suggest that the Dodd-Frank Act has not been associated  with a significant change in U.S. bank SIFIs’ funding costs (table 3). To  the extent that the cost of credit provided by bank SIFIs is a function of  their funding costs, the new requirements for SIFIs likely have had little  effect on the cost of credit to date.
Our estimates also suggest that the Dodd-Frank Act is associated with  improvements in most measures of U.S. bank SIFIs’ safety and  soundness. As shown in table 3, bank SIFIs appear to be holding more  capital than they otherwise would have held in every quarter since the  Dodd-Frank Act was enacted. The quality of assets on the balance sheets  of bank SIFIs also seems to have improved since the Dodd-Frank Act  was enacted. The act is associated with higher earnings for bank SIFIs in  the time period after the act’s enactment. It is also associated with  improved liquidity as measured by the extent to which a bank holding  company is using stable sources of funding. The only measure that has  not clearly improved since the act’s enactment is liquidity as measured by  the capacity of a bank holding company’s liquid assets to cover its volatile  liabilities. Thus, the Dodd-Frank Act appears to be broadly associated  with improvements in most indicators of safety and soundness for U.S.  bank SIFIs. (See app. VII for more details on our regression analysis.)
section_title: Swaps Indicators Provide Baselines for Assessing the Future Impact of Some Swap Reforms
paragraphs: In general, swaps are types of derivative contracts that involve ongoing  exchanges of one or more assets, liabilities, or payments for a specified  period. For example, swaps can be used to exchange fixed-rate interest  payments for floating interest payments based on market rates (one type  of interest rate swap), or to protect against the default of a bond issuer  (one type of credit default swap). Financial and nonfinancial firms use  swaps and other derivatives to hedge risk, to speculate, or for other  purposes. Unlike futures, which are standardized financial contracts that  are traded on exchanges, swaps traditionally have been privately  negotiated between two counterparties in the over-the-counter (OTC)  market. Swaps include interest rate swaps, commodity-based swaps,  equity swaps, and credit default swaps.
In varying degrees and ways, swaps and other OTC derivatives played a  role in the most recent financial crisis. As FSOC reported, credit default  swaps (CDS), including AIG’s large holdings of such swaps, exacerbated  the crisis because they were not well understood by regulators or market  participants. FSOC also noted that OTC derivatives generally were a  factor in the propagation of risks during the recent crisis because of their  complexity and opacity, which contributed to excessive risk taking, a lack  of clarity about the ultimate distribution of risks, and a loss in market  confidence. In that regard, the crisis illustrated that swaps and other OTC  derivatives can contribute to systemic risk in at least two ways. First,  while swaps can be used to manage risk and increase liquidity, swaps  generally have not been subject to regulatory requirements for margin  (i.e., collateral based on the market value of the swap). This allowed  some swap participants to take large speculative positions using a  relatively small amount of capital, thereby increasing leverage. Second,  swaps increased the interconnectedness of the financial system by  exposing many banks, financial entities, and end-users to the credit risk  of a small number of swap dealers. The concentration of most OTC  derivatives trading among a small number of dealers created the risk that  the failure of one of these dealers could expose counterparties to sudden  losses and destabilize financial markets.
Title VII of the Dodd-Frank Act establishes a new regulatory framework  for swaps. The act authorizes CFTC to regulate “swaps” and SEC to  regulate “security-based swaps” with the goals of reducing risk,  increasing transparency, and promoting market integrity in the financial  system. Title VII includes the following four major swaps reforms.
Registration and regulation. The title provides for the registration  and regulation of swap dealers and major swap participants, including  subjecting them to (1) prudential regulatory requirements, such as  minimum capital and minimum initial and variation margin  requirements and (2) business conduct requirements to address,  among other things, interaction with counterparties, disclosure, and  supervision.
Mandatory clearing. The title imposes mandatory clearing  requirements on swaps, but exempts, among others, certain end  users that use swaps to hedge or mitigate commercial risk.
Exchange trading. The title requires swaps subject to mandatory  clearing to be executed on an organized exchange or swap execution  facility, unless no facility offers the swap for trading.
Mandatory reporting. The title requires all swaps to be reported to a  registered swap data repository or, if no such repository will accept  the swap, to CFTC or SEC, and subjects swaps to post-trade  transparency requirements (real-time public reporting of certain swap  data).
Figure 1 illustrates these reforms and some of the differences between  swaps traded on exchanges and cleared through clearinghouses and  swaps traded in the OTC market.
According to the Dodd-Frank Act’s legislative history, key elements for  reducing systemic risk include increasing the use of central  clearinghouses and appropriate margining and capital for OTC  derivatives. CFTC and SEC have issued final rules to implement many  of the regulatory frameworks for clearing standardized swaps. In  December 2012, CFTC issued a final rule establishing the first clearing  requirement for four types of interest rate swaps and two types of CDSs.  In July 2012, SEC issued a final rule on, among other things, the process  that the agency will use to determine whether a security-based swap is  required to be cleared but has not yet subjected any security-based  swaps to the clearing requirement. CFTC, SEC, and the prudential  banking regulators have proposed rules to implement Dodd-Frank’s  margin and capital requirements for swap entities, but as of September  2013, these rules have not yet been finalized.listing select Dodd-Frank swap reform related rulemakings.)   (See app. VIII for tables  Once fully implemented, some provisions in Title VII of the act may help  achieve the goal of reducing risk, in part by increasing the central clearing  of swaps and posting of margin for uncleared swaps. We developed two  sets of indicators to measure changes in (1) the central clearing of swaps  and (2) the use of margin collateral for OTC derivatives. In this report,  these indicators provide a baseline for measuring future changes in the  central clearing of swaps and use of margin collateral, as the Dodd-Frank  swap reforms have not been fully implemented. In future reports, we plan  to update these indicators to determine whether changes in central  clearing and the use of margin collateral are consistent with the act’s  swap reforms. Importantly, these indicators have several key limitations.  First, changes in our indicators do not necessarily suggest a change in  risk, because the intended outcomes of the swap reforms may not  necessarily reduce systemic risk. For instance, experts, including those  from the IMF, have noted that an increase in central clearing of swaps  may not, by itself, reduce risk and may increase risk. Second, our  indicators do not identify causal links between changes in swap market  and the Dodd-Frank Act, including its regulations. Rather, the indicators  begin to track changes in central clearing and collateralization in the  swaps since the Dodd-Frank Act’s passage to examine whether the  changes are consistent with the act’s swap reform goals for central  clearing and collateralization.
Federal financial regulators have reported that mandatory clearing  through clearinghouses for certain swaps can reduce risk and provide  other benefits. As noted by CFTC, central clearing mitigates counterparty  risk to the extent that the clearinghouse is a more creditworthy  counterparty relative to the original swap participants.have a variety of tools to monitor and manage counterparty risk, which  include the contractual right to collect initial and variation margin  associated with swap positions; issue margin calls whenever the margin  in a customer’s account has dropped below predetermined levels; and  close out the swap positions of a customer that does not meet margin  calls within a specified period. Further, to the extent that swap positions  move from facing multiple counterparties in the OTC derivatives market to  being run through a smaller number of clearinghouses, clearing may  facilitate increased netting, which reduces operational risk and may  reduce the amount of collateral that a counterparty must post or pay in  terms of initial and variation margin. Although centralized clearing could  remove a large portion of the interconnectedness of current OTC markets  that leads to systemic risk, CFTC and others have noted that central  clearing, by its nature, concentrates risk in a handful of entities.
