International Financial Reforms: U.S. and Other Jurisdictions' Efforts to Develop and Implement Reforms
Published: 2014-04-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Cross-border interconnections in the financial markets and other factors helped spread disruptions during the 2007-2009 financial crisis and increased systemic risk. In response to the crisis, the G20 positioned itself as the main international forum for reforming financial regulations. In 2008, the G20 leaders committed to implement a broad range of reforms designed to strengthen financial markets and regulatory regimes.
In light of the G20's reform efforts and the potential implications of the reforms for the United States, GAO examined (1) the U.S. role in the international financial reform efforts and (2) the implementation status of recent international financial reforms in the United States relative to other countries and challenges that uneven implementation may present. To address these issues, GAO reviewed and analyzed reports or other documents issued by the G20, FSB, IMF, and other international bodies since 2008 and studies on the G20 reforms by academics, industry associations, and others. GAO reviewed the accuracy of U.S. responses to select questionnaires administered by FSB and asked other countries' national audit offices to do the same for their regulators' responses. Finally, GAO interviewed officials representing U.S. agencies, FSB Secretariat, IMF, industry associations, and academics.
GAO is not making any recommendations in this report.
section_title: What GAO Found
paragraphs: The United States has played an active role in helping to reform financial regulations to address weaknesses revealed by the 2007-2009 financial crisis. According to Treasury officials, during the acute phase of the crisis, the United States proposed elevating the Group of Twenty (G20) forum—representing 19 countries (including the United States) and the European Union—from the level of finance ministers and central banks to the level of heads of state or government. In 2008, the U.S. President and other G20 leaders held their first summit in Washington, D.C., in part to establish a framework to help prevent financial crises. The G20 leaders established principles for financial regulatory reform and agreed on a series of financial reforms, which they have revised or expanded at subsequent summits. To implement their reforms, the G20 leaders generally have called on their national authorities—finance ministries, central banks, and regulators—and international bodies, including the Financial Stability Board (FSB) and standard setting bodies, such as the Basel Committee on Banking Supervision. In 2009, the G20 leaders established FSB to coordinate and promote implementation of the financial reforms, which typically involves standard setting bodies developing international standards (e.g., principles, policies, or guidance) and then jurisdictions voluntarily adopting rules or policies consistent with these standards, such as through legislation or regulations. As members of FSB and international standard setting bodies, U.S. federal authorities have actively helped formulate the standards that implement the G20 reforms and cover, among other things, banking, derivatives, and hedge funds.
The United States and other jurisdictions have made progress implementing many of the G20 financial reform commitments, but most reforms have not been fully implemented by all jurisdictions. FSB and standard setting bodies collaboratively monitor and report on the implementation status of the G20 reforms. According to recent progress reports, the United States, like most FSB members, has implemented or is implementing G20 reforms that FSB designated as a priority based on their importance to global financial stability—including higher capital standards, derivatives reforms, compensation practices, policy measures for systemically important financial institutions, and regimes for resolving failing financial institutions. However, implementation varies among jurisdictions. For example, according to a September 2013 progress report, only the United States reported having rules at least partly in effect to implement the G20 reforms requiring derivatives to be centrally cleared, traded on organized trading platforms, and reported to trade repositories, while many other jurisdictions reported having rules in effect for only some of these reforms or adopted or proposed legislation to implement the reforms. To promote and monitor the adoption of the international standards by each jurisdiction, such as to ensure a level playing field, FSB, the International Monetary Fund (IMF), and the Basel Committee have established programs to review and assess their members' implementation of the standards. At the same time, legal, economic, and political factors can create implementation challenges for jurisdictions. For example, regulators in different jurisdictions may apply or interpret the standards differently. However, in some cases, inconsistent implementation of international financial standards could lead to certain activities migrating to less regulated jurisdictions (regulatory arbitrage) or adversely affect financial stability.

section_title: Letter
paragraphs: Cross-border interconnections in the financial markets and other factors  helped spread disruptions in the global financial system during the 2007- 2009 financial crisis and increased systemic risk at the national and  international levels. For example, the rise in the complexity and  globalization of over-the-counter (OTC) derivatives contributed to  economic growth but created interconnections that helped spread  disruptions quickly across markets and borders during the crisis. These  and other disruptions contributed to widespread losses in economic  output and wealth across the globe. In the United States, the 2007-2009  financial crisis was associated with large declines in economic output,  household wealth, and other economic indicators. In response to the  financial crisis, the United States and other countries undertook a variety  of initiatives to stabilize and reform their financial systems. For example,  in the United States, Congress passed the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act), which includes a  broad range of reforms intended to strengthen oversight of the financial  services sector.
At the international level, the U.S. President and leaders from other major  jurisdictions positioned the Group of Twenty (G20) as the main  international forum for reforming financial regulations. In 2008, the G20  leaders held their first summit in Washington, D.C., and collectively  committed to implement reforms designed to strengthen financial markets  and regulatory regimes to avoid future financial crises. In doing so, the  leaders acknowledged that regulation is first and foremost the  responsibility of national regulators. But they also noted that the financial  markets are global; thus, intensifying international cooperation,  strengthening international standards, and implementing such standards  consistently are necessary to help protect against adverse cross-border,  regional, and global developments affecting international financial  stability. Since 2008, the G20 leaders have met at least annually, in part  to monitor progress and refine and expand their financial reform agenda.  They generally have tasked their finance ministers and international  bodies with implementing the agenda. In particular, the G20 leaders  established the Financial Stability Board (FSB) as the successor to the  Financial Stability Forum and made FSB responsible for coordinating and  promoting the implementation of the G20 reform commitments.
We prepared this report under the authority of the Comptroller General to  conduct work on GAO’s initiative to assist Congress with its oversight  responsibilities. In light of the G20’s efforts to reform financial regulations  and the potential implications of such reforms for the United States, we  examined the
U.S. role in the international financial reform efforts, including the  development of international financial standards, and  implementation status of recent international financial reforms in the  United States relative to other jurisdictions and challenges that any  uneven progress may present.
To address our objectives, we reviewed and analyzed declarations,  surveys, and reports issued by the G20, FSB, International Monetary  Fund (IMF), and other international bodies since 2008. We also reviewed  and analyzed studies on the G20 reforms by academics, industry  associations, and others. We reviewed the accuracy of U.S. responses to  selected questionnaires administered by FSB or a standard-setting body  and asked other countries’ national audit offices to do the same for their  regulators’ responses. Finally, we interviewed officials representing U.S.  authorities—the Board of Governors of the Federal Reserve System  (Federal Reserve), Commodity Futures Trading Commission (CFTC),  Department of the Treasury (Treasury), Federal Deposit Insurance  Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and  Securities and Exchange Commission (SEC)—FSB Secretariat, IMF,  industry associations, and academics. Appendix I contains additional  information on our scope and methodology.
We conducted this performance audit from March 2013 to April 2014 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: The International Financial Architecture
paragraphs: Numerous international bodies with different missions and members have  played a role in implementing the G20 financial regulatory reform agenda.  In general, many of these bodies operate on a consensus basis and have  no legally binding authority. Thus, financial reform agreements reached  by these bodies must be adopted voluntarily by their member  jurisdictions, such as through legislative or regulatory changes (or both),  to take effect. Figure 1 depicts some of the international bodies involved  in the G20 financial regulatory reforms and that partly comprise an  international network often referred to as the “international financial  architecture.”
Within the international financial architecture, the G20 is a forum for  international cooperation on global economic and financial issues. Its  members include 19 countries and the European Union. The G20’s  objectives are to coordinate policy among its members to achieve global  economic stability and sustainable growth; promote financial regulations  that reduce risks and prevent future financial crises; and modernize the  international financial architecture. The G20 was established in 1999 as a  forum for finance ministers and central bank governors in the aftermath of  the financial crisis of 1997-1998. The G20 was elevated to the political  leader level in 2008, when its member countries’ heads of state or  government first met to respond to the global economic and financial  crisis. G20 member jurisdictions account for approximately 90 percent of  world gross domestic product, 80 percent of world trade, and are home to  two-thirds of the world’s population. Since 2008, the G20 leaders have  met at least annually. The presidency of the G20 rotates annually among  its members, and the host government supplies the staff for the  secretariat that runs the agenda and hosts meetings that year. In addition  to the G20 leaders meetings, the G20 finance ministers and central  bankers, and the Sherpas, who are representatives of the leaders, meet  on a regular basis. As the G20 operates on the basis of consensus, its  commitments reflect the agreement of its members, including the United  States.
The G20 established FSB in 2009 as the successor to the Financial  Stability Forum to coordinate at the international level the work of national  financial authorities and international standard-setting bodies in order to  develop and promote the implementation of effective regulatory,  supervisory, and other financial sector policies. FSB member institutions  include finance ministries, financial regulatory authorities, and central  banks of the G20 members, as well as those of Hong Kong Special  Administrative Region (SAR), the Netherlands, Singapore, Spain, and  Switzerland. FSB members also include international bodies—such as  IMF, the Organisation for Economic Co-operation and Development, and  the World Bank—and international standard-setting bodies, such as the  Basel Committee on Banking Supervision (Basel Committee),  International Accounting Standards Board (IASB), International  Organization of Securities Commissions (IOSCO), and International  Association of Insurance Supervisors (IAIS).
