Government Support For Bank Holding Companies: Statutory Changes to Limit Future Support Are Not Yet Fully Implemented
Published: 2013-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government extended unprecedented support to financial institutions to stabilize financial markets during the financial crisis. While these actions helped to avert a more severe crisis, they raised questions about the appropriate scope of government safety nets for financial institutions. GAO was asked to review the benefits that large bank holding companies (those with more than $500 billion in assets) have received from actual and implied government support.
This is the first of two reports GAO will issue on this topic. This report examines (1) actual government support for banks and bank holding companies during the financial crisis, and (2) recent statutory and regulatory changes related to government support for banks and bank holding companies. GAO reviewed relevant statutes, regulations, and agency documents; analyzed program transaction data; and interviewed regulators, representatives of financial institutions, and academics. In a second report to be issued in 2014, GAO will examine any funding or other economic advantages the largest bank holding companies have received as a result of implied government support.
section_title: What GAO Found
paragraphs: During the 2007-09 financial crisis, the federal government's actions to stabilize the financial system provided funding support and other benefits to bank holding companies and their subsidiaries. Agencies introduced new programs with broad-based eligibility that provided funding support to eligible institutions, which included entities that were part of a bank holding company and others. Programs that provided the most significant support directly to bank holding companies or their subsidiaries included Department of the Treasury capital investment programs, Federal Reserve System lending programs, and Federal Deposit Insurance Corporation (FDIC) guarantee programs. Together these actions helped to stabilize financial conditions, while participating firms also accrued benefits specific to their own institutions, such as liquidity benefits from programs that allowed them to borrow at longer maturities and at interest rates that were below possible market alternatives. At the end of 2008, program use--measured for each institution as the percentage of total assets supported by the programs--was higher on average for banks and bank holding companies with $50 billion or more in total assets than for smaller firms. The six largest bank holding companies were significant participants in several emergency programs but exited most by the end of 2009. Differences in program use were driven in part by how institutions funded themselves. For example, while smaller banks relied more on deposit funding, larger bank holding companies relied more on short-term funding markets and participated more in programs that assisted these markets. In addition to these programs, the Board of Governors of the Federal Reserve System (Federal Reserve Board) granted several regulatory exemptions to allow banks to provide liquidity support to their nonbank affiliates and for other purposes. Finally, government assistance to individual troubled firms benefited these firms, their counterparties, and the financial system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) contains provisions that aim to modify the scope of federal safety nets, restrict future government support and strengthen regulatory oversight for the banking sector, but implementation is incomplete and the effectiveness of some provisions remains uncertain. Agencies have finalized certain changes to traditional safety nets for insured banks, but impacts of provisions to limit the scope of transactions that benefit from these safety nets will depend on how they are implemented. The act also places restrictions on emergency authorities used by regulators during the crisis to assist financial firms. For example, it prohibits the use of these authorities to rescue a specific failing firm. The Federal Reserve Board is required by the act to establish policies and procedures implementing changes to its emergency authority under Section 13(3) of the Federal Reserve Act, but it has not completed its process for drafting the required procedures or set time frames for doing so. Setting time frames could help ensure more timely completion of these procedures. FDIC has made progress toward implementing its new authority under the Dodd-Frank Act to resolve a large failing firm. FDIC continues to work to address potential obstacles to the viability of its resolution process as an alternative to bankruptcy, such as challenges that could arise when resolving more than one failing firm. Finally, the Federal Reserve Board has finalized certain enhanced prudential standards for the largest financial firms intended to reduce the risks these firms could pose to the financial system.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Federal Reserve Board establish timeframes for completing its process for drafting procedures related to its emergency lending authority to ensure timely compliance with Dodd-Frank Act requirements. The Federal Reserve Board accepted this recommendation.

section_title: Letter
paragraphs: During the financial crisis of 2007-2009, the federal government extended  unprecedented amounts of assistance to financial institutions to stabilize  financial markets and the broader economy. This support included the  creation of temporary programs that extended more than $1 trillion in  loans, provided hundreds of billions of dollars of capital, and guaranteed  hundreds of billions of dollars of other liabilities for participating financial  institutions. On a few occasions, the federal government provided  additional capital and other support to individual large troubled institutions  to prevent a bankruptcy that could have further destabilized markets.  While these government interventions helped to avert a more severe  crisis, they raised questions about moral hazard and the appropriate  scope of government safety nets for financial institutions. In particular,  extraordinary support for troubled financial institutions led to debate about  how to decrease the likelihood of future rescues of failing institutions and  limit the potential for federal safety nets intended for insured depository  institutions to provide a backstop for activities conducted outside these  institutions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) includes provisions intended to prevent government rescues of  individual financial institutions, place new restrictions on emergency  authorities used by regulators to assist financial institutions during the last  financial crisis, and subject a designated group of large financial  institutions to stricter regulatory oversight, among other changes.
Nevertheless, market observers have continued to debate whether some  of the largest and most complex financial institutions—including bank  holding companies with more than $500 billion in total consolidated  assets—may continue to benefit from expectations of extraordinary  government support that could potentially give them funding and other  economic advantages relative to smaller competitors.