We developed two complementary clearing indicators. Our first indicator  measures the gross notional amount of swaps that are required to be  cleared and are being cleared as a percentage of the gross notional  amount of swaps required to be cleared.  This indicator shows the progress being made by market participants in complying with any  mandatory clearing requirement. All else being equal, an increase in  this indicator would be consistent with the act’s swaps reforms. However,  an increase in compliance with mandatory clearing requirements may not  increase central clearing overall if market participants substitute away  from swaps that are required to be cleared in favor of swaps that are not  required to be cleared. To assess the extent to which market  participants are substituting away from swaps that are required to clear,  we complement our first indicator with a second indicator that measures  the gross notional amount of swaps that are required to be cleared (but  are not necessarily cleared) as a percentage of the total gross notional  amount of the swaps market. This indicator shows the share of the swap  market comprised by swaps identified for mandatory clearing and helps  determine the extent to which changes in the first indicator represent   For example, an increase in the  increases in central clearing overall.first indicator—the percentage of swaps that are required to be cleared  that are cleared—would indicate an increase in central clearing overall if  the second indicator—the percentage of all swaps that are required to  clear—does not decrease at the same time. In contrast, if the first  indicator increases while the second decreases, then some of the  increase in the first indicator likely is due to substitution away from swaps  that are required to be cleared in favor of swaps that are not required to  be cleared, which is not consistent with the act’s swaps reforms.
Our indicators cover only the interest rate swaps and CDS markets,  because only certain of these types of swaps are currently subject to  CFTC’s mandatory clearing requirement. These are the two largest swaps markets. Based on CFTC’s Swaps Report, the total gross notional  amounts outstanding of the interest rate swap and CDS markets were  about $419 trillion and $20 trillion, respectively, as of August 30, 2013.
The indicators are developed using data in the proposed version of  CFTC’s Swaps Report, which are estimates from a variety of sources that  voluntarily submit the data. CFTC’s final version of its Swaps Report  will use data collected in response to Dodd-Frank provisions, and CFTC  staff stated that the agency was working to implement this transition.
Figure 2 shows the trends of our clearing indicators for interest rate  swaps from January 2013 through August 2013. Our first indicator shows  that market participants are making progress in meeting the clearing  requirement: The percentage of swaps required to be cleared and that  were cleared increased from around 53 percent to around 57 percent  (based on gross notional amounts). Currently, not all interest rate swaps  that are required to be cleared are being cleared, in part because CFTC  is phasing in the requirement by staggering the compliance dates for  different types of market participants and also because some nonfinancial  entities that use swaps to hedge or mitigate commercial risk are exempt  from the clearing requirement. The second indicator shows that interest  rate swaps that are required to be cleared made up about 88 percent of  the market (based on gross notional amount), and generally did not  decrease during the period. This indicates that the increase in the first  indicator represents an increase in central clearing that is consistent with  the act’s swaps reforms.
Figure 3 shows the trends of our two clearing indicators for CDSs from  January 2013 through August 2013. Our first indicator shows that, based  on gross notional amount, about 27 percent of swaps required to be  cleared were cleared at the end of the period, compared to about 24  percent at the beginning of the period. The second indictor shows that,  based on gross notional amount, CDSs required to be cleared accounted  for about 35 percent of the market at the end of the period, compared to  about 30 percent at the beginning of the period. This trend in the  percentage of all CDSs that are required to clear is not consistent with  market participants substituting away from CDSs that are required to  clear in favor of CDSs that are not required to clear. It follows that the  increase in the percentage of required-to-clear CDSs that cleared over  the period generally is consistent with the act’s swaps reforms.
We developed a second set of indicators to measure changes in the  collection of margin collateral for OTC derivatives. The first margin  indicator measures the fair value of collateral pledged by all  counterparties to secure OTC derivatives contracts as a percentage of  net current credit exposure to those counterparties for bank, financial, and  savings and loan holding companies that reported positive credit  exposure. The second set of margin indicators measures collateral  pledged by different types of counterparties—banks and securities firms,  monoline financial guarantors, hedge funds, sovereign governments, and  corporations and all other counterparties—as a percentage of credit  exposure to different types of counterparties. The net current credit  exposure approximates the credit loss that a bank, financial, or savings  and loan holding company would suffer if its counterparties defaulted on  their OTC derivatives contracts.swap entity can require its counterparties to post margin collateral in an  amount equal to or greater than the exposure of the contracts. An  increase in these indicators would suggest that holding companies are  requiring their counterparties to post a greater amount of collateral  against their credit exposure due to derivatives contracts overall, which  would be consistent with the purposes of the act’s swap reforms.
To protect itself from such a loss, a  Although CFTC, SEC, and the prudential regulators have not finalized  their margin rules for uncleared swaps, figures 4 and 5 show the trends in  our margin indicators from the second quarter of 2009 through the fourth  quarter of 2012. Figure 4 shows that holding companies in our sample  have increased the rate of collateralization of their net current credit  exposure from OTC derivatives from 62 percent to 82 percent over the  period, suggesting that these holding companies are requiring their  counterparties to post a greater amount of collateral against their  derivatives contracts. However, as discussed later, aggregate measures  of collateralization rates can mask differences in collateralization rates for  different counterparty types.
Figure 5 shows that the rate of collateralization of net current credit  exposure from OTC derivatives has consistently differed by the type of  counterparty, with hedge funds posting the most collateral as a  percentage of credit exposure and sovereign governments typically  posting the least. According to OCC, the rates differ, in part, because  swap dealers may require certain counterparties, such as hedge funds, to  post both initial and variation margin and other counterparties, such as  banks and securities firms, to post only variation margin. Depending on  how the margin rules are finalized, the rates of collateralization for some  counterparties may increase.
Our margin indicators are subject to important limitations. First, both net  current credit exposure and the fair value of collateral are as of a point in  time because the fair values of derivatives contracts and collateral can  fluctuate over time. Second, an average collateralization of 100 percent  does not ensure that all current counterparty exposures have been  eliminated, because one counterparty’s credit exposures may be  overcollateralized but another counterparty’s credit exposure may be  undercollateralized. Third, our indicators measure the fair value of the  collateral held against net current credit exposures but do not necessarily  measure the risk of uncollateralized losses. The fair value of net current  credit exposure does not fully account for the riskiness of any single swap  contract, so it is possible for the rate of collateralization to increase while  the risk of uncollateralized losses also has increased, if a party has  entered into riskier swaps. Fourth, there are over 1,000 holding  companies in our sample, but less than 100 holding companies report  positive credit exposure to counterparties in OTC derivatives contracts  and five holding companies account for over 95 percent of the total gross  notional amount of all derivatives contracts reported by all of the holding  companies in our sample. Thus, trends in these indicators largely reflect  collateralization rates for a small number of holding companies. Finally,  these indicators do not reflect collateralization rates for companies, such  as standalone broker-dealers, that have credit exposure to counterparties  in OTC derivatives contracts but are not affiliated with a bank, financial, or  savings and loan holding company.
section_title: Regulators Vary in Their Approaches and Progress in Developing Retrospective Review Plans
paragraphs: Federal financial regulators vary in their approaches and progress in  developing and implementing plans to conduct retrospective reviews of  their existing Dodd-Frank and other rules in recognition of Executive  Order 13,579 (E.O. 13,579). Issued in July 2011, E.O. 13,579 seeks to  facilitate the periodic review of existing significant regulations by asking  independent regulatory agencies to consider how best to promote  retrospective analysis of rules that may be outmoded, ineffective,  insufficient, or excessively burdensome. Retrospective reviews  complement the prospective analysis that agencies conduct as part of  their rulemaking (discussed above) and can provide insights on how  regulations actually are working. E.O 13,579 represents the first time the  President has issued an executive order to ask independent regulatory  agencies to produce retrospective review plans for public scrutiny. But  independent regulators, such as the federal financial regulators, are not  required to follow this order.