According to FSB, it seeks to support the multilateral agenda for  strengthening financial systems and the stability of international financial  markets. FSB’s mandate includes (1) assessing vulnerabilities affecting  the global financial system and identifying and overseeing actions needed  to address them; (2) promoting coordination and information exchange  among authorities responsible for financial stability; (3) undertaking  reviews of the policy development work of the international standard-  setting bodies to ensure their work is timely, coordinated, focused on  priorities, and addressing gaps; and (4) collaborating with IMF to conduct  early warning exercises. In addition, FSB has instituted a framework for  monitoring implementation of the G20 financial reforms and reports  periodically to the G20 about standards development and implementation  progress.
Organizationally, a 70-person Plenary, composed of one to three  representatives from each represented jurisdiction or organization, is the  sole decision-making body of FSB. The Plenary approves reports,  principles, standards, recommendations, and guidance developed by  FSB, and approves work programs and the FSB budget. The FSB  Plenary is led by the FSB Chairman. A Steering Committee coordinates  work in between Plenary meetings. FSB’s work is carried out through the  activities of standing committees, including the Standing Committee on  Assessment of Vulnerabilities, the Standing Committee on Standards  Implementation, and the Standing Committee on Supervisory and  Regulatory Cooperation. The FSB Plenary is reviewing the structure of  representation in FSB, which is to be completed by the next leaders  summit in November 2014. As outlined in the FSB charter, FSB Plenary  seat assignments are meant to reflect the size of the national economy,  financial market activity, and national financial stability arrangements in a  member jurisdiction. The staff of FSB members carry out the majority of  FSB’s work. The FSB Secretariat has approximately 30 staff members  who also support FSB’s work.
IMF is an organization of 188 member jurisdictions. Founded in 1944,  IMF’s primary purpose is to safeguard the stability of the international  monetary system—the system of exchange rates and international  payments that enables countries (and their citizens) to buy goods and  services from one another. IMF’s main activities include (1) providing  advice to members on adopting policies that can help them prevent or  resolve a financial crisis, achieve macroeconomic stability, accelerate  economic growth, and alleviate poverty; (2) making financing temporarily  available to members to help them address balance of payments  problems; and (3) offering technical assistance and training to countries,  at their request, to help them build the expertise and institutions they  need to implement sound economic policies.
As part of its surveillance activities, IMF conducts surveillance of its  members’ financial sectors at the bilateral and multilateral levels and  research and analysis of macroeconomic and financial issues. A  comprehensive and in-depth review of individual members’ and  jurisdictions’ financial sectors is undertaken by the mandatory financial  stability assessments (mandatory FSAs) or the Financial Sector  Assessment Program (FSAP), while Article IV staff reports (and  associated selected issue papers) cover financial sector issues at a  higher frequency and often follow-up on mandatory FSA or FSAP  recommendations. IMF’s multilateral surveillance appears in the form of  regular reports, such as the Global Financial Stability Report, World  Economic Outlook, Fiscal Monitor, and Spillover reports.IMF has worked with FSB and international standard-setting bodies to  develop standards and guidance, to the extent those activities are  consistent with its mandate. In addition to these activities, the G20 has  tasked IMF and FSB with the responsibility for conducting early warning  exercises, which typically take place twice a year, to assess risks to  global financial stability.
subsections: section_title: Basel Committee
paragraphs: The Basel Committee is the primary global standard-setter for the  prudential regulation of banks and provides a forum for cooperation on  banking supervisory matters. Established in 1975, it sets supervisory  standards and guidelines to promote global financial stability. The  standards have no legal force but are developed and issued by Basel  Committee members, with the expectation that individual national  authorities will implement them. The Basel Committee members include  central banks or bank supervisors for 27 jurisdictions. The Basel  Committee expanded its membership in 2009, adding the financial  authorities of Argentina, Hong Kong SAR, Indonesia, Saudi Arabia,  Singapore, South Africa, and Turkey to its membership. With the G20’s  support, the Basel Committee recently established a more active program  to monitor members’ commitments to implement Basel Committee  standards. The Basel Committee works with FSB, of which it is a  member, and other international standard-setting bodies to address  financial reform issues within its mandate. The Basel Committee is a  sponsor organization of the Joint Forum, which also includes IOSCO and  IAIS, and which coordinates work on issues of common concern.
IOSCO sets global standards for the securities sector to protect investors,  ensure efficient markets, and address systemic risks. Its members include  more than 120 securities regulators. It also has affiliated members,  including 80 other securities markets participants (such as stock  exchanges). Established in 1983, IOSCO develops, implements, and  promotes adherence to internationally recognized standards for securities  regulation. It works with the G20 and FSB to develop standards and  guidance to implement the global regulatory reforms that apply to  securities markets and institutions. IOSCO is a founder of the Joint  Forum, along with the Basel Committee and IAIS. IOSCO also works with  the Committee on Payment and Settlement Systems (CPSS) on reform  efforts related to financial market infrastructures, including central clearing  counterparties.
IAIS is the international standard-setting body responsible for developing  and assisting in the implementation of principles, standards, and other  supporting material for the supervision of the insurance sector.  Established in 1994, IAIS’s objectives are to promote effective and  globally consistent supervision of the insurance industry; to develop and  maintain fair, safe, and stable insurance markets; and contribute to global  financial stability. Its members include insurance supervisors and  regulators from more than 200 jurisdictions in approximately 140   Nongovernmental organizations  countries, including the United States.and private sector entities also participate in IAIS activities as observers.  As noted above, IAIS is a member of the Joint Forum.
CPSS is a standard-setting body for payment, clearing, and securities  settlement systems. Established in 1990, it also serves as a forum for  central banks to monitor and analyze developments in domestic payment,  clearing, and settlement systems. Its members include 25 central banks  responsible for payment and settlement systems. CPSS is a member of  FSB and cooperates with other groups, including IOSCO and the Basel  Committee, to address issues of common concern.
IADI is the global standard-setting body for deposit insurers. IADI  activities include developing principles, standards, and guidance to  enhance the effectiveness of deposit insurance systems, methodologies  for the assessment of compliance with its principles, standards, and  guidelines, and facilitating assessment processes. IADI also provides  guidance for establishing new—and enhancing existing—deposit  insurance systems, and encourages international contact among deposit  insurers and other interested parties. IADI has 73 member organizations  from 71 countries. It recently worked with the Basel Committee to  produce the Core Principles for Effective Deposit Insurance Systems,  which was designated by FSB as one of the 12 key standards for sound  financial systems.
IASB is the standard-setting body of the IFRS Foundation, an  independent, nonprofit, private sector organization working in the public  interest. Established in 2001, IASB carries out the IFRS Foundation’s  stated objective of developing a single set of high-quality,  understandable, enforceable, and globally accepted accounting  standards. IASB members are responsible for the development and  publication of International Financial Reporting Standards (IFRS). IASB  members are independent experts, and the board is required to reflect  geographical diversity. The IFRS Foundation also has as principal  objectives promoting the use and rigorous application of IFRS; taking  account of the reporting needs of emerging economies and small and  medium-sized entities; and promoting and facilitating the adoption of  IFRS through the convergence of national accounting standards and  IFRS.
section_title: Informal Groups
paragraphs: Various jurisdictions also have formed informal coalitions to address  specific multilateral financial issues. For example, according to U.S.  regulatory officials who are involved in the group, the OTC Derivatives  Regulators Group (ODRG) is an informal group of regulators in  jurisdictions that account for the most significant derivatives activity  around the world: Australia, Brazil, the European Union, Hong Kong SAR,  Japan, Ontario and Quebec (Canada), Singapore, Switzerland, and the   ODRG focuses more strategically than the committees  United States. and activities under FSB and IOSCO on addressing critical cross-border  issues in the OTC derivatives markets. ODRG reports periodically to the  G20 finance ministers and central bank governors about its progress in  identifying and addressing cross-border regulatory issues.
section_title: Overview of the G20 Leaders’ Regulatory Reform Agenda and Implementation Process
paragraphs: Securities are regulated at the province level in Canada. expanded the areas covered by their reform agenda.summarizes the key sectors and functional areas covered by the G20  financial reform commitments.
The G20 leaders generally have called on their national authorities— along with FSB; standard setting bodies, such as the Basel Committee  and IOSCO; and other bodies—to convert their broad financial reform  commitments into more specific standards (including policies, principles,  practices, or guidance). Although the standards are developed under  the auspices of FSB or standard setting bodies (or both), the work of  many of these entities largely is carried out by staff of finance ministries,  central banks, and financial sector regulators of the member jurisdictions.  Because international standards are not legally binding, individual  countries or jurisdictions must voluntarily adopt them, such as through  legislative or regulatory changes, or both, for the standards to take effect.  For example, a jurisdiction may need to pass legislation and adopt  regulations to implement one standard but only a regulation to implement  another standard. In that regard, the legal and practical abilities of the  G20 leaders to commit to legal and regulatory changes can vary widely,  depending on the structure of the regulatory system in their jurisdictions  (i.e., whether there are independent regulatory agencies) and on the  nature of the relationship between the executive and legislative branches  in their jurisdictions. Figure 2 illustrates this multistep process.