You asked us to review the economic benefits that the largest bank  holding companies (those with more than $500 billion in total consolidated  assets) have received as a result of actual or perceived government  support. This is the first of two reports we will issue on this topic. In this  report, we review (1) support banks and bank holding companies  received as a result of government efforts to stabilize financial markets  during the financial crisis of 2007-2009, and (2) recent statutory and  regulatory changes related to government support for banks and bank  holding companies and factors that could impact the effectiveness of  these changes. In terms of scope, the first section of this report  addresses benefits that bank holding companies and their subsidiaries  received during the crisis from actual government support provided  through emergency actions taken. It does not address benefits that some  institutions may have received and may continue to receive from  perceived government support—that is, support that market participants  may expect the federal government to provide to these institutions in the  event that they face large losses that threaten them with failure. In a  second report to be issued in 2014, we will address questions about  whether the largest bank holding companies have received funding or  other economic advantages as a result of expectations that the  government would not allow them to fail. That report will include the  results of our original empirical analysis of funding costs for large bank  holding companies.
To address the objectives for this report, we reviewed relevant statutes,  regulations, agency documents and data, related studies, and prior GAO  work. To describe government actions that extended support for banks  and bank holding companies during the crisis, we included information  and analyses from prior GAO work on the Troubled Asset Relief Program  (TARP), the emergency programs of the Board of Governors of the  Federal Reserve System (Federal Reserve Board), and other emergency  assistance provided to the banking sector. To obtain perspectives on the  benefits that bank holding companies and their subsidiaries received from  emergency government actions, we reviewed papers by staff of financial  regulators and other experts and interviewed federal financial regulators,  representatives of bank holding companies that received emergency  government assistance, trade associations, and academics. To describe  the amount of funding support that institutions of various sizes received  from emergency government programs, we obtained and analyzed  program transaction data for the programs introduced by the Department  of the Treasury (Treasury), the Federal Reserve Board, and the Federal  Deposit Insurance Corporation (FDIC) that provided the most significant  funding support directly to bank holding companies or their subsidiaries.  For selected programs, we compared the terms of this assistance (such  as interest rates and fees) to indicators of pricing for market alternatives  that might have been available to program participants. While this  analysis provides a measure of program pricing versus potential market  alternatives, it does not produce a precise quantification of the benefits  that accrued to participating financial institutions. To compare the extent  to which banking organizations of various sizes used these emergency  programs, we calculated the percentage of banking organization assets  that were supported by emergency programs—either through capital  injections, loans, or guarantees—at quarter-end dates for 2008 through  2012. Finally, we obtained and analyzed Federal Reserve Board  documentation of Federal Reserve Board decisions to grant exemptions  to Section 23A of the Federal Reserve Act and approve applications from  financial companies to convert to bank holding company status.
Our scope did not include an analysis of any benefits that banks or bank  holding companies may have received from any expectations of future  government support. As discussed earlier, we will cover any benefits to  banking entities from perceived government support in our second report.  For parts of our work that involved the analysis of computer-processed  data, such as transaction data for the agencies’ emergency programs, we  assessed the reliability of these data and determined that they were  sufficiently reliable for our purposes. Appendix I contains additional  information about the data sources used and our assessment of the  reliability of these data.  Appendices III and IV contain additional  information about our methodology for the data analyses in our first  objective.
To address our second objective, we reviewed information on statutory  and regulatory changes related to the authority to provide government  support for banks and bank holding companies, including prior GAO work  on implementation of the Dodd-Frank Act. To update the status of  agencies’ efforts to implement these changes, we reviewed agencies’  proposed and final rules, and interviewed staff from FDIC, the Federal  Reserve Board, the Office of the Comptroller of the Currency (OCC), and  Treasury. We identified statutory provisions or requirements that agencies  had not fully implemented and interviewed agency staff about planned  steps to complete implementation. We also reviewed relevant  congressional testimonies and other public statements by agency  officials. To describe factors that could impact the effectiveness of these  provisions, we reviewed prior GAO work on the potential impacts of  Dodd-Frank Act provisions. To obtain additional perspectives on factors  that could impact the effectiveness of these provisions, we interviewed  and reviewed the public statements and analyses of agency officials,  academics, and market experts. Appendix I contains additional  information on our scope and methodology.
We conducted this performance audit from January 2013 through  November 2013 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Bank Holding Companies
paragraphs: Bank holding companies are companies that own or control one or more  banks. In the United States, most banks insured by FDIC are owned or  controlled by a bank holding company. In addition to bank subsidiaries  engaged in traditional banking activities of deposit-taking and lending,  many U.S. bank holding companies also own or control nonbank  subsidiaries, such as broker-dealers and insurance companies. The Bank  Holding Company Act of 1956, as amended, establishes the legal  framework under which bank holding companies operate and establishes  their supervision, with the Federal Reserve Board having authority over  bank holding companies and their banking and nonbanking interests.