Most federal financial regulators told us that they were not developing  retrospective review plans specifically in response to E.O. 13,579. As a  matter of policy or to satisfy statutory obligations, federal financial  regulators generally had been conducting retrospective reviews before  the issuance of E.O. 13,579. In that regard, the prudential regulators told  us that they generally view their retrospective rule reviews conducted in  accordance with statute or policy to be consistent with the order’s  principles and objectives. For example, prudential regulators noted that  the Economic Growth and Regulatory Paperwork Reduction Act of 1996  (EGRPRA) requires them to review their regulations at least once every  10 years and identify and eliminate any regulatory requirements that are  outdated, unnecessary, or unduly burdensome. The regulators  reported on the results of their last EGRPRA review in July 2007, which  was done over a 3-year period. During the review, the regulators  undertook various efforts to reduce regulatory burden on their supervised  institutions, including by streamlining supervisory processes. They also  identified four areas to explore further for opportunities to revise  regulations: suspicious activity reports, lending limits, the Basel II capital  framework, and consumer disclosures. The next EGRPRA review must  be completed by 2016. Three prudential regulators told us that they are  actively planning for the review. According to one prudential regulator,  CFPB, the Federal Reserve, FDIC, NCUA, and OCC, are working in a  collaborative fashion under the auspices of the Federal Financial  Institutions Examination Council to develop a program to conduct a  comprehensive review of the regulations under EGRPGRA. In addition,  some prudential regulators have conducted periodic, retrospective  reviews of their existing rules as a matter of policy or practice. For  example, NCUA has a policy of reviewing one-third of its rules on an  annual basis, and the Federal Reserve has a policy of reviewing each of  its rules at least once every 5 years. FDIC is undertaking a review of its  regulations to eliminate and reduce unnecessary regulatory burden in  light of the regulations it incorporated when it took on supervision of state- charted thrifts upon the dissolution of the Office of Thrift Supervision. In  addition, according to FDIC staff, the agency recently revised its policies,  in part, to reaffirm its commitment to periodically undertake a review of  each FDIC regulation and policy statement. Lastly, as part of its effort to  integrate the Office of Thrift Supervision into its agency, OCC has been  undertaking a comprehensive review of its and the Office of Thrift  Supervision’s regulations to eliminate duplication and reduce  unnecessary regulatory burden.
According to CFPB officials, the agency is not developing a retrospective  review plan in response to E.O. 13,579 but, instead, is focusing on  fulfilling its retrospective review requirements under section 1022 of the  Dodd-Frank Act. Under the act, CFPB is required to assess  retrospectively each significant rule or order adopted by CFPB under  federal consumer financial law to address, among other things, the rule or  order’s effectiveness in meeting the act’s purposes and goals. CFPB is  required to publish a report of its assessment no later than 5 years after  the rule or order’s effective date, and is required to solicit public comment  to inform its assessment. The officials said that they are in the initial stage  of developing a review plan, which includes identifying what data will be  needed and how such data can be collected, but have not yet drafted a  plan. According to the officials, after the section 1022 reviews are  completed and based on any lessons learned, CFPB may develop a plan  pursuant to E.O. 13,579 to review its existing rules on a recurring basis.  In a related effort, CFPB requested public comment in December 2011 on  streamlining regulations it inherited from other federal agencies. As a  result of the comments received, CFPB has identified several priority  areas for regulatory action.
Only CFTC and SEC voluntarily developed retrospective review plans in  response to the executive order. In a June 2011 request for information,  CFTC outlined a two-phase plan to conduct periodic, retrospective  reviews of its existing regulations. Under the first phase, CFTC has examined and revised a number of its existing regulations as part of its  implementation of the Dodd-Frank Act. Under the second phase, CFTC  plans to conduct retrospective reviews of the remainder of its regulations  after substantial completion of its Dodd-Frank rulemakings. CFTC has  provided OMB with periodic status reports on its retrospective review plan  and reported in July 2013 that it still is in phase one. In a September 2011  request for information, SEC requested public comments to assist it in  developing a retrospective review plan as part of its ongoing efforts to  update its regulations and in light of E.O. 13,579. At the same time,  SEC noted that it has formal and informal processes for reviewing  existing rules to assess their continued utility and effectiveness.
According to SEC staff, they have reviewed public comments received in  response to the release and worked on a draft plan, but the agency has  not yet approved or issued a final plan.
M-11-28 (July 22, 2011). categorize regulations by type and seek public comment on them.  According to FDIC staff, prudential regulators currently are discussing  how best to obtain public input for the EGRPRA process. Each year,  NCUA invites the public to comment on the rules proposed for review  that year. Also, CFPB is required to solicit public comment to inform  its statutorily required retrospective reviews.
Prioritization. Per OMB’s guidance, the plan should specify factors  that the agency will consider and the process that the agency will use  in setting priorities and selecting rules for review. To the extent  feasible, the plan should also include an initial list of candidate rules  for review over the next two years, with clear timelines and deadlines.  Regulators generally have not specified the factors that they will use  to prioritize and select rules for review but have indicated that they  plan to do so. CFTC and SEC asked for public comments on the  factors they should use to prioritize and select rules for review. In its  plan, CFTC noted that its Regulatory Review Group, consisting of  senior staff, will recommend to the CFTC Commission a list of  candidate rules for review, in part based on public comments. Under  the EGRPRA review, the prudential regulators are required to  categorize regulations by type and seek public comment on them to  identify regulatory areas that are outdated, unnecessary, or unduly  burdensome. According to FDIC staff, prudential regulators are  developing a plan to efficiently and effectively complete the EGRPRA  review process. Lastly, CFPB’s review under the Dodd-Frank Act  must cover all of its significant rules, and NCUA’s review covers one- third of the agency’s rules annually.
Analysis of costs and benefits. Per OMB’s guidance, agencies may  find it useful to engage in a retrospective analysis of the costs and  benefits (both quantitative and qualitative) of regulations chosen for  review. The guidance suggests that the plan may address the metrics  that the agency will use to evaluate regulations after they have been  implemented, and the steps the agency has taken to ensure that it  has high-quality data and robust models with which to conduct  retrospective analyses. Regulators generally have not yet specified  the metrics they will use to evaluate regulations or steps to be taken  to ensure that they have high-quality data with which to conduct their  retrospective analysis. SEC asked for public comments on, among  other things, how it can obtain and consider data and analyses to  assess the benefits of its rules. Likewise, CFPB officials told us that  they are exploring what data they may collect to analyze their rules.
Structure and staffing. Per OMB’s guidance, responsibility for  retrospective review should be vested with a high-level agency official  who can secure cooperation across the agency. The plan should also  consider how best to maintain sufficient independence from the  offices responsible for writing and implementing regulations. Finally,  the plan should identify possible actions to strengthen internal review  expertise, if necessary. Regulators generally expect their office of  general counsel or other nonrulemaking group to be responsible for  overseeing implementation of their plans. For example, SEC has  indicated that its Division of Economic and Risk Analysis will conduct  the retrospective evaluations, and CFTC plans to form a group of  senior staff that will implement its retrospective review plan. CFPB  officials told us that the agency’s research group likely will oversee the  reviews. NCUA’s Office of General Counsel conducts the agency’s  retrospective reviews.
Coordination with other forms of retrospective analysis and  review. Per OMB’s guidance, many independent agencies already  are engaged in retrospective analysis and review under existing  requirements and authorities. The guidance states that it is  appropriate to use existing processes and information as significant  inputs into plans. As discussed, prudential regulators are using their  existing retrospective reviews in lieu of developing specific  retrospective review plans in response to E.O. 13,579.
Revisiting their retrospective analyses of their Dodd-Frank regulations  after the regulations are implemented will allow regulators to determine  whether regulations are achieving their intended purpose without creating  unintended consequences that negatively impact the markets. Such  reviews can also signal whether changes should be made to the existing  rules to better achieve their intended purposes. In our prior work, we  identified procedures and practices that could be particularly helpful in  improving the effectiveness of retrospective reviews. In particular, we  noted that agencies would be better prepared to undertake reviews if they  had identified the needed data before beginning a review and, even  better, before promulgating the rule. If agencies fail to plan for how they  will measure the performance of their rules and how they will obtain the  data they need to do so, they may be limited in their ability to accurately  measure the progress or true effect of the regulations. In that regard, we  recommended in our prior report that the federal financial regulators  develop plans that determine how they will measure the impact of Dodd- Frank regulations—for example, determining how and when to collect,  analyze, and report needed data. To date, regulators have not  implemented our recommendation. We maintain that doing so would  position them to make their future retrospective reviews as robust as  possible.
section_title: Conclusions
paragraphs: Federal financial regulators have considerable work under way to  implement the Dodd-Frank Act reforms that could improve the U.S.  financial system in many ways. However, much work remains to  implement the reforms. For example, many rulemakings are yet to be  finalized. Moreover, completing the rulemaking process does not mean  that reforms are fully implemented. Rather, it will take time—beyond the  time spent on finalizing the rulemakings—for regulators and industry to  adopt the reforms contained in the rulemakings, and even longer to  determine the actual effect of the reforms.