Although the G20 is serving as the main forum at the international level  for reforming financial regulations, some academics have questioned the  reliance on the G20 and other international bodies to reform international  financial standards, citing various potential challenges with the current  approach. For example, some maintain that international financial  standards existed before the 2007-2009 financial crisis and were intended to reduce systemic risk but failed to prevent or mitigate the recent crisis.However, U.S. regulators and others have pointed to gaps or weaknesses  in the international framework or standards that existed before the crisis  and that the G20 reforms are intended to address. Additionally, some  academics have questioned the potential effectiveness of international  financial agreements or standards, arguing that their informal and  nonbinding nature allows members to suffer limited consequences for  noncompliance. In contrast, they also note that the informal approach  influences behavior, with many governments adopting international  financial standards into domestic law, or maintain that a formal approach  to enforcement would not necessarily be more effective and could raise  domestic sovereignty issues. Finally, some academics have commented  that FSB’s limited and skewed geographic membership—despite its  expansion to include some emerging countries—still may affect  perceptions about its legitimacy. However, FSB’s charter includes  provisions for FSB to consult with nonmembers on strategic plans,  principles, standards, and guidance, and to allow nonmembers to  participate, on an ad hoc basis, in its working groups and committee  meetings. As discussed earlier, FSB has a work plan to review the  structure of its representation, which is to be completed by the November  2014 summit.
section_title: The Dodd-Frank Act
paragraphs: Congress passed the Dodd-Frank Act in 2010 in response to the  regulatory and oversight weaknesses identified after the 2007-2009  financial crisis. As summarized on the Senate Banking Committee’s  website, the act seeks to (1) address risks to the stability of the U.S.  financial system, in part through the creation of the Financial Stability  Oversight Council (FSOC), (2) end too-big-to-fail bailouts of large,  complex financial institutions, (3) increase transparency and regulation for  certain complex financial instruments, and (4) strengthen protections for  consumers and investors. The act requires federal agencies to issue  hundreds of regulations to implement the act’s requirements. Regulators  have proposed many of the rules, but many of the Dodd-Frank Act   As discussed  rulemakings had yet to be finalized as of December 2013.later in this report, many of the Dodd-Frank Act’s provisions are similar to  the international financial reform commitments agreed to by the G20  leaders.
section_title: United States Has Played an Active Role in International Financial Regulatory Reforms but Has Faced Challenges
paragraphs: The United States has been active in the international financial regulatory  reforms intended to address regulatory and other weaknesses revealed  by the 2007-2009 financial crisis. Through its participation in the G20, the  United States has helped set the G20 financial regulatory reform agenda.  Moreover, through their participation on various international bodies, U.S.  financial regulators and, where relevant, Treasury have helped develop  standards to implement the G20 reform agenda. However, U.S. financial  regulators have faced challenges in implementing the G20 financial  reform agenda.
subsections: section_title: United States Has Helped Set the G20 Financial Regulatory Reform Agenda
paragraphs: The United States has played an important role in elevating the G20  summits to the level of head of state (or government) and in setting G20  agendas for reforming international financial regulation. According to  Treasury officials, during the acute phase of the financial crisis in 2008,  the United States proposed elevating the G20 forum from the traditional  level of finance ministers and central banks to the level of heads of state  or government. To that end, the G20 leaders, including the U.S.  President, held a summit for the first time in Washington, D.C., in  November 2008. The main objective for elevating the G20 forum was to  help the world’s major economies cope with the then-ongoing financial  crisis and establish a framework to help prevent future financial crises.  Among other things, the G20 leaders established principles for financial  regulatory reform and developed a list of initial reform commitments. The  U.S. President has attended the subsequent G20 leaders’ summits and  has continued to play an active role in helping to support or expand the  G20 financial reform agenda. The G20 members’ finance ministers and  central bankers also have been meeting regularly to advance the reform  agenda.
In addition to the U.S. President’s direct participation in the G20 summits,  the United States has helped to set the G20 financial reform agenda. For  example, as host to the G20 summit in Washington (2008) and Pittsburgh  (2009), U.S. officials were responsible for coordinating the preparation of  the summit agendas and reform agreements. Agreements reached at the  Pittsburgh summit included commitments by the G20 leaders to regulate  the OTC derivatives markets and establish procedures to manage the  failure of systemically important financial institutions. Moreover, U.S.  officials have helped support and advance specific reform proposals for  other summits. For example, in the lead-up to the London G20 summit in  2009, the United States publicly supported increasing capital  requirements for banks, creating FSB, and expanding the scope of  regulation to systemically important institutions and markets. In the lead- up to the Toronto summit in June 2010, the United States reiterated its  support for more stringent capital and liquidity requirements for banks. At  the Toronto summit, leaders pledged to endorse the forthcoming capital  reforms (i.e., the Basel III capital standards) at their summit in Seoul in  November 2010.
The United States also has been coordinating with international bodies  and regulators to put in place domestic financial reforms. For instance,  after the G20 summit in Seoul in November 2010, U.S. officials noted that  the passage of the Dodd-Frank Act put the United States at the forefront  of global financial reform. U.S. officials also highlighted that a number of  the Dodd-Frank Act’s provisions aligned with the G20 reform  commitments. These included provisions for (1) a resolution regime, (2) a  framework of oversight and reporting for OTC derivatives markets, (3)  regulation of all firms that pose the most risk to the financial system, and   Further, the  (4) a registration requirement for advisers to hedge funds. officials noted that the United States is working closely with the European  Union and others to ensure that the G20’s agenda for regulatory reform is  implemented.
section_title: United States Has Helped Develop International Financial Standards
paragraphs: White House Fact sheet on the Seoul summit, available at  http://www.whitehouse.gov/the-press-office/2010/11/12/g-20-fact-sheet-us-financial- reform-and-g-20-leaders-agenda.
FSB: FSB coordinates implementation of the G20 financial reform  agenda. The Federal Reserve, SEC, and Treasury serve on FSB’s  Steering Committee and Plenary, which is FSB’s decision-making  body. These agencies also chair or are members of three key  standing committees and, with CFTC, FDIC, the Federal Reserve  Bank of New York, and OCC, have participated in or chaired other  FSB working groups.
Basel Committee: The Basel Committee develops prudential  standards for banks. FDIC, the Federal Reserve, and OCC are  members of the Basel Committee. OCC chairs one of two key  subcommittees—the Supervision and Implementation group. FDIC  officials noted that the agency chairs a task force exploring options to  improve the simplicity and comparability of the capital framework.
IOSCO: IOSCO sets global standards for the securities sector. SEC  and CFTC have served in leadership roles in IOSCO and informal  groups. For example, SEC and CFTC are both members of the  IOSCO Board. In addition, CFTC and SEC co-chaired an IOSCO OTC  derivatives task force that established standards for mandatory  clearing. CFTC also co-chairs a separate IOSCO committee on  commodity derivatives.
CPSS: CPSS sets global standards for payment, clearing, and  securities settlement systems. The Federal Reserve and Federal  Reserve Bank of New York are members of CPSS. They have  participated in a number of CPSS and CPSS-IOSCO efforts, including  the development of risk management standards for financial market  infrastructures.
IAIS: IAIS sets global standards for the insurance industry. The U.S.  Treasury’s Federal Insurance Office chairs an IAIS committee that  leads the development of prudential standards. The Federal  Insurance Office also has served in leadership roles and as a member  of other IAIS committees, subcommittees, and working groups.
IADI: IADI sets global standards for deposit insurers. The FDIC is an  active member of IADI, sits on its Executive Council, and chairs and  participates in a number of IADI committees, subcommittees, and  working groups.
Figure 3 shows which U.S authorities are members of selected  international bodies (as represented by the solid lines). Although CFTC,  FDIC, and OCC are not members of FSB, they have participated in or  chaired FSB working groups (as represented by the dashed lines).
As members of FSB and international standard setting bodies, U.S.  financial regulators and Treasury have been actively involved in  developing many of the international financial standards (including  policies, principles, practices, or guidance) that implement the G20  financial reform commitments. Since 2008, FSB and international  standard setting bodies have developed an array of new or revised  standards covering a broad range of issues including banking, OTC  derivatives, compensation practices, shadow banking, and SIFIs and  resolution regimes. (See appendix III for a more detailed list of reform  areas and objectives, related standards, and the participation of U.S.  agencies.) Examples of standards that U.S. authorities helped develop  include the following:
Basel capital standards: FDIC, the Federal Reserve, Federal  Reserve Bank of New York, and OCC, as U.S. representatives to the  Basel Committee, helped develop the Basel III capital standards,  which set higher levels for capital requirements for banks and  introduced a new global liquidity standard. The Basel Committee  released Basel III in December 2010, in part in response to the G20  leaders’ calls for higher standards for capital and enhanced  supervision.