The Bank Holding Company Act also limits the types of activities that  bank holding companies may conduct, either directly or through their  nonbank affiliates. The restrictions, which are designed to maintain the  general separation of banking and commerce in the United States, allow  bank holding companies to engage only in banking activities and those  activities that the Federal Reserve Board has determined to be “closely  related to banking,” such as extending credit, servicing loans, and  performing appraisals of real estate and tangible and intangible personal  property, including securities. Under amendments to the Bank Holding  Company Act made by the Gramm-Leach-Bliley Act, also known as the  Financial Services Modernization Act of 1999, a bank holding company  can elect to become a financial holding company that can engage in a  broader range of activities that are financial in nature. The Gramm- Leach-Bliley Act defined a set of activities as financial in nature and  authorized the Federal Reserve Board, with the agreement of Treasury,  to determine whether an additional activity is financial in nature or  incidental or complementary to a financial activity. For example, financial  holding companies are permitted to engage in securities underwriting and  dealing, but would be prohibited, for example, from selling commercial  products. Large U.S. bank holding companies typically are registered as  financial holding companies and own a number of domestic bank  subsidiaries, as well as nonbank and foreign subsidiaries.
The largest U.S. bank holding companies have grown substantially in size  and scope in recent decades. Since 1990, in part due to waves of  mergers, the share of total bank holding company assets controlled by  the largest 10 firms increased from less than 30 percent to more than 60  percent, as of July 2012. Some bank holding companies grew to become  large financial conglomerates that offer a wide range of products that cut  across the traditional financial sectors of banking, securities, and  insurance. Following the enactment of the Gramm-Leach-Bliley Act in  1999, the assets held in nonbank subsidiaries or at the holding company  level grew to account for a progressively larger share of total bank holding  company assets. Greater involvement by bank holding companies in  nontraditional banking businesses has been accompanied by an increase  in the proportion of bank holding company income that is generated by  fee income, trading, and other noninterest activities. As large bank  holding companies have broadened the scope of their activities and their  geographic reach, they have become more organizationally complex. A  simple indicator of organizational complexity is the number of separate  legal entities within the bank holding company; the largest four U.S. bank  holding companies each had at least 2,000 as of June 30, 2013.
The 2007-2009 financial crisis raised concerns that some U.S. bank  holding companies—as well as some nonbank financial institutions—had  grown so large, interconnected, and leveraged that their failure could  threaten the stability of the U.S. financial system and the global economy.  The Dodd-Frank Act includes several provisions intended to reduce the  risk of a failure of a large, complex financial institution, the damage that  such a failure could do to the economy, and the likelihood that a failing  institution would receive government support. For example, the act directs  the Federal Reserve Board to impose enhanced prudential standards and  oversight on bank holding companies with $50 billion or more in total  consolidated assets and nonbank financial companies designated by the  Financial Stability Oversight Council (FSOC) for supervision by the  Federal Reserve Board.
section_title: Federal Safety Net Programs for the Banking Sector
paragraphs: The federal government maintains programs—frequently referred to as  safety nets—to reduce the vulnerability of depository institutions to runs  that could threaten the health of the banking system and the broader  economy. Following a series of banking crises in the early 1900s, the  government created two programs generally considered to form the core  of these safety nets: the Federal Reserve System’s discount window and  FDIC deposit insurance. By making emergency liquidity available to  solvent depository institutions through the discount window and reducing  incentives for depositors to withdraw their funds, these safety nets were  intended to help ensure that depository institutions could continue to lend  and provide other important services, even during turbulent economic  conditions. In addition to the discount window and deposit insurance, the  Federal Reserve Board and FDIC have other emergency authorities  related to maintaining financial stability. Moreover, the Federal Home  Loan Bank System serves to provide liquidity to the banking system that  helps to foster stability. In part because access to federal safety nets  potentially reduced incentives for insured depositors to monitor and  restrain the risk-taking of banks, banks were also subjected to federal  supervision and regulation.
The Federal Reserve System, in its role as the lender of last resort,  operates discount window programs, which provide a backup source of  liquidity through collateralized loans for depository institutions to help  ensure the stable flow of credit to households and businesses. During  normal market conditions, banks and other depository institutions in  generally sound financial condition can obtain discount window loans to  address short-term funding needs arising from unexpected funding  pressures. In a financial crisis, discount window lending can provide  broader liquidity support to the banking system that can help mitigate  strains in financial markets. The Federal Reserve Board authorizes the  Reserve Banks to offer three discount window programs to depository  institutions: primary credit, secondary credit, and seasonal credit, each  with its own terms. The primary credit program is the principal discount  window program and extends credit to depository institutions in generally  sound condition on a very short-term basis (usually overnight). The  secondary credit program is available to extend credit on a very short- term basis for depository institutions that are not eligible for primary  credit, with the purpose of helping institutions to return to market sources  of funds. The seasonal credit program generally extends loans to small  depository institutions that face seasonal fluctuations in their funding  needs. Section 10B of the Federal Reserve Act provides the statutory  framework for these programs and, among other things, requires all  discount window loans to be secured to the satisfaction of the lending  Reserve Bank.