To date, OMB, in consultation with federal agencies, has classified 36 of  the Dodd-Frank rules as major under CRA and, thus, expects them to  have a large effect on the economy. As provided by CRA, these rules  could not take effect until the later of 60 days after Congress receives the  rule report, or 60 days after the rule is published in the Federal Register,  as long as Congress does not pass a joint resolution of disapproval. OMB  provided guidance on implementing CRA in 1999, but such guidance  does not establish standardized processes for submitting rules to OMB  for its review or applying CRA’s criteria. In the absence of such guidance,  we found that federal financial regulators may have used different  processes for submitting their rules and analyses to OMB, and for  applying CRA criteria. These inconsistent processes could lead to the  inconsistent classification of some rules. To the extent that any major  rules are not being classified as such, those rules would not be subject to  the 60-day congressional notice required under CRA before major rules  become effective.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that OMB, in consultation with federal financial regulators,  consistently classifies Dodd-Frank rules as major under CRA, we  recommend that the Director of OMB, through the Administrator of the  Office of Information and Regulatory Affairs, issue additional guidance to  help standardize processes for identifying major rules under CRA,  including on (1) the extent to which agencies should submit rules to OMB  for review, such as whether agencies should submit only those rules their  analyses indicate are major or all rules, and (2) how agencies should  apply CRA’s major rule criteria in their analyses, such as whether  agencies should include indirect benefits or costs, combine benefits or  costs of separate but related rules, or aggregate benefits or costs for  jointly issued rules.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFPB, CFTC, FDIC, the Federal  Reserve Board, FSOC, NCUA, OMB, OCC, SEC, and Treasury for review  and comment. CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC,  OMB, OCC, SEC, and Treasury provided technical comments, which we  have incorporated, as appropriate. Treasury (on behalf of FSOC) and  NCUA provided written comments that we have reprinted in appendixes  IX and X, respectively. In its comment letter, Treasury noted that FSOC  has taken a variety of actions to facilitate coordination and consultation  among financial regulators, such as through its deputies and functional  committees, and continually seeks ways to further enhance collaboration.  We describe these actions in the draft report. In its letter, NCUA agreed  with our findings, conclusions, and recommendation.
OMB staff provided comments on a draft of our report via e-mail through  their GAO liaison on November 25, 2013. In those comments, OMB  disagreed with our findings and recommendation concerning OMB’s  application of the major rule criteria under CRA. Specifically, OMB  disagreed with our findings that OMB inconsistently applied CRA criteria  in its designation of major rules and stated that the examples in our draft  report are not actual inconsistencies in the application of the CRA criteria.  In addition, OMB noted that two of our examples reflected a challenge  faced by OMB in determining whether a rule is major. Specifically,  agencies often do not have the data needed to conduct a precise analysis  of a rule’s economic impact but, nevertheless, will recommend that a rule  be designated as major if their analysis strongly suggests that the rule  may be major. OMB said that in these circumstances, it generally will rely  on an agency’s expert judgment and concur with its recommendation.  Furthermore, OMB said that even if some rule determinations under CRA  were inconsistent, such outcomes may not result in any real-world  consequence. For example, a rule incorrectly determined to be non-major  under CRA could have an effective date less than 60 days after the rule’s  submission to Congress, but only if the agency did not plan to set the  rule's effective date 60 or more days after the rule’s submission. Finally,  given these concerns, OMB questioned what new guidance to agencies  would entail. Therefore, OMB suggested eliminating the recommendation  from the draft report.
We maintain that the findings and recommendation on the major rule  designation process are appropriate. First, we did not seek to determine  whether any of the individual rules we reviewed were misclassified under  CRA. Instead, our analysis identified examples in which federal agencies  used different processes (1) for submitting their rules and supporting  analyses to OMB and (2) in applying the CRA major rule criteria, which  we concluded could lead to inconsistent classifications of similar rules  under CRA. Indeed, determining whether any of the rules we reviewed  actually were misclassified is not possible without clear guidance on  whether agencies, for example, may consider a rule's indirect  consequences, combine similar rules, or add a rule's benefits and costs in  developing their designation recommendation. Our recommendation  serves to address this gap in guidance and help ensure more  standardized processes. We clarified a heading in the draft report to  reflect our focus on the processes used by OMB and federal financial  regulators.
Second, we agree that federal financial regulators face challenges in  quantifying the benefits and costs of their rules and have highlighted such  challenges in our prior reports. However, again, our findings and  recommendation focus on inconsistencies in the processes used by OMB  and federal financial regulators to designate major rules under CRA—not  on the analyses conducted by the regulators.
Third, CRA gives Congress 60 days to review a major rule before the rule  can become effective, during which time Congress can issue a joint  resolution disapproving the rule. While OMB notes that there might not be  a real-world consequence if a rule is misclassified as non-major, this  outcome relies on the issuing agency setting an effective date for the rule  of at least 60 days after a rule’s submission to Congress. Moreover, such  a misclassification could infringe upon Congress’s ability to reject the rule.  Additionally, under CRA, GAO is required to provide Congress with a  report on each major rule that contains GAO’s assessment of each  issuing agency’s compliance with the procedural steps required by  various acts and executive orders, including preparation of a cost-benefit  analysis. In its mandated annual reports to Congress discussing the  benefits and costs of federal regulations, OMB has stated that it uses  GAO major rule reports as the sole source of information for analyzing  major rules issued by independent regulatory agencies.misclassification of a major rule as non-major would mean that  information on that rule would not be highlighted to Congress and the  public in a GAO report and would, in turn, not be considered in OMB’s  annual reports to Congress on the benefits and costs of federal  regulations.
Finally, although OMB issued guidance to federal agencies in 1999 on  implementing CRA, the guidance did not clearly articulate the processes  agencies should use to (1) submit their rules and analysis to OMB or (2)  apply the CRA major rule criteria. In the absence of such guidance, we  found that federal financial regulators varied in the processes they used  to submit rules and analysis to OMB and their application of CRA criteria.  For example, as we discuss in the report, SEC and CFPB staff told us  that they did not know whether they were permitted to add costs and  benefits or combine rules, respectively, in assessing whether a rule was  major. In that regard, we maintain that additional guidance on the  processes we identified would enhance the ability of OMB and federal  financial regulators to fulfill their responsibilities under CRA.
We are sending copies of this report to CFPB, CFTC, FDIC, the Federal  Reserve Board, FSOC, NCUA, OMB, OCC, SEC, Treasury, interested  congressional committees and members, and others. This report will also  be available at no charge on our website at http://www.gao.gov.
Should you or your staff have questions concerning this report, please  contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix XI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines rulemaking under the Dodd-Frank Wall Street  Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). More  specifically, we examined (1) the regulatory analysis conducted by federal  agencies in their Dodd-Frank rulemakings, including their assessments of  which rules they considered to be major rules under the Congressional  Review Act (CRA); (2) interagency coordination by the agencies in their  Dodd-Frank rulemakings and by the Consumer Financial Protection  Bureau (CFPB) with other agencies in connection to its supervision of  large banks and certain nonbank financial service providers; and (3)  possible impact of selected Dodd-Frank provisions and their  implementing regulations and agency plans to assess such regulations  retrospectively.