OTC derivatives reforms: CFTC, the Federal Reserve, or SEC  helped develop standards issued by IOSCO or CPSS (or both) for  financial market infrastructures, central clearing of OTC derivatives,  and reporting of OTC derivatives.  These standards respond to the  G20 leaders’ commitment in 2009 to ensure that all standardized OTC  derivative contracts would be traded on organized platforms, where  appropriate, and cleared through central counterparties; and all OTC  derivatives contracts would be reported to trade repositories. CFTC,  FDIC, the Federal Reserve, OCC, and SEC helped develop standards  issued by the Basel Committee and IOSCO on margin requirements  for non-centrally cleared OTC derivatives, as requested by the G20.
Enhanced supervision of SIFIs and resolution regimes: FDIC, the  Federal Reserve Bank of New York, and Treasury helped develop  standards issued by FSB for resolution regimes. The regimes would  help enable authorities to resolve failing financial firms in an orderly  manner and without exposing the taxpayer to the risk of loss.  According to FSB, these standards respond to a 2009 request by the  G20 leaders to address too-big-to-fail problems associated with  SIFIs—that is, when the threatened failure of a SIFI leaves public  authorities with no option but to provide public funds to avoid  widespread financial instability and economic damage. Moreover,  the standards are part of a broader SIFI framework intended to reduce  both the probability and impact of SIFIs failing.
section_title: U.S. Challenges Involving the G20 Financial Regulatory Reforms
paragraphs: In our discussions with U.S. federal financial regulators, they identified  time or resource constraints as key challenges in helping to develop  international financial standards. One regulator said its staff members feel  tension between allocating time to their routine regulatory duties and their  international work. A U.S. regulator also said that since 2008, there has  been a constantly increasing number of work streams, groups, and  projects flowing from the G20, many with relatively short deadlines.  Moreover, the number of overall projects tends to increase over time as  old projects evolve into new areas and new projects are initiated. One of  the regulators estimated that the number of projects had at least doubled  since the start of the 2007-2009 financial crisis. Two of the regulators also  told us they have faced resource constraints, such as not having the  travel funds to attend meetings.
The number of members from any one country is intended to be  representative of the size of national economies, financial market  activities, and national financial stability arrangements. However, two U.S.  regulators told us FSB’s selection of members has created additional  coordination work for U.S. federal authorities. According to a U.S.  regulator, U.S. membership in international bodies does not always reflect  the significance of the U.S. economy. For example, while U.S. firms have  a dominant share of the OTC derivatives markets, CFTC—one of the  primary U.S. regulators responsible for overseeing derivatives markets— has no representation on the FSB Plenary, the FSB decision-making  body. As a result, U.S. regulators have had to devote time and effort  coordinating input and responses from U.S. regulators not represented on  FSB. Treasury officials told us that FSB must limit the number of  representatives from any member jurisdiction to prevent its membership  from becoming too unwieldy, but recognized that this limitation creates  additional coordination work for U.S. financial regulators. Treasury staff  told us that to address this limitation Treasury established a liaison, who  coordinates closely and regularly with all U.S. financial regulators to keep  them informed of FSB’s activities and work products and to obtain their  input.
section_title: United States and Other Jurisdictions Report Having Made Progress Implementing International Reforms, but Most Reforms Have Not Been Fully Implemented
paragraphs: The United States and other jurisdictions report having made progress  implementing the G20’s international financial reforms, but most reforms  have not been implemented by all jurisdictions. Under its mandate, FSB is  responsible for coordinating and promoting the monitoring of the  implementation of the G20 reform commitments and reporting on the  implementation progress to the G20. In collaboration with standard setting  bodies, FSB established a framework in 2011 to monitor and report on  the implementation of the G20 financial reform commitments, including   In addition, FSB and IMF  the related international financial standards.have programs to assess members’ compliance with international  financial standards and foster a level playing field. However, a broad  range of legal, economic, and political factors can create implementation  challenges for jurisdictions. The failure to implement the international  reforms consistently could, among other things, hinder the ability of  national authorities or international bodies to protect against  developments affecting national and international financial stability.
subsections: section_title: Jurisdictions Vary in Their Implementation Stage of the Priority Area Reforms
paragraphs: FSB has selected priority reform areas that undergo more intensive  monitoring and detailed reporting than other reform areas, and the list of  priority areas is reviewed annually by FSB and revised as needed. FSB  selects the areas based on the importance of their consistent and  comprehensive implementation to global financial stability. For each  priority area, an FSB working group or standard setting body is  responsible for monitoring implementation progress and periodically  preparing a progress report.Basel framework; (2) OTC derivatives market reforms; (3) policy  measures for SIFIs; (4) resolution regimes, (5) compensation practices;   Currently, FSB’s priority areas are (1) the  and (6) shadow banking.vary in their implementation stage of the priority area reforms.
subsections: section_title: Implementation of Basel III Standards
paragraphs: At their 2010 summit in Seoul, the G20 leaders endorsed Basel III capital  standards and committed to adopt and implement the standards.  According to the Basel Committee’s progress report issued in October  2013, 11 of its 27 members had implemented in full the Basel capital  framework, which includes Basel II, 2.5, and III standards (see table 2).  Specifically, 12 jurisdictions reported that they had issued final Basel III  capital rules that were legally in force. At that time, the United States and  14 other jurisdictions reported that they had issued final rules to  implement the Basel III capital standards, but the rules had not yet taken   The remaining member jurisdiction reported that a regulation on  effect.Basel III was to be issued in 2013.
As previously discussed, although the Basel Committee members have  adopted or will adopt rules to implement the Basel capital standards, the  adoption of the standards does not necessarily ensure that they will be  applied consistently across banks and jurisdictions. In that regard, the  Basel Committee established the Regulatory Consistency Assessment  Program in 2012. The committee monitors the transposition of Basel III  standards into domestic regulations semiannually based on information  provided by each of its member jurisdictions. The aim of such monitoring  is to ensure that the internationally agreed timeline remains on track. The  committee publishes its results in regular progress reports (discussed  earlier).
The Basel Committee also assesses the consistency of implementation of  the Basel III standards. These assessments are done on a jurisdictional  and thematic basis.
Member jurisdictional assessments review the extent to which  domestic Basel III regulations in each member jurisdiction are aligned  with the Basel III standards. The assessments examine the  consistency and completeness of the adopted standards, including  the significance of any deviations in the standards, and provide an  overall assessment of compliance using a four-grade scale:  compliant, largely compliant, materially non-compliant, and  noncompliant. As of year-end 2013, the committee had completed  seven jurisdictional assessments. In its assessments of Brazil, China,  Switzerland, Singapore, and Japan, the committee found their rules  generally to be compliant with the Basel standards. The committee  conducted assessments of the European Union’s and United States’  proposed Basel III rules but did not assign them a grade because of  the draft nature of the rules.
Thematic assessments review regulatory outcomes to ensure that the  prudential ratios calculated by banks are consistent across banks and  jurisdictions and predominantly reflect differences in risk rather than in  practice. The committee initially focused its thematic assessments on  analyzing how banks were weighing (or valuing) assets based on their  risk level, because differences in the application of the Basel  standards can lead to variations in the amount of capital banks have  to hold. In that regard, the objective of the assessments generally has  been to obtain a preliminary estimate of the potential for variation in  risk-weighted assets across banks and highlight aspects of the Basel  standards that contribute to this variation. The committee’s two  assessments on this issue found considerable variation across banks  in the average risk-weighted assets for market risk in the trading book  and credit risk in the banking book. Part of the variation was  attributed to differences in supervisory practices or decisions.  According to a Basel Committee Chairman, information from the  studies is being used by national supervisors and banks to take action  where needed, such as to improve consistency. The Basel Committee  also plans to use the results as part of its ongoing policy work.
section_title: Implementation of the OTC Derivatives Reforms
paragraphs: At the 2009 summit in Pittsburgh, the G20 leaders committed that all  standardized OTC derivatives should be traded on organized trading  platforms and centrally cleared; all OTC derivatives should be reported to  a repository; and all noncentrally cleared OTC derivatives should be  subject to higher capital requirements. At the 2011 summit in Cannes, the  G20 leaders further agreed to require noncentrally cleared OTC  derivatives to be subject to margin requirements—the posting of collateral  to offset losses caused by the default of a derivatives counterparty. FSB  and standard setting bodies, including the Basel Committee, CPSS, and  IOSCO, have issued most of the standards needed to implement the G20  OTC derivatives reforms.
According to FSB’s sixth progress report on implementation of OTC  derivatives market reforms issued in September 2013, over half of FSB’s  19 member jurisdictions, including the United States, reported having  proposed or enacted legislation to require OTC derivatives transactions to  be centrally cleared, traded on organized trading platforms, and reported  to trade repositories. As shown in table 3, five jurisdictions, including the United States, reported having proposed or enacted legislation to  implement the margin requirements. Table 3 also shows that the United  States is the only jurisdiction with regulations in force and operating for  the central clearing, organized platform trading, and trade reporting  requirements (for at least part of the market), but many jurisdictions  reported having adopted regulations for the trade reporting requirement.  Only one jurisdiction reported having adopted regulations for the margin  requirement. According to FSB, the schedule for further changes in  legislative and regulatory frameworks is uneven across jurisdictions and  commitment areas.