FDIC deposit insurance covers deposit accounts—including checking and  savings accounts, money market deposit accounts, and certificates of  deposit—at insured depository institutions up to the insurance limit and is  backed by the full faith and credit of the U.S. government. Federal deposit  insurance was created to reduce the incentive for depositors to withdraw  funds from banks during a financial panic and maintain stability and  confidence in the nation’s banking system. During the 1800s and early  1900s, a number of states adopted different versions of deposit insurance  to insure bank obligations in response to a wave of bank failures.  However, these state insurance funds were later unable to cope with  economic events during the 1920s, which led to calls for a system of  federal deposit insurance to maintain financial stability. The Banking Act  of 1933, which created FDIC by an amendment to the Federal Reserve  Act, authorized FDIC to provide deposit insurance to banks and went into  effect on January 1, 1934. The deposit insurance fund, administered by  FDIC to resolve failed banks and thrifts, protects depositors from losses  due to institution failures up to a limit. The deposit insurance fund is  primarily funded by fees from assessments on insured depository  institutions. If necessary, FDIC can borrow from Treasury, the Federal  Financing Bank, and the Federal Home Loan Banks. As discussed later in  this report, the Dodd-Frank Act permanently increased the deposit  insurance limit from $100,000 to $250,000 and changed the base used to  determine an insured depository institution’s risk-based assessment to be  paid into the deposit insurance fund.
In addition to the discount window and deposit insurance, during the  2007-2009 financial crisis the Federal Reserve Board and FDIC used  their emergency authorities to assist individual failing institutions. As  discussed later in this report, the Dodd-Frank Act changed these  authorities so that emergency lending can no longer be provided to assist  a single and specific firm but rather can only be made available through a  program with broad-based eligibility—that is, a program that provides  funding support to institutions that meet program requirements and  choose to participate.
Federal Reserve emergency lending authority. Prior to the Dodd- Frank Act, emergency lending authority under Section 13(3) of the  Federal Reserve Act permitted the Federal Reserve Board, in unusual  and exigent circumstances, to authorize a Reserve Bank to extend  credit to individuals, partnerships, or corporations, if the Reserve Bank  determined that adequate credit was not available from other banking  institutions, and if the extension of credit was secured to the  satisfaction of the lending Reserve Bank. During the financial crisis  of 2007-2009, the Federal Reserve Board invoked this authority on a  number of occasions to authorize one or more Reserve Banks to  provide emergency assistance to particular institutions or to establish  new programs to provide liquidity support to important credit markets.
FDIC open bank assistance. The FDIC Improvement Act of 1991  included a systemic risk exception to the requirement that FDIC  resolve failed banks using the least costly method. Under this  exception, FDIC could provide assistance to a failing bank if  compliance with its requirements to resolve the bank using the least  costly approach would have “serious adverse effects on economic  conditions and financial stability”—that is, would cause systemic  risk—and if such assistance would “avoid or mitigate such adverse  effects.” FDIC could act under the exception only under a process  that included recommendations from the FDIC Board of Directors and  Federal Reserve Board and approval by the Treasury Secretary.  The agencies invoked this authority during the crisis to authorize FDIC  to provide guarantees to particular banks and to introduce new  guarantee programs with broad-based eligibility. As discussed later in  this report, the Dodd-Frank Act effectively removed FDIC’s authority  to provide assistance to failing banks outside of a receivership.
The Federal Home Loan Bank (FHLB) System also serves to provide  funding support to depository institutions during normal and strained  market conditions. The FHLB System is a government-sponsored  enterprise (GSE) that consists of 12 Federal Home Loan Banks (FHLB)  and is cooperatively owned by member financial institutions, which  include banks, thrifts, insurance companies, and credit unions. The  primary mission of the FHLB System is to promote housing and  community development by making loans, known as advances, to  member financial institutions. These institutions are required to secure  FHLB advances with high-quality collateral (such as single-family  mortgages) and may use FHLB advances to fund mortgages. To raise the  funds necessary to carry out its activities, the FHLB System issues debt  in the capital markets at favorable rates compared to commercial  borrowings due to market perceptions that the federal government would  intervene to support the FHLB System in a crisis, thereby reducing its risk  of default. When credit markets become strained, as they did during the  most recent crisis, the FHLB System can serve as an important backup  source of liquidity for member institutions that meet the FHLBs’ collateral  and other requirements.
section_title: 2007-2009 Financial Crisis
paragraphs: The 2007-2009 financial crisis was the most severe that the United States  has experienced since the Great Depression. The dramatic decline in the  U.S. housing market that began in 2006 precipitated a decline in the price  of financial assets that were associated with housing, particularly  mortgage-related assets based on subprime loans. Some institutions  found themselves so exposed to declines in the values of these assets  that they were threatened with failure—and some failed—because they  were unable to raise the necessary capital as the value of their lending  and securities portfolios declined. Uncertainty about the financial  condition and solvency of financial entities led banks to dramatically raise  the interest rates they charged each other for funds and, in late 2008,  interbank lending effectively came to a halt. The same uncertainty also  led money market funds, pension funds, hedge funds, and other entities  that provide funds to financial institutions to raise their interest rates,  shorten their terms, and tighten credit standards. As their funding became  increasingly difficult to obtain, financial institutions responded by raising  the prices and tightening their credit standards for lending to households  and nonfinancial businesses. The liquidity and credit crisis made the  financing on which businesses and individuals depend increasingly  difficult to obtain as cash-strapped banks tightened underwriting  standards, resulting in a contraction of credit to the economy. By late  summer of 2008, the potential ramifications of the financial crisis included  the continued failure of financial institutions, increased losses of individual  wealth, reduced corporate investments, and further tightening of credit  that would exacerbate the emerging global economic slowdown that was  beginning to take shape.