To examine the regulatory analyses and coordination conducted by the  regulators, we focused our analysis on final rules issued pursuant to the  Dodd-Frank Act that became effective from July 24, 2012, through July  22, 2013, a total of 70 rules (see app. II). To identify these rules, we used  a website maintained by the Federal Reserve Bank of St. Louis that  tracks Dodd-Frank regulations. from the agencies under review.
In this report, we use the terms “rules,” “regulations,” or “rulemakings” generally to refer  to Federal Register notices of agency action pursuant to the Dodd-Frank Act, including  regulations, interpretive rules, general statements of policy, guidance, and rules that deal  with agency organization, procedure, or practice. Combined with our past two reports, we  have reviewed all Dodd-Frank Act rules in effect as of July 22, 2013. See GAO, Dodd- Frank Act Regulations: Implementation Could Benefit from Additional Analyses and  Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011), and Dodd-Frank Act  Regulations: Agencies’ Efforts to Analyze and Coordinate Their Rules, GAO-13-101  (Washington, D.C.: Dec. 18, 2012). under the Administrative Procedure Act—and required the agencies to  conduct some form of regulatory analysis. For each of the 59 rules, we  reviewed final rule Federal Register releases to document and summarize  the analyses conducted by the regulators under review. Using GAO’s  Federal Rules database we found that 10 of the 59 rules were classified  by the Office of Management and Budget (OMB), in consultation with the  rulemaking agencies, as major rules under CRA (that is, have resulted in  or are likely to result in an annual impact on the economy of $100 million  or more, a major increase in costs or prices, or significant adverse effects  on competition, employment, investment, productivity, innovation, or on  the ability of U.S.-based enterprises to compete with foreign-based  enterprises in domestic and export markets). For agencies subject to  Executive Order 12,866 (E.O. 12,866), such major rules would be  considered significant regulatory actions and subject to formal benefit- cost analysis. We developed a data collection instrument to compare  and assess the regulatory analysis conducted for the 10 major rules  against the principles outlined in OMB Circular A-4, which provides  guidance to federal agencies on the development of regulatory analysis.  To conduct our analyses, we reviewed Federal Register releases of the  proposed and final rules. To examine how OMB, in consultation with  federal agencies, classifies rules as major, we reviewed CRA, GAO  reports, and other material. Rather than limiting our scope to major rules  effective from July 24, 2012, through July 22, 2013, we reviewed and  analyzed all final Dodd-Frank rules classified as major as of July 22,  2013. To identify such major rules, we relied on GAO’s Federal Rules  database. We identified 36 major rules issued pursuant to the Dodd- Frank Act (which includes the 10 major rules mentioned above) and  corroborated our list with federal agencies under review. To examine the  basis for classifying the rules as major, we reviewed the impact analyses  prepared by the agencies and provided to OMB, if available; GAO reports  on major rules; and Federal Register releases on the rules. We also  interviewed officials from OMB and federal agencies about the processes  used to classify major rules.
To examine interagency coordination among the regulators, we reviewed  the Dodd-Frank Act, Federal Register releases, and GAO reports to  identify the interagency coordination or consultation requirements for the  70 Dodd-Frank rules within our scope. We also interviewed officials or  staff from the Commodity Futures Trading Commission (CFTC), CFPB,  and the Securities and Exchange Commission (SEC) to identify which  rules were subject to interagency coordination requirements under Titles  VII and X of the act. We found evidence of coordination between the  rulemaking agency and other regulators for 49 of the 70 regulations that  we reviewed. We reviewed the Federal Register releases of the proposed  and final rules and interviewed agency officials to document whether the  agencies coordinated or consulted with other U.S., foreign, or  international regulators, as required by the Dodd-Frank Act or on a  voluntary basis. To examine steps taken by CFPB to comply with the  act’s interagency coordination and information-sharing requirements for  its supervision activities, we reviewed the act; CFPB’s Supervision and  Examination Manual, memorandums of understanding with federal and  state regulators on interagency coordination, and other agency  documents; and GAO reports. We also interviewed officials from CFPB  and federal prudential regulators about their coordination with each other  and coordination challenges.
Finally, we took a multipronged approach to analyze what is known about  the impact of the Dodd-Frank Act on the financial marketplace. First, we  used bank holding company data from the Federal Reserve Bank of  Chicago (from FR Y-9C), Bureau of Economic Analysis, and Federal  Reserve Board’s National Information Center, to update our indicators  monitoring changes in certain characteristics of systemically important  financial institutions (SIFI) that might be affected by Dodd-Frank  regulations.impact of the act on SIFIs, the indicators have a number of limitations,  including that they do not identify any causal linkages between the act  and changes in the indicators. Moreover, factors other than the act affect  SIFIs and, thus, the indicators. Second, we used the Federal Reserve  Bank of Chicago data to update our economic analysis estimating  changes in the (1) cost of credit provided by bank SIFIs and (2) safety  and soundness of bank SIFIs. Our analysis does not differentiate the  effects of the act from simultaneous changes in economic conditions or  other factors that may affect such companies. Third, the Dodd-Frank Act  requires CFTC, SEC, and the prudential regulators to implement new  reforms for swaps and security-based swaps to reduce risk, increase  transparency, and improve market integrity. For example, the act provides  for the registration of swap dealers, including subjecting them to minimum  margin requirements, and authorizes CFTC and SEC to impose  mandatory clearing requirements on swaps. We developed margin and  clearing indicators that may reflect the act’s impact on these activities  using bank holding company data from the Federal Reserve Bank of  Chicago (from FR Y-9C) and CFTC’s Swaps Report, respectively. As new  data become available, we expect to update and, as warranted, revise  our indicators and create additional indicators to cover other provisions.  Although changes in our indicators may be suggestive of the act’s impact  on the swaps market, the indicators have a number of limitations,  including that they do not identify causal linkages between the act and  changes in the indicators. Fourth, to assess agency plans to conduct  retrospective reviews of their existing rules, we reviewed executive  orders, including E.O. 13,579 that asks independent regulatory agencies  to prepare retrospective review plans; OMB guidance; Federal Register  releases, policies, and other agency documents pertaining to  retrospective reviews; and GAO reports. Finally, we interviewed federal  financial regulators about their plans to conduct retrospective reviews of  their Dodd-Frank rules. For parts of our methodology that involved the   Although changes in the indicators may be suggestive of the  analysis of computer-processed data, we assessed the reliability of these  data and determined that they were sufficiently reliable for our purposes.
We conducted this performance audit from January 2013 to December  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Dodd-Frank Rules Effective as of July 22, 2013
paragraphs: The following table lists the Dodd-Frank rules that we identified as  effective during the scope period for this review—July 24, 2012, through  July 22, 2013.
The following table lists the Dodd-Frank rules that we identified as final  and effective during the scope period for our November 2012 review— July 22, 2011, through July 23, 2012.