In its progress report, FSB also noted that in light of the global nature of  OTC derivatives markets, cross-border coordination was needed to avoid  unnecessary duplicative, inconsistent, or conflicting regulations. FSB  plans to publish a progress report by April 2014 that provides, among  other things, an updated assessment of reform implementation, including  any remaining issues in the cross-border application of regulations.
While cross-border coordination issues persist, we reported in late 2013  that CFTC and SEC took steps to coordinate with foreign authorities on  several rulemakings related to Dodd-Frank swap reforms, which include  clearing, exchange trading, and reporting requirements.CFTC issued many swap-related rules and noted that it coordinated with  international bodies, such as the European Securities Markets Authority,  European Central Bank, and regulators in the United Kingdom, Japan,  Hong Kong SAR, Singapore, Sweden, and Canada. On the swap entities  rule, CFTC and SEC staffs said that they participated in numerous  conference calls and meetings with international regulators.
section_title: Implementation of the G20 Reforms for SIFIs
paragraphs: The 2007-2009 financial crisis revealed weaknesses in the existing  regulatory framework for overseeing SIFIs, which FSB defines as  institutions of such size, market importance, and interconnectedness that  their distress or disorderly failure could destabilize the financial system  and result in severe economic consequences. According to FSB, when  the threatened failure of a SIFI leaves public authorities with no option but  to provide public funds to avoid financial instability and economic  damage, the SIFI can be considered too big—or too important—to fail.  The knowledge that this can happen could encourage SIFIs to take  excessive risks (referred to as moral hazard) and may represent a large  implicit public subsidy of private enterprise. At the Pittsburgh Summit in  2009, G20 leaders called on FSB to propose measures to address the  systemic and moral hazard risks associated with SIFIs. FSB developed a framework intended to reduce the probability and impact of SIFIs failing.The SIFI framework recommends new international standards for national  resolution regimes (called “Key Attributes of Effective Resolution Regimes  for Financial Institutions”) and requirements for banks determined to be  globally systemically important to have additional loss absorption capacity  to reflect the greater risk they pose to the global financial system. At the  2010 summit in Seoul, the G20 leaders endorsed the FSB’s SIFI  framework.
In its April 2013 peer review report on resolution regimes, FSB reported  that some of its member jurisdictions developed new or revised existing   For example, FSB noted that the United States has  resolution regimes.implemented a new resolution regime—referred to as Orderly Liquidation  Authority (OLA)—aligned with FSB’s key attributes through its passage of  the Dodd-Frank Act. OLA includes broad authorities to wind-up failing  financial companies that meet certain systemic criteria. FSB also noted  that Australia, Germany, Mexico, Netherlands, Spain, Switzerland, and  the United Kingdom have amended their resolution regimes through  legislative changes.member jurisdictions need to take further legislative measures to  implement the key attributes fully in substance and scope. In its report  entitled Report on Progress and Next Steps Towards Ending Too-Big-To- Fail (TBTF) issued in September 2013, FSB noted that it will coordinate  with IMF, the World Bank, and international standard setting bodies to  finalize a methodology to assess implementation of the key attributes at  the national level for use by IMF and the World Bank in their Standards  and Codes Initiative (discussed later).
At the same time, FSB noted that many of its  In addition to legislative changes, FSB found that sector-specific regimes  for restructuring or winding down financial firms exhibited a broad range  of practices in terms of scope and authorities. According to FSB, this is to  be expected, because the key attributes do not prescribe the specific form  of the resolution regime as long as the regime is consistent with the key  attributes. All FSB members, including the United States, reported that  they have specific powers to restructure or wind up banks (or both) that  are distinct from ordinary corporate insolvency (see table 4). However,  the extent to which the resolution regimes also cover insurers, investment  or securities firms, and financial market infrastructure varies across  jurisdictions.
Additionally, in its April 2013 peer review report on resolution regimes,  FSB reported that the resolution regimes of most of its members neither  require nor prohibit cooperation with foreign resolution authorities. FSB  regards legal frameworks for cross-border cooperation as a key attribute  of resolution regimes. According to FSB, eight jurisdictions have statutory  provisions that explicitly empower or strongly encourage resolution  authorities to cooperate with foreign authorities (Australia, Hong Kong  SAR, Indonesia, Japan, Spain, Switzerland, United Kingdom, and United  States) while several others indicated that it is their policy to cooperate  where possible.
In 2012, we reported that international coordination remains a critical  component in resolving the failure of a large, complex financial company  and that regulators have been taking steps to address this issue,  including through their work with FSB. More recently, in a 2013 report,  we examined the advantages and disadvantages of certain proposals to  revise the U.S. Bankruptcy Code for financial company bankruptcies,  including proposals to change the role of financial regulators in the  bankruptcy process and the special treatment of qualified financial  contracts, such as derivatives. We recommended that FSOC should  consider the implications for U.S. financial stability of changing the role of  regulators and the treatment of qualified financial contracts in financial  company bankruptcies. Although our recommendation continues to have  merit, FSOC has not yet implemented the recommendation. FSB made  related recommendations in its peer review on resolution regimes  (discussed later)—namely designating a lead authority for resolving  domestic entities of the same group and introducing powers to impose a  temporary stay on the exercise of contractual acceleration or early  termination rights in financial contracts, subject to suitable safeguards.
Identification of Largest and Most Complex SIFIs  Complementing the resolution regime reforms, FSB, the Basel  Committee, IAIS, and others have taken steps to reduce the probability of  the failure of SIFIs in part by working to establish requirements aimed at  increasing SIFIs’ capacity to absorb losses. In November 2013, FSB  published its updated annual list of global systemically important banks  (G-SIB), which generally comprise the largest and most complex  internationally active banks. As shown in table 5, there were 29 G-SIBs  headquartered in 11 countries: 8 in the United States; 4 each in France  and the United Kingdom; 3 in Japan; 2 each in China, Spain, and  Switzerland; and 1 each in Germany, Italy, Netherlands, and Sweden. G- SIBs are grouped into one of five buckets based on their systemic  importance, which correspond to increasing levels of additional loss  absorbency requirements. The requirements are to be updated shortly  and implemented by jurisdictions and phased in from January 2016, with  full implementation by January 2019.
According to the Basel Committee’s August 2013 progress report,  Canada and Switzerland have issued final regulations for G-SIBs and  domestic systemically important banks (D-SIBs) and begun to enforce  them.  Ten of the Basel Committee members have issued final D-SIB regulations that were not yet in force (South Africa and EU member  states). The remaining member jurisdictions, including the United States,  had not yet issued draft rules. At the time, U.S. regulators expected to  issue a notice of proposed rulemaking for G-SIBs by year-end 2013.of February 2014, the U.S. regulators had not issued a rule proposal to  implement regulation for the Basel Committee G-SIB risk-based capital  surcharge framework.
FSB and standard setting bodies also have been extending the SIFI  framework to other institutions. First, in response to a request by the  G20 leaders, FSB extended the G-SIFI framework to domestic  systemically important banks. In October 2012, the Basel Committee  issued its framework for dealing with such banks, which focuses on the  impact that the distress or failure of banks will have on the domestic  economy. Second, IAIS developed a methodology to identify global  systemically important insurers. In July 2013, FSB, in consultation with  IAIS and national authorities, identified nine insurers (including three U.S.  insurers) as global systemically important insurers, which will be subject  to a set of policy measures consistent with the SIFI framework.FSB, in consultation with IOSCO, has developed draft methodologies to   Third,  identify nonbank, noninsurance G-SIFIs, which were issued for public  consultation in January 2014.
section_title: FSB’s Compensation Principles and Standards
paragraphs: According to FSB’s second progress report issued in August 2013, all but  two FSB jurisdictions (Argentina and Indonesia) have implemented FSB’s  compensation principles and standards in their national regulation or  supervisory guidance. The principles and standards for significant  financial institutions include having a board remuneration committee as  an integral part of their governance structure, ensuring that total variable  compensation does not limit institutions’ ability to strengthen their capital  base, and providing annual reports on compensation to the public on a  timely basis. In light of the implementation status, FSB concluded that  national implementation of the principles and standards can be  considered largely complete and noted that the focus now is on effective  supervision and oversight of firms. In addition, the report noted that while  good progress continues to be made, more work needs to be done by  national authorities and firms to ensure that implementation of the FSB  principles and standards is effectively leading to more prudent risk-taking  behavior. The report also noted that there still is some way to go before  the improvements in compensation practices can be deemed effective  and sustainable, particularly given the practical challenges to embedding  risk management in firms’ compensation practices.