Because financial crises can result in severe damage to the economy and  the road to recovery can be long, governments and monetary authorities  have historically undertaken interventions, even though some of the  resulting actions raise concerns about moral hazard and can pose a risk  of losses to taxpayers. Given its severity and systemic nature, the  recent global financial crisis prompted substantial interventions starting in  late 2007, after problems in the subprime mortgage market intensified. As  discussed further in the next section of this report, these interventions  included the creation of temporary government programs to support  important credit markets and financial institutions that intermediate credit  in the economy by channeling funds from savers to borrowers.
section_title: Government Actions to Stabilize Markets Resulted in Significant Support to Bank Holding Companies
paragraphs: From 2007 through 2009, the federal government’s actions to stabilize the  financial system provided funding support and other benefits to bank  holding companies and their bank and nonbank financial subsidiaries.  The Federal Reserve Board, Treasury, and FDIC introduced new  programs with broad-based eligibility that provided funding support to  institutions that met program requirements and chose to participate.  Selected programs—for which eligibility was not restricted exclusively to  institutions that were part of a bank holding company—included Federal  Reserve System lending programs, Treasury capital investment  programs, and FDIC programs that guaranteed uninsured deposits and  new debt issues. Isolating the impact of individual interventions is difficult,  but collectively these actions likely improved financial conditions by  enhancing confidence in financial institutions and the financial system.  Bank holding companies and their subsidiaries also accrued benefits  specific to their own institutions, including liquidity benefits from programs  that allowed them to borrow at lower interest rates and at longer  maturities than might have been available in the markets. Programs  generally were made available to institutions of various sizes, and  differences in the use of programs by institutions of various sizes were  driven in part by differences in how institutions funded themselves. For  example, compared to smaller bank holding companies, larger bank  holding companies relied less on deposits as a source of funding and  more on short-term credit markets and participated more in programs  created to stabilize these markets. At the end of 2008, use of these  programs—measured for each institution as the percentage of total  assets supported by the programs—was larger on average for larger  banking organizations—those with $50 billion or more in total assets— than for smaller banking organizations. The six largest bank holding  companies were significant participants in several emergency programs  but exited most of the programs by the end of 2009. Differences in  program use across banking organizations of various sizes diminished as  institutions exited the programs. In addition to programs that provided  broad-based support, the Federal Reserve Board granted a number of  regulatory exemptions to allow banks to provide liquidity support to their  nonbank affiliates and for other purposes. Finally, some large bank  holding companies benefitted from individual institution assistance or  regulatory relief. For example, government assistance to prevent the  failures of large institutions benefited recipients of this assistance and  other market participants.
subsections: section_title: Crisis Programs with Broad-Based Eligibility Provided Funding Support to Bank Holding Companies and Their Subsidiaries
paragraphs: During the financial crisis, the Federal Reserve System, Treasury, and  FDIC introduced new programs with broad-based eligibility to provide  general funding support to the financial sector and to stabilize the  financial system. Given this report’s focus on bank holding companies,  this section focuses on the financial stability programs that provided the  most significant funding support directly to bank holding companies or  their bank or nonbank subsidiaries. Table 1 provides an overview of the  size, purpose, terms, and conditions of these programs, which included:  the Federal Reserve System’s Term Auction Facility (TAF); Primary  Dealer Credit Facility (PDCF); Term Securities Lending Facility  (TSLF); and Commercial Paper Funding Facility (CPFF);
Treasury’s Capital Purchase Program (CPP); and
FDIC’s Temporary Liquidity Guarantee Program (TLGP), which had  two components: the Debt Guarantee Program (DGP) guaranteed  certain newly issued senior unsecured debt, and the Transaction  Account Guarantee Program (TAGP) guaranteed certain previously  uninsured deposits.
Institutions eligible for these programs included both entities that were  part of a bank holding company structure and entities that were not. The  Federal Reserve System designed its emergency programs to address  disruptions to particular credit markets and to assist participants in these  markets. For example, the Federal Reserve System’s programs that  targeted support to repurchase agreement markets provided assistance  to securities firms that were subsidiaries of bank holding companies and  securities firms that were not. The Federal Reserve System’s CPFF  purchased commercial paper from participating bank holding companies  and other financial and nonfinancial firms that met the program’s eligibility  requirements. Treasury’s CPP and FDIC’s TLGP provided support  primarily to insured depository institutions (banks and thrifts) and bank  and savings and loan holding companies.