The following table lists the Dodd-Frank rules that we identified as final  and effective during the scope period for our November 2011 review— July 21, 2010, through July 21, 2011.
section_title: Appendix III: Dodd-Frank Rules Classified as Major, Final as of July 22, 2013
paragraphs: The following table lists the Dodd-Frank rules that have been designated  as major by OMB and are final as of July 22, 2013.
section_title: Appendix IV: Interagency Coordination for Dodd-Frank Rules Effective on July 24, 2012, through July 22, 2013
paragraphs: The following table lists Dodd-Frank rules effective from July 24, 2012  through July 22, 2013 where the issuing regulator(s) coordinated with at  least one other federal or foreign regulator during the rulemaking process.
section_title: Appendix V: Summary of Rulemakings Related to Selected Dodd-Frank Provisions Applicable to Systemically Important Financial Institutions
paragraphs: The Dodd-Frank Act contains several provisions that apply to nonbank  financial companies designated by the Financial Stability Oversight  Council for Federal Reserve supervision and enhanced prudential  standards (nonbank SIFI) and bank holding companies with $50 billion or  more in total consolidated assets (bank SIFI). Table 9 summarizes some  of those provisions and the rulemakings, including their status, to  implement those provisions.
section_title: Appendix VI: Trends in GAO Indicators for Bank SIFIs
paragraphs: As we reported last year, some Dodd-Frank Act provisions and related  rules may result in adjustments to the size, interconnectedness,  complexity, leverage, or liquidity of systemically important financial  institutions (SIFI) over time. We developed indicators to monitor changes  in some of these SIFI characteristics. The size and complexity indicators  reflect the potential for a single company’s financial distress to affect the  financial system and economy. The leverage and liquidity indicators  reflect a SIFI’s resilience to shocks or its vulnerability to financial distress.  Like we did in our last report, we continue to focus our analysis on bank  SIFIs, given that FSOC only recently designated three nonbank financial  firms for Federal Reserve supervision. Our indicators have limitations.  For example, the indicators do not identify causal links between changes  in SIFI characteristics and the act. Rather, the indicators track changes in  the size, complexity, leverage, and liquidity of SIFIs over the period since  the Dodd-Frank Act was passed to examine whether the changes are  consistent with the act. However, other factors—including the economic  downturn, international banking standards agreed upon by the Basel  Committee on Banking Supervision (Basel Committee), European debt  crisis, and monetary policy actions—also affect bank holding companies  and, thus, the indicators. These factors may have a greater effect than  the Dodd-Frank Act on SIFIs. As discussed, some rules implementing  SIFI-related provisions have not yet been finalized. Thus, trends in our  indicators include the effects of these rules only insofar as SIFIs have  changed their behavior in response to issued rules and in anticipation of  expected rules. In this sense, our indicators provide baselines against  which to compare future trends.
subsections: section_title: SIFI Size
paragraphs: We developed three indicators of size. The first indicator tracks the  number of U.S. bank SIFIs. The second indicator measures a SIFI’s size  based on the total assets on its balance sheet. The third indicator  measures the extent to which industry assets are concentrated among  the individual SIFIs, reflecting a SIFI’s size relative to the size of the  industry. A limitation of these indicators is that they do not include an  institution’s off-balance sheet activities and thus may understate the  amount of financial services or intermediation an institution provides.  Furthermore, asset size alone is not an accurate determinant of systemic  risk, as an institution’s systemic risk significance also depends on other  factors, such as its complexity and interconnectedness.
As shown in figure 6, there were 33 bank SIFIs (i.e., bank holding  companies with $50 billion or more in total consolidated assets) in the  second quarter of 2013. The figure also shows that six of the bank SIFIs  had more than $500 billion in total consolidated assets (referred to as  large bank SIFIs in this report) and were considerably larger than the  other bank SIFIs.
Our indicators show that the number and size of U.S. bank SIFIs declined  from the third quarter of 2010 through the second quarter of 2013, and  several SIFIs continue to dominate and have increased their dominance  of the market.
Table 10 shows that the total number of U.S. bank SIFIs decreased  by three over the period: (1) the number of large bank SIFIs  decreased by one and (2) the number of other bank SIFIs decreased  by two. In our November 2012 report, we noted that there were seven  large SIFIs as of the second quarter of 2012. Six of them continue to  be large bank SIFIs as of the third quarter of 2013. In February 2013,  the remaining one received regulatory approval to deregister as a  bank holding company.
Table 10 also shows that the median assets for U.S. bank SIFIs  declined by about $21.5 billion (about 12 percent) over the period.  However, median assets for large bank SIFIs increased from $1,278.1  billion to $1,662.3 billion, or by $384.2 (about 30 percent), in part  because one of the large bank SIFIs deregistered as a bank holding  company in 2013. Median assets for the other bank SIFIs decreased  from $139.8 billion to $118.8 billion, or by $21 billion (about 15  percent).
Figure 7 shows that the median market share for large bank SIFIs  increased from 7.4 percent to 10.3 percent (or by about 40 percent) of  the industry’s assets from the third quarter of 2010 through the  second quarter of 2013. In contrast, the median market share for the  other bank SIFIs declined from 0.8 percent to 0.7 percent (or by about  9 percent) over the same period.
Our indicators of complexity are the number of legal entities of bank  SIFIs, the percentage of foreign legal entities of large SIFIs, and the  number of countries where they are located. An institution’s operational  complexity may reflect an institution’s diverse lines of business and  locations in which the institution operates, which are reflected partly  through its various legal structures. Consequently, a SIFI with a large  number of legal entities—particularly foreign ones operating in different  countries under different regulatory regimes—may be more difficult to  resolve than a SIFI with fewer legal entities in fewer countries. One  limitation of our indicator is that it does not provide information on the  relative complexity of SIFIs resulting directly from their various lines of  business. Additionally, changes in the operational complexity of a SIFI  may be reflected in our indicators only insofar as they result in a change  in the number of legal entities.
The complexity indicators continue to show that most large bank SIFIs  have a relatively large number of legal entities compared with other U.S.  bank SIFIs and that they operate in various countries. They also show  that some of the large bank SIFIs may be becoming less but others more  complex:
Figure 8 shows that the six large bank SIFIs in the second quarter of  2013 continue to have more than 2,300 legal entities, with two of them  having more than 7,000 and 10,000, respectively. Five of the large  SIFIs had fewer legal entities at the end of the second quarter of 2013  than they had at the end of the second quarter of 2010. The median  number of legal entities for the large bank SIFIs decreased from 4,991  to 3,682 from the second quarters 2010 to the second quarter of  2013. The median for the remaining 27 bank SIFIs also declined from  108 to 107 over the same period. Within this group, 21 of the 27 bank  holding companies had less than 200 legal entities over the period.
Table 11 shows that five of the six large U.S. bank SIFIs in the second  quarter of 2013 continue to have a high number or percentage of  foreign legal entities, and some may be becoming less complex but  others more complex based on these indicators. Four large bank  SIFIs decreased their number or percentage of legal entities located  outside of the United States from the second quarter of 2010 to the  second quarter of 2013. Additionally, for these large SIFIs, the  number of countries where their foreign legal entities operate  decreased or remained stable over the period. In contrast, two large  bank SIFIs increased both their number and percentage of legal  entities located outside of the United States over the period, and for  one of them the number of countries where its foreign entities  operated increased by 50 percent.
Although there are many ways to measure leverage, we use two  measures: (1) tangible common equity as a percentage of total assets,  and (2) tangible common equity as a percentage of risk-weighted assets.  The two indicators differ, in part because total risk-weighted assets reflect  some of an institution’s off-balance sheet activity but total assets do not.
We focus on tangible common equity, because it most closely  approximates the amount of capital available to absorb losses in asset  values in the short term. A limitation of both indicators is that they may not  fully reflect an institution’s exposure to risk. Total assets do not reflect an  institution’s risk exposure from off-balance sheet activities and generally  treat all assets as equally risky. The calculation of risk-weighted assets is  designed to reflect differences in risk, but the weights assigned to the  assets may not fully reflect the risk exposure associated with those  assets, for example, because assets in broad categories of loans all  receive the same risk weight.
Our indicators suggest that large and other bank SIFIs have decreased  their leverage since the third quarter of 2010, but have slightly decreased  or not changed their leverage levels over the past year.
Figure 9 shows that median tangible common equity as a percentage  of total assets generally continued its upward trend for large and other  bank SIFIs from the third quarter of 2010 through the second quarter  of 2013. For large bank SIFIs, the indicator increased from 6.3  percent to 6.8 percent (or by about 8 percent). For the other bank  SIFIs, the indicator increased from 6.8 percent to 8.2 percent (or by  about 21 percent).
Figure 10 shows that median tangible common equity as a  percentage of risk-weighted assets, which include off-balance sheet  activity, increased from the third quarter of 2010 through the second  quarter of 2013 but fluctuated over the period. For large bank SIFIs,  the indicator increased from 10.8 percent to 11.8 percent (or by about  9 percent) over the period. For the other SIFIs, the indicator increased  from 9.4 percent to 10.3 percent (or by about 10 percent) over the  period. This measure of leverage did not change much for either  group of SIFIs from mid-2012 to mid-2013.