According to FSB, several authorities noted that firms still were  expressing some concerns about a level playing field with respect to  jurisdictions that may not have fully implemented the principles and  standards. At the same time, FSB noted that national authorities have yet  to see any real evidence that the implementation of the principles and  standards has impeded or diminished the ability of supervised institutions  to recruit and retain talent. In 2012, FSB established the bilateral  complaint handling process—a mechanism for national supervisors from  FSB jurisdictions to bilaterally report, verify, and, if needed, address  specific compensation-related complaints by financial institutions based  on level playing field concerns. According to FSB, no firm had submitted a  complaint, as of August 2013. FSB plans to continue to monitor the  implementation of the principles and standards.
section_title: United States and Other FSB Member Jurisdictions Reported That They Have Implemented or Are Implementing Most of the G20 Reform Commitments in the Nonpriority Areas
paragraphs: The United States and other FSB members reported that they have  implemented or are in the process of implementing most of the G20  financial reform commitments in the nonpriority areas. FSB generally  monitors the implementation of the G20 reforms in the nonpriority areas  less intensively—primarily through annual surveys of its members.  Specifically, FSB’s 2013 survey of its members covered the G20 financial  reform commitments in the nonpriority areas. The data are self-reported  by FSB member jurisdictions, and FSB generally does not evaluate the  survey responses to verify the accuracy or assess the effectiveness of  implementation. Although the priority and nonpriority areas overlap in  some areas, the reform commitments in the nonpriority areas cover a  broader range of sectors and functions, including shadow banking, hedge  funds, securitization, credit rating agencies, financial markets, and  supervision.
As shown on table 6, implementation of the G20 financial reform  commitments varies by nonpriority reform area. All FSB members  reported that they implemented or have been implementing 15 of the  commitments. For example, all members reported making progress in  implementing commitments to strengthen oversight of shadow banking,  register hedge funds, regulate credit rating agencies, and enhance  supervision, accounting standards, and financial consumer protection. In  contrast, one or more FSB members reported no action to implement 11  nonpriority commitments, which include strengthening supervisory  requirements for investment in structured products, enhancing disclosure  of securitized products, strengthening national deposit insurance  arrangements, and enhancing market transparency in commodity  markets.
Table 6 also shows the United States reported that it has taken action to  implement all but one of the nonpriority G20 reform commitments— strengthening of supervisory requirements or best practices for  investment in structured products—and has completely implemented 19  of the 27 nonpriority reform commitments.reported being the furthest along—completely implementing 23 of the 27  nonpriority commitments. Additionally, 21 of the 24 FSB member  jurisdictions reported having completely implemented 16 or more of the  nonpriority commitments.
Although the FSB survey data provide a broad picture of the  implementation status of the G20 reform commitments in the nonpriority  areas, the survey and its data have limitations. Importantly, the data are  self-reported by FSB members. According to an FSB official, the FSB  Secretariat has followed up bilaterally in a small number of cases to  collect additional information and clarify certain responses, but FSB  generally does not evaluate the survey responses to verify the accuracy  or assess the effectiveness of implementation. As a result, the survey  findings do not allow straightforward comparisons between jurisdictions or  across reform areas. Also, some commitments are broadly defined and,  to an extent, open to interpretation. For example, one reform commitment  for hedge funds is enhancing counterparty risk management, and FSB  reported that 19 members effectively implemented the reform. One of  these members reported addressing the issue partly through an annual  hedge fund survey; in contrast, another member reported adopting  legislation and regulation to implement the reform. To interpret each G20  reform commitment, FSB added a new field in its 2013 survey that  identifies the international standard associated with a particular reform  commitment.
section_title: IMF and FSB Conduct Reviews to Assess Implementation and Effectiveness of International Financial Reforms
paragraphs: While the Basel Committee conducts reviews of its members (discussed  earlier), IMF and FSB also have programs to monitor the implementation  of international financial standards and review the effectiveness of the  supervision. These programs include IMF and the World Bank’s Financial  Sector Assessment Program (FSAP) and Reports on the Observance of  Standards and Codes (ROSC) assessments, as well as FSB thematic  and country peer reviews.
subsections: section_title: IMF and the World Bank’s FSAP and ROSC
paragraphs: FSAP provides the framework for comprehensive and in-depth  assessments of a country’s financial sector. FSAP assessments gauge  the stability of the financial sector and assess its potential contribution to  growth. Historically, participation in FSAP has been voluntary, but in  2010 IMF made financial stability assessments under FSAP a mandatory  part of the surveillance for members with systemically important financial  sectors. As of November 2013, IMF has identified 29 jurisdictions,  including the United States, as having such a sector, in part based on the  size and interconnectedness of each country’s financial sector.  Similarly, following the 2007-2009 financial crisis, the G20 countries  committed to undergo an FSAP every 5 years.
For the first time, the United States underwent an FSAP between 2009  and 2010, when the Dodd-Frank Act was being deliberated and before it  was enacted. The FSAP report discussed, among other things, the U.S.  experience with and recovery from the recent financial crisis, factors that  contributed to the crisis, and legislative actions being undertaken by the  United States to reform its financial system. The report included a number  of recommendations broadly intended to institutionalize and strengthen  systemic risk oversight; redesign the regulatory architecture; strengthen  micro-prudential regulation and supervision; strengthen oversight of  market infrastructure; enhance crisis management, resolution, and  systemic liquidity arrangements; and address too-big-to-fail issues and  the future of the housing government-sponsored enterprises. The report  recognized that the Dodd-Frank Act was largely consistent with the FSAP  recommendations but noted effective implementation would be key.
IMF and the World Bank also have a program to assess member  compliance with international financial sector standards, the results of  which are summarized in a ROSC. IMF and the World Bank have  recognized international standards in policy areas identified as key for  sound financial systems and deserving of priority implementation in  consideration of a country’s circumstances. The standards include those  developed by the Basel Committee, CPSS, IOSCO, IAIS, IADI, and IASB.  These assessments are voluntary, even in jurisdictions for which an  FSAP stability assessment is mandatory. ROSCs can be done on a  stand-alone basis or as part of an FSAP. For example, the FSAP review  of the United States included ROSCs covering international banking,  securities, insurance, clearing, and settlement standards. assessment of the U.S. supervisory system against international codes  identified many positive aspects but also some important shortcomings.
section_title: FSB’s Thematic and Country Peer Reviews
paragraphs: International Monetary Fund, “United States: Publication of Financial Sector Assessment  Program Documentation— Reports on Observance and Codes,” IMF Country Report No.  10/250 (July 2010). playing field. Under the FSB charter, member jurisdictions have  committed to undergo periodic peer reviews. FSB’s peer program  includes two types of reviews: thematic and country.
Thematic reviews focus on the implementation and effectiveness of FSB- endorsed international standards deemed important for global financial  stability. The objectives of the reviews are to encourage consistent cross- country and cross-sector implementation, evaluate (where possible) the  extent to which standards have had their intended results, and identify  gaps and weaknesses in reviewed areas. As previously discussed, FSB  has conducted thematic peer reviews in the priority reform areas, such as  compensation and resolution regimes. It also has conducted peer reviews  in nonpriority reform areas, including the following:
The ongoing peer review on credit ratings was assessing FSB  member progress implementing FSB’s Principles for Reducing   The interim report  Reliance on Credit Rating Agency Ratings.identified several areas where accelerated progress is needed,  including the need for FSB members to provide incentives to financial  institutions to develop their own independent credit assessment  processes. It also identified challenges that need to be addressed,  which include reducing undue reliance on credit ratings in  international standards, identifying suitable alternative standards of  creditworthiness, and addressing constraints in the development of  internal risk assessment systems.
The peer review on risk governance found that national authorities,  since the crisis, have taken several measures to improve regulatory  and supervisory oversight of risk governance at financial institutions.  These measures include developing or strengthening existing  regulation or guidance, raising supervisory expectations for the risk  management function, engaging more frequently with the board and  management, and assessing the accuracy and usefulness of the  information provided to the board to enable effective discharge of their  responsibilities. It also made four recommendations targeting areas in which more substantial work was needed, including strengthening  regulatory and supervisory guidance, reviewing principles for risk  governance, and exploring ways to formally assess risk culture at  financial institutions.
FSB’s country reviews focus on the implementation of international  standards and their effectiveness nationally. The reviews examine steps  taken or planned by national authorities to address FSAP and ROSC  recommendations of IMF and the World Bank. (FSB peer reviews take  place 2 to 3 years following an FSAP.) Unlike an FSAP, an FSB country  review does not comprehensively analyze a jurisdiction’s financial system  structure or policies, or its compliance with international financial  standards. According to an FSB official, both country and thematic peer  reviews have the inherent limitation of being primarily “desktop-based”  reviews, which constrains the review team’s ability to engage in on-site  interactions to assess implementation progress, challenges, and impact.  FSB’s peer review handbook notes that country peer reviews will include  a brief on-site visit in the reviewed jurisdiction to meet with the authorities,  and subject to the agreement of the reviewed jurisdiction, the on-site visit   Such a  also may include meetings with relevant market participants.visit should support the peer review’s objective and be consistent with  equal treatment of members under the peer review process, and its  expected benefits should outweigh the resource costs.