Bank holding companies also benefited from other government programs,  such as programs that targeted support to other market participants. For  example, in the absence of Treasury and Federal Reserve System  programs to guarantee and support money market mutual funds,  respectively, such funds may have reduced their purchases of money  market instruments issued by subsidiaries of bank holding companies and  other firms, thereby exacerbating funding pressures on these firms. Other  significant government programs included the Term Asset-Backed  Securities Loan Facility (TALF), which was created by the Federal  Reserve System to support certain securitization markets, and other  programs created by Treasury under TARP authority.
While the Federal Reserve System and FDIC provided expanded support  through traditional safety net programs for insured banks during the crisis,  some of the emergency government programs provided funding support  at the bank holding company level—where it could be used to support  both bank and nonbank subsidiaries—or directly to nonbank entities. In  late 2007, the Federal Reserve Board took a series of actions to ease  strains in interbank funding markets, including lowering the target federal  funds rate, easing terms at the discount window, and introducing a new  program—TAF—to auction term loans to banks. However, in part due to  statutory and regulatory restrictions on the ability of insured banks to  provide funding support to their nonbank affiliates, agencies determined  that emergency government support to insured banks was not sufficient  to stem disruptions to important credit markets. Nonbank credit markets— such as repurchase agreement and debt securities markets—had grown  to rival the traditional banking sector in facilitating loans to consumers and  businesses, and agencies determined that actions to address disruptions  to these markets were needed to avert adverse impacts to the broader  economy. For example, in March 2008, the Federal Reserve Board  authorized PDCF and TSLF to address strains in repurchase agreement  markets by providing emergency loans to broker-dealers, a few of whom  were owned by U.S. bank holding companies. When the crisis  intensified in September 2008 following the failure of Lehman Brothers  Holdings Inc.—a large broker-dealer holding company—the Federal  Reserve Board modified terms for its existing programs and took other  actions to expand funding support for both bank and nonbank entities.
In September 2008, Treasury and the Federal Reserve System  introduced new temporary programs to address liquidity pressures on  money market funds and to help ensure that these funds could continue  to purchase money market instruments issued by bank holding  companies and other firms. In addition, in October 2008, Congress  enacted legislation under which Treasury provided capital investments to  banks, bank holding companies, and other institutions; the legislation also  temporarily increased FDIC’s deposit insurance limit from $100,000 to  $250,000. Also that month, the Federal Reserve System created CPFF  to support commercial paper markets, and FDIC introduced TLGP, under  which it guaranteed previously uninsured transaction accounts and  certain newly issued senior unsecured debt for participating insured  depository institutions, bank and savings and loan holding companies,  and approved affiliates of insured depository institutions. For a more  detailed discussion of the circumstances surrounding the creation of  these programs, see appendix II.
Isolating the impact of individual government interventions is difficult, but  collectively these interventions helped to improve financial conditions by  enhancing confidence in financial institutions and the financial system  overall. Bank holding companies and their subsidiaries, in addition to  the financial sector and the economy as a whole, benefited from improved  financial conditions. Bank holding companies and their subsidiaries also  experienced individual benefits from participating in particular programs.
Individually and collectively, government lending, guarantee, and capital  programs provided important liquidity and other benefits to bank holding  companies and their subsidiaries including:
Access to funding in quantities and/or at prices that were  generally not available in the markets. Government entities  generally sought to set prices for assistance through these programs  to be less expensive than prices available during crisis conditions but  more expensive than prices available during normal market  conditions. In some credit markets assisted by government  programs—such as commercial paper and repurchase agreement  markets—conditions had deteriorated such that many institutions  faced substantially reduced access to these markets or had no access  at all. As discussed below, we compared program pricing to relevant  indicators of market pricing where available and found that emergency  lending and guarantee programs generally were priced below market  alternatives that may have been available. The availability of funding  support at this pricing in predictable quantities was also beneficial.  Even at times when eligible institutions did not access the available  programs, these programs diversified the sources of funds that could  be available to them if they faced increased funding pressures.
Access to funding at longer maturities. By providing and standing  ready to provide funding support for terms of 1 month or longer,  government programs helped to reduce rollover risk—the risk that an  institution would be unable to renew or “rollover” funding obligations  as they came due—for individual institutions and their counterparties.  At times during the crisis, bank holding companies and their  subsidiaries faced difficulties borrowing at terms of 1 month or longer  in several important credit markets, including interbank, repurchase  agreement, and commercial paper markets. Government programs  mitigated funding pressures for borrowers in these markets by  reducing the risk that funding sources would rapidly disappear for an  institution or its counterparties. Because participants in these  programs were also lenders of funds, these programs helped to  encourage these institutions to continue to lend funds to support the  economy.
Stabilizing deposit funding. FDIC’s TAGP, which temporarily  insured certain previously uninsured deposits for a fee, helped to  stabilize deposit funding by removing the risk of loss from deposit  accounts that were commonly used to meet payroll and other  business transaction purposes and allowing banks, particularly  smaller ones, to retain these accounts. Deposits are the primary  source of funding for most banks, and smaller banks tend to fund  themselves to a greater extent with deposits.