We developed two indicators to analyze changes in SIFI liquidity: (1)  short-term liabilities as a percentage of total liabilities and (2) liquid assets  as a percentage of short-term liabilities. Short-term liabilities are balance  sheet obligations due within 1 year; an institution’s short-term liabilities as  a percentage of total liabilities are a measure of its need for liquidity.  Liquid assets can easily be sold without affecting their price and, thus,  can be easily converted to cash to cover debts that come due.  Accordingly, liquid assets as a percentage of an institution’s short-term  liabilities are a measure of access to liquidity. For example, if this  percentage is under 100 percent, the institution does not have sufficient  access to liquidity and is unlikely to have enough liquid assets to cover its  short-term debt. A limitation of both of these indicators is that they do not  include off-balance sheet liabilities, such as callable derivatives or  potential derivatives-related obligations. The second indicator also does  not include off-balance sheet liquid assets, such as short-term income  from derivative contracts.
Our indicators show that U.S. bank SIFIs have improved their liquidity  from the third quarter of 2010 through the second quarter of 2013,  although one of our measures shows that large bank SIFIs’ liquidity  deteriorated from mid-2012 to mid-2013. The figures also show that large  bank SIFIs held relatively more short-term liabilities and liquid assets to  cover such liabilities than other bank SIFIs.
Figure 11 shows that median short-term liabilities as a percentage of  total liabilities for large bank SIFIs decreased from 55.1 percent to  52.0 percent (or by about 6 percent) over the period, but it increased  from mid-2012 to mid-2013, reversing a downward trend. For the  other bank SIFIs, the indicator continued its downward trend over the  period—declining from 25.4 percent to 20.8 percent (or by about 18  percent).
Figure 12 shows that median short-term (or liquid) assets as a  percentage of short-term liabilities generally continued its upward  trend for both large and other SIFIs from the third quarter of 2010  through the second quarter of 2013. Specifically, the indicator  increased from 100.7 percent to 136.5 percent (or by 35 percent) for  large bank SIFIs and from 79.0 percent to 104.9 percent (or by 33  percent) for other bank SIFIs.
section_title: Appendix VII: Econometric Analyses of the Impact of Enhanced Regulation and Oversight on SIFIs
subsections: section_title: Methodology
paragraphs: We conducted an econometric analysis to assess the impact of the Dodd- Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they  provide and (2) their safety and soundness. Our multivariate econometric  model uses a difference-in-difference design that exploits the fact that the  Dodd-Frank Act subjects bank holding companies with total consolidated  assets of $50 billion or more to enhanced regulation by the Federal  Reserve but not others, so we can view bank holding companies with  total consolidated assets of $50 billion or more (bank SIFIs) as the  treatment group and other bank holding companies as the control group.  We compared the changes in the characteristics of U.S. bank SIFIs over  time to changes in the characteristics of other U.S. bank holding  companies over time. All else being equal, the difference in the  differences is the initial impact of new requirements for bank SIFIs  primarily tied to enhanced regulation and oversight under the Federal  Reserve.
Our general regression specification is the following:  ybq = α + β + γSIFIbq + X’bqΦ + εbq  where b denotes the bank holding company, q denotes the quarter, ybq is  the dependent variable, α is a bank holding company-specific intercept,  β is a quarter-specific intercept, SIFIbq is an indicator variable that equals  1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is  a list of other independent variables, and εbq is an error term. We  estimated the parameters of the model using quarterly data on top-tier  bank holding companies that filed form FR Y-9C for the period from the  first quarter of 2006 to the second quarter of 2012.
The parameter of interest is γ, the coefficient on the SIFI indicator, which  is equal to one for bank holding companies with consolidated assets of  $50 billion or more in the quarters starting with the treatment start date  and is equal to zero otherwise. The Dodd-Frank Act was enacted in July  2010, so the treatment start date is the third quarter of 2010. Thus, the  parameter γ measures the average difference in the difference in  dependent variable between bank SIFIs and other bank holding  companies after and before the Dodd-Frank Act was enacted.
We use different dependent variables (ybq) to estimate the initial impacts  of the new requirements for SIFIs on the cost of credit provided by bank  SIFIs and on various aspects of bank SIFIs’ safety and soundness,  including capital adequacy, asset quality, earnings, and liquidity.
Funding cost. A bank holding company’s funding cost is the cost of  deposits or liabilities that it then uses to make loans or otherwise  acquire assets. More specifically, a bank holding company’s funding  cost is the interest rate it pays when it borrows funds. All else being  equal, the greater a bank holding company’s funding cost, the greater  the interest rate it charges when it makes loans. We measure funding  cost as an institution’s interest expense as a percentage of interest- bearing liabilities.
Capital adequacy. Capital absorbs losses, promotes public  confidence, helps restrict excessive asset growth, and provides  protection to creditors. We use two alternative measures of capital  adequacy: tangible common equity as a percentage of total assets  and tangible common equity as a percentage of risk-weighted assets.
Asset quality. Asset quality reflects the quantity of existing and  potential credit risk associated with the institution’s loan and  investment portfolios and other assets, as well as off-balance sheet  transactions. Asset quality also reflects the ability of management to  identify and manage credit risk. We measure asset quality as  performing assets as a percentage of total assets, where performing  assets are equal to total assets less assets 90 days or more past due  and still accruing interest, assets in non-accrual status, and other real  estate owned.
Earnings. Earnings are the initial safeguard against the risks of  engaging in the banking business and represent the first line of  defense against capital depletion that can result from declining asset  values. We measure earnings as net income as a percentage of total  assets.
Liquidity. Liquidity represents the ability to fund assets and meet  obligations as they become due, and liquidity risk is the risk of not  being able to obtain funds at a reasonable price within a reasonable  time period to meet obligations as they become due. We use two  different variables to measure liquidity. The first variable is liquid  assets as a percentage of volatile liabilities. This variable is similar in  spirit to the liquidity coverage ratio introduced by the Basel Committee  on Banking Supervision and measures a bank holding company’s  capacity to meet its liquidity needs under a significantly severe  liquidity stress scenario. We measure liquid assets as the sum of cash  and balances due from depository institutions, securities (less pledged  securities), federal funds sold and reverse repurchases, and trading  assets. We measure volatile liabilities as the sum of federal funds  purchased and repurchase agreements, trading liabilities (less  derivatives with negative fair value), other borrowed funds, deposits  held in foreign offices, and large time deposits held in domestic  offices. Large time deposits are defined as time deposits greater than  $100,000 prior to March 2010 and as time deposits greater than  $250,000 in and after March 2010.
The second liquidity variable is stable liabilities as a percentage of  total liabilities. This variable measures the extent to which a bank  holding company relies on stable funding sources to finance its assets  and activities. This variable is related in spirit to the net stable funding  ratio introduced by the Basel Committee on Banking Supervision,  which measures the amount of stable funding based on the liquidity  characteristics of an institution’s assets and activities over a 1 year  horizon. We measure stable funding as total liabilities minus volatile  liabilities as described earlier.
Finally, we include a limited number of independent variables (Xbq) to  control for factors that may differentially affect SIFIs and non-SIFIs in the  quarters since the Dodd-Frank Act was enacted. We include these  variables to reduce the likelihood that our estimates of the impact of new  requirements for SIFIs are reflecting something other than the impact of  the Dodd-Frank Act’s new requirements for SIFIs.