As part of this commitment, the United States volunteered to undergo a  country peer review in 2013. The review found that U.S. authorities had  made good progress in following up on FSAP recommendations,  particularly in regard to systemic risk oversight arrangements and the  supervision and oversight of financial market infrastructures. At the same  time, the review included recommendations targeted at systemic risk  oversight arrangements, supervision and oversight of financial market  infrastructures, and insurance supervision. For example, FSB  recommended that FSOC develop a more systematic, analytical, and  transparent macroprudential framework for coordinating efforts and  incorporating the bottom-up views of member agencies to address  systemic risk. In addition, FSB recommended that FSOC develop a more  in-depth and holistic analysis of the systemic risks to financial stability.  Similarly, in 2012, we reported that FSOC’s establishment of a Systemic  Risk Committee to facilitate coordination among its member staffs can  help FSOC analyze known risks, but the approach does not take full  advantage of FSOC member agency resources to identify new threats to  the financial system. We also reported that FSOC identifies a number of  potential emerging threats to financial stability in its annual reports, but  does not use a systematic, forward-looking approach to identify such  threats. To address these weaknesses, we recommended, among other  things, that FSOC develop (1) a monitoring approach that includes  systematic sharing of key financial risk indicators across FSOC members  and member agencies to assist in identifying potential threats for further  monitoring or analysis; and (2) a more systematic, forward-looking  approach for reporting on potential emerging threats to financial stability  in annual reports. In its comment letter, Treasury stated that officials will  carefully consider the report’s findings and recommendations.  As of  March 2014, Treasury had taken some steps to implement the  recommendations, but the recommendations had not been fully  implemented.
While FSB noted that federal and state authorities in the United States  began addressing FSAP recommendations on the insurance sector—for  example, establishing the Federal Insurance Office—it also noted that  significant additional work is needed. According to FSB, the structure and  characteristics of insurance supervision in the United States—the  multiplicity of state regulators, the absence of federal regulatory powers to  promote greater regulatory uniformity, and the limited rights to preempt  state law—constrain the federal government’s ability to ensure regulatory  uniformity in this sector.should promote greater regulatory uniformity in the insurance sector,  including by conferring additional powers and resources at the federal  level where necessary.
section_title: Jurisdictional Differences and Other Factors May Create Implementation Challenges for the G20 Financial Reforms
paragraphs: As recognized by regulators, industry associations, and academics, a  broad range of legal, economic, and political factors can create  implementation challenges for jurisdictions. For example, differences in  economic development of countries and differences in philosophy or  ideology between jurisdictions can make it difficult for the international  standards to be implemented consistently across jurisdictions.  Representatives from one industry association told us that when standard  setting bodies set narrow or detailed principles, such principles can  become difficult to implement consistently because of jurisdictional  differences. In addition, legislatures and industry groups may support  more or less stringent requirements than called for by the standards.  Finally, domestic regulators may apply or interpret the standards  differently from other domestic regulators. As discussed previously, the  Basel Committee’s thematic reviews found variation in the application of  the capital standards across jurisdictions and partly attributed the  variations to differences in supervisory practices.
As recognized by the G20 leaders, international bodies, industry  associations, and others, the failure to implement the international  financial standards consistently across jurisdictions could have a number  of negative consequences. Most importantly, such inconsistencies could  hinder or weaken the ability of national authorities or international bodies  to protect against developments affecting national and international  financial stability and help prevent or mitigate future financial crises.  Moreover, a regulator stated that inconsistent implementation could lead  to an unlevel playing field for financial institutions or regulatory arbitrage.  For example, financial markets or services could migrate to less-regulated  or unregulated jurisdictions. It also could impose a variety of avoidable  costs on financial institutions with negative consequences for customers,  investors, and national and global economies. For example, financial  institutions operating in multiple jurisdictions could be subject to  conflicting or duplicative rules and, thus, higher compliance costs.
Some academics and industry associations also have noted that  complete global consistency across all financial regulations is not  necessarily possible or preferable. Two academics suggest that if  jurisdictions face significant limitations in their ability to reach agreement,  harmonization efforts might lead to agreement on only weak global  standards. An academic we interviewed said that harmonized  regulations across all jurisdictions may provide a level playing field but  could be problematic, in part by not providing jurisdictions with the  flexibility to respond to their differences. He also said that standardizing  regulations could cause financial institutions to behave in the same way  and unintentionally concentrate risk (e.g., holding the same types of  assets). Similarly, an industry association noted that international  consistency does not require uniformity but an appropriate level of  similarity, comparability, and predictability of regulatory outcomes across  jurisdictions. According to the association, international consistency also  means striking a balance between consistency and the need for sensible  local differences and supervisory discretion. In light of the potential for  inconsistent implementation in areas that may result in unnecessary  negative consequences, the review programs operated by FSB, IMF, and  international standard-setting bodies likely will play an important role in  addressing this issue. Indeed, some academics and industry associations  view FSB’s peer reviews as an important mechanism for monitoring and  encouraging compliance with international financial standards. Moreover,  one academic suggests that the reviews may help deepen commitment to  the standards by domestic officials by holding member jurisdictions  accountable not only to an international body but also to each other.  However, some express concern about the potential effectiveness of FSB  peer reviews, in part because any of their recommendations, like the  international financial standards, are not binding.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFTC, FDIC, FSB, the Federal  Reserve, IMF, OCC, SEC, and Treasury, for their review and comment.  All of the agencies except for the Federal Reserve provided technical  comments, which we have incorporated, as appropriate. Treasury and  SEC provided written comments that we have reprinted in appendixes V  and VI, respectively.
In commenting on our draft report, Treasury noted that the G20, FSB, and  international standard-setting bodies have been cooperating since the  financial crisis on advancing the international financial reform agenda and  strengthening the global financial system. Treasury further noted that the  United States has played a leadership role in designing and implementing  this agenda. Finally, Treasury agreed with the report that international  reform efforts are not complete. Treasury noted that it would continue to  work with other regulators to forge high-quality, compatible rules,  encouraging reforms in other jurisdictions as strong as those in the United  States, and would continue to promote greater consistency and  convergence.
SEC noted that it welcomed GAO's review of the international reform  efforts and valued GAO’s perspective in this area. SEC stated that the  report correctly notes that international standards are not legally binding  and rely on the decision of national authorities to implement the standards  (reflecting, among other considerations, appropriate respect for national  sovereignty). SEC also noted that it was pleased that the report  acknowledges that while negative consequences can flow from varying  degrees of implementation of international standards, there also can be  good reasons behind such differences, such as avoiding a movement to  less robust standards or the unintentional concentration of risks. SEC  agrees with the report’s discussion that there may be reasons to take into  account variations in national legal and market structures and conditions,  including differences in economic development and enforcement  authority.
SEC also comments on a number of specific issues in the report. SEC  noted that it does not share the view that international organizations  “implement” international standards, nor should they have that authority.  Our report summarizes the international financial reform process, drawing  a clear line between the development of international standards under the  auspices of FSB or standard-setting bodies (or both) and the voluntary  adoption of rules or policies consistent with these standards by  jurisdictions, such as through legislation or regulations. SEC also noted  that interconnections permitted disruptions to spread quickly across  borders but was unsure that such interconnections increased systemic  risk as stated in our report. No single definition for systemic risk exists,  but systemic risk has been viewed as the possibility that a single event  could broadly affect the entire financial system, causing widespread  losses rather than just losses at one or a few institutions. As we recently  reported in January 2013, the 2007-2009 financial crisis illustrated the  potential for systemic risk to be generated and propagated outside of the  largest financial firms (such as by money market mutual funds), in part  because of interconnections not only between firms but also between  markets. SEC also noted the particular status of the accounting standard- setting bodies. In particular, both IASB and the Financial Accounting  Standards Board are independent, private-sector organizations. Although  the IASB is an FSB member, the legitimacy of the accounting standards  that these bodies set depends, among other things, on those bodies’  ability to set accounting standards free from political interference. We  have added a clarifying note in figure 4 in appendix II to reflect this  comment. Finally, SEC noted that our report uses the term “shadow  banking” and it is not appropriate to use this term to refer to market-based  financing, which serves a credit intermediation function. Our report  discusses shadow banking, because it is one of the G20 financial reform  commitments—expanding the regulatory perimeter, including  strengthening of the regulation and oversight of shadow banking. Our  report does not define shadow banking but rather uses FSB’s Policy  Framework for Addressing Shadow Banking Risks in Securities Lending  and Repos (see appendix III, table 7) as a reference document.  According to FSB, this policy was intended to help strengthen oversight  and regulation of the shadow banking system. The policy notes that the  “shadow banking system” can broadly be described as “credit  intermediation involving entities and activities (fully or partially) outside  the regular banking system.” Therefore, the use of the term shadow  banking is appropriate for this report.
We are sending copies of this report to CFTC, FDIC, the Federal  Reserve, OCC, SEC, and 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 VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report reviews the (1) U.S. role in the international financial reform  efforts, including the development of international financial standards, and  (2) implementation status of recent international financial reforms in the  United States relative to other jurisdictions and challenges or concerns  that any uneven progress could present.