Funding support for a broad range of collateral types. A few  Federal Reserve System programs provided important liquidity  benefits to individual institutions and credit markets by allowing  institutions to obtain liquidity against a broad range of collateral types.  TAF provided 1-month and 3-month loans to eligible banks against  collateral types that could also be used to secure discount window  loans. While TAF collateral requirements were based on discount  window requirements, TAF provided emergency credit on a much  larger scale, with TAF loans outstanding peaking at nearly $500  billion, compared to peak primary credit outstanding during the crisis  of just over $100 billion. In March 2008, the Federal Reserve  System began providing liquidity support to certain nonbank financial  firms—the primary dealers—for less liquid collateral types through  PDCF and TSLF. Through PDCF, the Federal Reserve Bank of New  York (FRBNY) allowed primary dealers to obtain overnight cash loans  against harder-to-value collateral types, such as mortgage-backed  securities. Through TSLF, FRBNY auctioned loans of Treasury  securities to primary dealers in exchange for less-liquid collateral  types to increase the amount of high-quality collateral these dealers  had available to borrow against in repurchase agreement markets.  When pressures in repurchase agreement markets intensified in  September 2008, the Federal Reserve Board expanded the types of  collateral it accepted for both PDCF and TSLF.
Although imperfect, one indicator of the extent to which an institution  directly benefited from participation in an emergency program is the  relative price of estimated market alternatives to the program. To  determine how pricing of the emergency assistance compared to market  rates, we compared pricing for programs to the pricing for market  alternatives that might have been available to program participants. First,  we compared the interest rates and fees charged by the Federal Reserve  System and FDIC for participation in the emergency lending and  guarantee programs with available market alternatives. We considered a  number of potential indicators of market interest rates available to  financial institutions, including a survey of interbank interest rates (the  London Interbank Offered Rate or LIBOR), commercial paper interest  rates published by the Federal Reserve Board, spreads on bank credit  default swaps (CDS) and interest rates on repurchase agreements.  These interest rates provide a general indication of market alternatives  that could have been available to participants, but for a number of  reasons the rates are unlikely to reflect available alternatives for all  participants at all points in time during the crisis and cannot be used to  produce a precise quantification of the benefits that accrued to  participating financial institutions. For example, participants’ access to  market alternatives may have been limited, data on the relevant private  market may be limited, or market alternatives could vary across  participants in ways that we do not observe in the data. The markets  targeted by emergency programs had experienced significant strains,  such as a substantial drop in liquidity, a sharp increase in prices, or  lenders restricting access only to the most credit worthy borrowers or  accepting only the safest collateral. Also, our indicators do not capture all  of the benefits associated with participation in the relevant programs.  Furthermore, once programs were introduced, they probably influenced  the price of market alternatives, making it difficult to interpret differences  between emergency program and market prices while programs were  active. Second, to determine the extent to which Treasury capital  investment programs were priced more generously than market  alternatives, we reviewed estimates of the expected budget cost  associated with equity funding support programs as well as a valuation  analysis commissioned by the Congressional Oversight Panel. For more  details on our methodology for these analyses, see appendix III.
Based on our analysis, we found that emergency assistance provided  through these programs was often priced below estimated market  alternatives that might have been available to program participants. This  result is consistent with a policy goal of these programs to stabilize  financial markets and restore confidence in the financial sector. The  pricing of emergency assistance below estimated market alternatives is  also evidenced by the significant participation in these programs.  Specifically, we found that emergency lending and guarantee programs  were generally priced below certain indicators of market alternatives that  could have been available. In addition, based on analyses we reviewed,  Treasury paid prices above estimated market prices for emergency equity  support programs. For selected programs that we analyzed, we also  found that program pricing would likely have become unattractive in  comparison to market pricing during normal and more stable credit  conditions.
Federal Reserve System programs. Federal Reserve System  emergency lending programs during the crisis provided sources of both  secured and unsecured funding at rates that were often below those of  potential market alternatives and at terms that reduced rollover risk for  participants. These characteristics are consistent with a policy goal to  stabilize financial conditions by providing funding support for financial  institutions that relied on wholesale funding markets. At the time, the  markets targeted by the Federal Reserve emergency programs had  experienced strains, such as a drop in volume or a significant increase in  prices or collateral standards.
TAF. Interest rates on TAF loans, on average, were between 22 and  39 basis points lower than three market interest rates that could have  represented alternatives for participants. TAF auctioned collateralized  loans—generally at terms of either 28 or 84 days—to insured banks to  help alleviate strains in term funding markets. We compared interest  rates for 28-day TAF loans with 1-month LIBOR, 30-day asset-backed  commercial paper (ABCP) rates, and interest rates on very large 1- month unsecured certificates of deposit. We chose these interest  rates because they are all indicators of the cost of borrowing for  financial institutions in term funding markets. However each differs  from TAF in important ways. For example, LIBOR is based on  unsecured loans (TAF loans were secured by collateral) and ABCP,  despite being secured, has other features that differ from TAF,  including the mix of underlying collateral. We found that LIBOR  exceeded TAF interest rates by an average of 22 basis points. ABCP  interest rates exceeded TAF interest rates by on average 39 basis  points and interest rates on very large certificates of deposit exceeded  TAF interest rates by on average 29 basis points while the program  was active. Because of differences between TAF and these measures  of market interest rates, these spreads are an imperfect measure of  the extent to which banks derived benefits from participating in TAF.