Nontraditional income. Nontraditional income generally captures  income from capital market activities. Bank holding companies with  more nontraditional income are likely to have different business  models than those with more income from traditional banking  activities. Changes in capital markets in the period since the Dodd- Frank Act was enacted may have had a greater effect on bank holding  companies with more nontraditional income. If bank SIFIs typically  have more nontraditional income than other bank holding companies,  then changes in capital markets in the time since the Dodd-Frank Act  was enacted may have differentially affected the two groups. We  measure nontraditional income as the sum of trading revenue;  investment banking, advisory, brokerage, and underwriting fees and  commissions; venture capital revenue; insurance commissions and  fees; and interest income from trading assets less associated interest  expense, and we express nontraditional income as a percentage of  operating revenue.
Securitization income. Bank holding companies with more income  from securitization are likely to have different business models than  those with more income from traditional banking associated with an  originate-to-hold strategy for loans. Changes in the market for  securitized products in the period since the Dodd-Frank Act was  enacted may thus have had a greater effect on bank holding  companies with more securitization income. If bank SIFIs typically  have more securitization income than other bank holding companies,  then changes in the market for securitized products in the time since  the Dodd-Frank Act was enacted may have differentially affected the  two groups. We measure securitization income as the sum of net  servicing fees, net securitization income, and interest and dividend  income on mortgage-backed securities minus associated interest  expense, and we express securitization as a percentage of operating  revenue. Operating revenue is the sum of interest income and  noninterest income less interest expense and loan loss provisions.
Foreign exposure. Changes in other countries, such as the  sovereign debt crisis in Europe, may have a larger effect on bank  holding companies with more foreign exposure. If bank SIFIs typically  have more foreign exposure than other bank holding companies, then  changes in foreign markets may have differentially affected the two  groups. We measure foreign exposure as the sum of foreign debt  securities (held-to-maturity and available-for-sale), foreign bank loans,  commercial and industrial loans to non-U.S. addresses, and foreign  government loans. We express foreign exposure as a percentage of  total assets.
Size. We include size because bank SIFIs tend to be larger than other  bank holding companies, and market pressures or other forces not  otherwise accounted for may have differentially affected large and  small bank holding companies in the time since the Dodd-Frank Act  was enacted. We measure the size of a bank holding company as the  natural logarithm of its total assets.
CPP participation. We control for whether or not a bank holding  company participated in the Capital Purchase Program (CPP)  component of the Troubled Asset Relief Program (TARP) to  differentiate any impact that this program may have had from the  impact of the Dodd-Frank Act.
We also conducted several sets of robustness checks:
We restricted our sample to the set of institutions with assets that are  “close” to the $50 billion cutoff for enhanced prudential regulation for  bank SIFIs. Specifically, we analyzed two restricted samples of bank  holding companies: (1) bank holding companies with assets between  $25 billion and $75 billion and (2) bank holding companies with assets  between $1 billion and $100 billion.
We examined different treatment start dates. Specifically, we allowed  the Dodd-Frank Act’s new requirements for SIFIs to have an impact in  2009 quarter 3, 1 year prior to the passage of the act. We did so to  allow for the possibility that institutions began to react to the act’s  requirements in anticipation of the act being passed.
We analyzed alternative measures of capital adequacy, including  equity capital as a percentage of total assets and Tier 1 capital as a  percentage of risk-weighted assets.
We allowed the effect of the treatment to vary by quarter.
section_title: Data
paragraphs: We conducted our analysis using quarterly data on bank holding  companies that filed form FR Y-9C obtained from the Federal Reserve  Bank of Chicago for the period from the first quarter of 2006 to the second  quarter of 2013.
section_title: Results
paragraphs: Our econometric analysis assesses the initial impact of the Dodd-Frank  Act’s new requirements for bank SIFIs on (1) the cost of credit they  provide and (2) their safety and soundness. Our analysis leverages the  Dodd-Frank Act’s requirement that bank holding companies with total  consolidated assets of $50 billion or more are subject to enhanced  regulation by the Federal Reserve but other bank holding companies are  not by comparing funding costs, capital adequacy, asset quality, earnings,  and liquidity for bank SIFIs and non-SIFI bank holding companies before  and after the implementation of the enhanced prudential requirements. All  else being equal, the difference in the comparative differences is the  inferred effect of the Dodd-Frank Act on bank SIFIs. While some of the  SIFI-related rulemakings have yet to be finalized, our estimates are  suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and  provide a baseline against which to compare future results.
Our baseline estimates suggest that the Dodd-Frank Act has not been  associated with a significant change in U.S. bank SIFIs’ funding costs  (table 12). To the extent that the cost of credit provided by bank SIFIs is a  function of their funding costs, the new requirements for SIFIs are likely to  have had little effect on the cost of credit to date.
Our baseline estimates also suggest that the Dodd-Frank Act is  associated with improvements in most measures of U.S. bank SIFIs’  safety and soundness. Bank SIFIs appear to be holding more capital than  they otherwise would have held in every quarter since the Dodd-Frank  Act was enacted (see “Baseline” column in table 12). The quality of  assets on the balance sheets of bank SIFIs also seems to have improved  since the Dodd-Frank Act was enacted. The act is associated with higher  earnings for bank SIFIs in the time period after the act’s enactment. It is  also associated with improved liquidity as measured by the extent to  which a bank holding company is using stable sources of funding. The  only measure that has not clearly improved since the act’s enactment was  liquidity as measured by the capacity of a bank holding company’s liquid  assets to cover its volatile liabilities. Thus, the Dodd-Frank Act appears to  be broadly associated with improvements in most indicators of safety and  soundness for U.S. bank SIFIs (relative to non-SIFI bank holding  companies).
Our approach allows us to partially differentiate changes in funding costs,  capital adequacy, asset quality, earnings, and liquidity associated with the  Dodd-Frank Act from changes due to other factors. However, several  factors make isolating and measuring the impact of the Dodd-Frank Act’s  new requirements for SIFIs challenging. The effects of the act cannot be  differentiated from the effects of simultaneous changes in economic  conditions, such as the pace of the recovery from the recent recession, or  regulations, such as those stemming from Basel III, or other changes,  such as in credit ratings that differentially may affect bank SIFIs and other  bank holding companies. In addition, some of the new requirements for  SIFIs have yet to be implemented. Nevertheless, our estimates are  suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and  provide a baseline against which to compare future trends.
The results of our robustness checks are as follows:
Our results for funding costs are generally robust to restricting the set  of bank holding companies we analyze to those with assets of $25  billion-$75 billion, but our results for capital adequacy, asset quality,  earnings, and liquidity are not.
Our results are generally robust to restricting the set of bank holding  companies we analyze to those with assets of $1 billion-$100 billion.
Our results are generally robust to starting the treatment in the third  quarter of 2009, 1 year prior to the passage of the Dodd-Frank Act.  This finding is consistent with the idea that bank holding companies  began to change their behavior in anticipation of the act’s  requirements, perhaps as information about the content of the act  became available and the likelihood of its passage increased.  However, there may be other explanations, including anticipation of  Basel III requirements, reactions to stress tests, and market pressures  to improve capital adequacy and liquidity.
Our results for the impact on capital adequacy are generally similar  when we measure capital adequacy using Tier 1 capital as a  percentage of assets or risk-weighted assets but not when we  measure capital adequacy using equity capital as a percentage of  assets (see table 13).
Our results are generally robust to allowing the treatment effect to  vary by quarter (see table 14).
section_title: Appendix VIII: Dodd-Frank Rules Implementing Central Clearing, Capital, and Margin Swap Reforms
paragraphs: The following tables list select Dodd-Frank rules that implement sections  of Title VII related to central clearing requirements for swaps and security- based swaps, and margin and capital requirements for swaps entities, as  of November 15, 2013.
section_title: Appendix IX: Comments from the Financial Stability Oversight Council
section_title: Appendix X: Comments from the National Credit Union Administration
section_title: Appendix XI: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Richard Tsuhara (Assistant  Director), Silvia Arbelaez-Ellis, Timothy Bober, William R. Chatlos,  Jeremy Conley, Rachel DeMarcus, Courtney LaFountain, Thomas  McCool, Marc Molino, Patricia Moye, Barbara Roesmann, and Susan  Offutt made key contributions to this report.