To address the first objective, we reviewed and analyzed declarations,  communiqués, and other statements issued by the G20 leaders about  their agreed-to commitments to reform financial regulations. In addition,  we reviewed and analyzed reports or other documents issued since 2008  by various international bodies—including the Financial Stability Board  (FSB), International Monetary Fund (IMF), Basel Committee on Banking  Supervision, International Organization of Securities Commissions,  Committee on Payment and Settlement Systems, and International  Accounting Standards Board—about their role in implementing the G20  reforms, such as through the development of international financial  standards, or monitoring the implementation status of the G20 reforms at  the international and jurisdictional levels. We also reviewed press  statements, policy documents, or other material issued by U.S. and other  jurisdictions about their work to support the G20 financial reforms. We  interviewed U.S. financial regulatory authorities, including the Commodity  Futures Trading Commission (CFTC), Federal Deposit Insurance  Corporation (FDIC), Board of Governors of the Federal Reserve System,  Office of the Comptroller of the Currency (OCC), Securities and  Exchange Commission (SEC), and Department of the Treasury—and  FSB and IMF officials about their role in the G20 reform efforts, including  implementation challenges. To gain insights about the G20 financial  reforms and associated implementation challenges, we also reviewed  numerous studies by academics and other experts and interviewed four  professors in the fields of law, economics, and political science and two  industry associations representing banks or over-the-counter (OTC)  derivatives market participants. We judgmentally selected these parties  based on studies or other material they issued on the G20’s international  financial reforms, and the results are not generalizable.
To address the second objective, we reviewed, analyzed, and  summarized progress reports, peer reviews, surveys, or other material  prepared by FSB and international bodies, including the Basel Committee  on Banking Supervision and IMF, on the implementation status of the  G20 reforms in the priority areas at the jurisdictional level. Similarly, we  also reviewed and analyzed FSB’s annual surveys of its member  jurisdictions on their implementation status of the G20 reforms in the  nonpriority areas. We reviewed the accuracy of U.S. responses to  questionnaires administered by FSB or a standard setting body that  covered U.S. progress implementing Basel II, 2.5, and III and the G20’s  OTC derivatives reforms, including the requirements for OTC derivatives  transactions to be centrally cleared, traded on organized trading  platforms, and reported to trade repositories, and we generally found the  U.S. responses were accurate. We also asked audit offices of 14  jurisdictions that are members of FSB—and which are participating in an  International Organization of Supreme Audit Institutions working group on  financial reforms—to do the same for their regulators’ responses. Finally,  as identified above, we interviewed officials representing U.S. regulators,  FSB, IMF, industry associations, and academics about challenges or  concerns that uneven implementation of the G20 financial reforms across  jurisdictions could present.
We conducted this performance audit from March 2013 to April 2014 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: The International Financial Architecture and International Bodies
paragraphs: As shown in figure 4, a variety of international bodies are part of the  international financial architecture.
subsections: section_title: Bank for International Settlements
paragraphs: The Bank for International Settlements provides a forum for international  cooperation among central banks and within financial and supervisory  communities. Its members as of July 2013 are central banks or monetary  authorities of 59 economies plus the European Central Bank. The Bank  for International Settlements acts as a bank for central banks; publishes  economic and monetary research; and acts as a counterparty for central  banks in their financial transactions and as agent or trustee in connection  with international financial operations. It also hosts other international  financial organizations and groups, such as FSB and the Basel  Committee.
section_title: Committee on the Global Financial System
paragraphs: The Committee on the Global Financial System is a central bank forum to  monitor issues relating to financial markets and systems. It works to  identify and assess potential sources of stress in global financial markets.
section_title: Financial Action Task Force
paragraphs: The Financial Action Task Force is an organization of 36 jurisdictions that  sets standards and promotes effective implementation of legal,  regulatory, and operational measures for combating money laundering,  terrorist financing, and other related threats to the integrity of the  international financial system.
section_title: Organisation for Economic Co-operation and Development
paragraphs: The Organisation for Economic Co-operation and Development is a  membership organization of 34 countries that promotes economic growth  and employment among its members, while maintaining financial stability.  It has cooperated with the G20 in areas related to promoting economic  growth, and in areas of financial regulation such as developing principles  on consumer protection. It also is involved in global tax standards  development.
section_title: The World Bank
paragraphs: The World Bank, established in 1944, provides financial and technical  assistance to developing countries with the goals of ending extreme  poverty and promoting shared prosperity by fostering income growth of  the bottom 40 percent of every country. Headquartered in Washington,  D.C., with 10,000 staff in 120 offices worldwide, the bank provides  financial assistance products and services and engages in a range of  knowledge-sharing activities.
section_title: The Monitoring Board of the IFRS Foundation
paragraphs: The Monitoring Board of the IFRS Foundation oversees the work of the  International Accounting Standards Board (IASB). As noted in the  background section of this report, the IASB carries out the IFRS  Foundation’s stated objectives of developing a single set of high-quality,  understandable, enforceable, and globally accepted accounting  standards. IASB members are responsible for the development and  publication of International Financial Reporting Standards (IFRS). The  members of the Monitoring Board are the Growth and Emerging Markets  Committee of the International Organization of Securities Commissions,  the Financial Services Agency of Japan, the European Commission, and  the U.S. Securities and Exchange Commission. Additional members of  the Monitoring Board selected in January 2014 are the Comissão de  Valores Mobiliários of Brazil and the Financial Services Commission of  Korea. The Basel Committee on Banking Supervision is an observer.
section_title: Appendix III: Reform Areas and Objectives of the Group of Twenty, Standards Developed by International Bodies, and U.S. Agencies’ Participation
paragraphs: The Group of Twenty (G20) leaders have committed to undertake a broad  range of financial regulatory reforms at the various summits held since  2008. The G20 leaders generally have tasked their national authorities— along with the Financial Stability Board (FSB), standard-setting bodies,  such as the Basel Committee on Banking Supervision, the International  Organization of Securities Commissions (IOSCO), International  Association of Insurance Supervisors (IAIS), and other bodies—with  converting their broad financial reform commitments into more specific  standards (including policies, principles, practices, or guidance). Although  the standards are developed under the auspices of FSB or standard  setting bodies (or both), the work of many of these entities largely is  carried out by staff of finance ministries, central banks, and financial  sector regulators of the member institutions. As shown in table 7, various  U.S. agencies have participated in the development of standards needed  to implement the G20 reform commitments, and all have been involved in  their review.
section_title: Appendix IV: Implementation Status of the Group of Twenty’s Reform Commitments Reported by Select Member Jurisdictions of the Financial Stability Board
paragraphs: The Financial Stability Board (FSB) is responsible for coordinating the  implementation of the Group of Twenty’s (G20) financial reform  commitments and reporting implementation progress to the G20. In  collaboration with standard setting bodies, FSB established a framework  in 2011 to monitor and report on the implementation of the G20 financial  reform commitments. FSB has selected priority reform areas that  undergo more intensive monitoring and detailed reporting than other  reform areas, and the list of priority areas is reviewed annually by FSB  and revised as needed. Priority reform areas are selected based on the  importance of their consistent and comprehensive implementation toward  global financial stability. For each priority area, an FSB working group or  a standard setting body is responsible for monitoring implementation  progress and periodically preparing a progress report. Currently, FSB’s  priority areas are (1) the Basel II, 2.5, and III framework; (2) OTC  derivatives market reforms; (3) compensation practices; (4) policy  measures for global SIFIs; (5) resolution regimes; and (6) shadow  banking.
For the G20 financial reform commitments in the nonpriority areas, FSB  generally monitors their implementation less intensively, primarily through  annual surveys of its member jurisdictions.member jurisdictions covered 27 G20 financial reform commitments. The  survey data are self-reported by FSB member jurisdictions, and FSB  generally does not evaluate the survey responses to verify the accuracy  or assess the effectiveness of implementation.
FSB’s 2013 survey of its  Figure 5 provides country profiles that summarize information on the  implementation status of selected G20 financial reform commitments by  the 11 countries that are home to global systemically important banks, as  identified by FSB. The country profiles include information on the  implementation status of G20 reform commitments in priority and  nonpriority areas. The profiles also provide examples of how countries  have implemented certain nonpriority reforms, such as through legislative  or regulatory changes. These examples are excerpts taken from FSB’s  2013 surveys completed by the jurisdictions and reflect the differences in  the approaches taken by the jurisdictions. Finally, each profile includes  information on a country’s population, gross domestic product (GDP), and  global competitiveness index.
section_title: Appendix V: Comments from the Department of the Treasury
section_title: Appendix VI: Comments from the Securities and Exchange Commission
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Richard Tsuhara (Assistant  Director), Rudy Chatlos, Catherine Gelb, Camille Keith Jennings, Thomas  McCool, Thomas Melito, Marc Molino, Akiko Ohnuma, Barbara  Roesmann, and Jessica Sandler made key contributions to this report.