PDCF. Our analysis suggests that PDCF provided secured overnight  funding on more favorable terms for some types of collateral (such as  corporate debt) than market alternatives that some primary dealers  might have relied upon in the absence of PDCF. Because PDCF  operated in a similar manner to repurchase agreement markets, we  compared PDCF terms to available data for triparty and bilateral  repurchase agreement transactions. One important term for  repurchase agreement loans is the haircut, which is the amount of  additional collateral the lender requires over the value of the loan.
Repurchase agreement lenders generally require higher haircuts on  riskier and less liquid collateral types. PDCF offered loans at the same  interest rate (the discount rate charged on discount window loans) for  all collateral types and applied a haircut schedule that assigned  progressively higher haircuts to riskier assets. We compared PDCF  haircuts to market haircuts for selected asset classes in the triparty  repurchase agreement market. We found that the haircut required by  PDCF was consistently greater than the median haircut in the triparty  repurchase agreement market for comparable asset classes. Thus,  borrowers who faced the median haircut on their collateral in the  triparty market were better off borrowing in the triparty market than  through PDCF, all else being equal. However, the PDCF haircut was  smaller than the 75th percentile haircut in the triparty market for a  variety of collateral types. This implies that higher-risk borrowers were  better off borrowing through PDCF than through the triparty market, at  least for certain types of collateral. Smaller haircuts would have  allowed these PDCF participants to borrow more against the same  collateral than in private repurchase agreement markets.
TSLF. TSLF allowed primary dealers to obtain funding for the most  commonly pledged collateral types at 32 basis points below an  estimated market alternative. When TSLF was created in March 2008,  repurchase agreement lenders were requiring higher interest rates  and haircuts for loans against a range of less-liquid collateral types  and were reluctant to lend against mortgage-related securities.  Through TSLF, primary dealers paid an auction-determined interest  rate to exchange harder-to-finance collateral for more liquid Treasury  securities—which were easier to borrow against in repurchase  agreement markets—generally for a term of 28 days. TSLF held  separate auctions of Treasury securities against two different  schedules of collateral to apply a higher interest rate to riskier  collateral. Schedule 1 collateral included higher quality assets, such  as agency debt and agency mortgage-backed securities (MBS), and  Schedule 2 collateral included Schedule 1 collateral and a broader  range of asset types, such as highly-rated private-label MBS. We  compared TSLF interest rates to the difference between lower interest  rates primary dealers might have paid on repurchase agreements  secured by Treasury securities and the higher interest rates they  could have paid on repurchase agreements secured by TSLF-eligible  collateral. Due to limited availability of interest rate data for  repurchase agreements collateralized by other lower-quality collateral  eligible for TSLF, such as private-label MBS, we compared TSLF  interest rates to the difference or spread between interest rates on  repurchase agreements collateralized by agency MBS and  repurchase agreements collateralized by Treasury securities. We  found that the spread between repurchase agreement interest rates  on agency MBS (the most commonly-pledged collateral for TSLF) and  Treasury securities exceeded TSLF interest rates by on average 32  basis points while the program was active.
CPFF. CPFF purchased 3-month commercial paper at prices that  were lower than market rates during the crisis on instruments that  could have represented alternative funding sources but were more  expensive than average commercial paper rates during normal market  conditions. CPFF controlled for changes in short-term interest rates by  setting the price of commercial paper issuance to CPFF at a fixed  spread above the daily 3-month overnight indexed swap rate, a rate  that tracks investor expectations about the future federal funds rate.  Table 2 summarizes the pricing structure for CPFF. We compared all- in borrowing costs (an interest rate plus a credit surcharge for  unsecured borrowing) for CPFF borrowers with 3-month LIBOR. To  determine how CPFF pricing compared to borrowing costs in crisis  conditions, we compared CPFF pricing terms to 3-month LIBOR for  the period from the failure of Lehman Brothers Holdings Inc. (Sept.  14, 2008) through the date on which CPFF became operational (Oct.  27, 2008). We found that average CPFF pricing terms were lower  than the average LIBOR rate by 92 basis points and 44 basis points  for CPFF purchases of unsecured commercial paper and  collateralized ABCP, respectively. To determine how unsecured CPFF  rates compared to benchmarks for borrowing costs in normal market  conditions, we applied the CPFF pricing rule for unsecured  commercial paper to a 2-month period in 2006 and found that CPFF  pricing would have been more expensive than AA unsecured  commercial paper interest rates by roughly 200 basis points and  LIBOR by over 190 basis points. This analysis suggests that CPFF  would have become less attractive to participants as market  conditions improved.
Treasury capital investments. Analyses we reviewed suggest that the  prices Treasury paid for equity in financial institutions participating in  TARP exceeded estimated market prices that private investors might  have paid for comparable investments in these institutions during the  crisis. This pricing is consistent with a policy goal to stabilize financial  conditions by improving the equity capitalization of banks. In late 2008,  before CPP was announced, banks had difficulty issuing sufficient new  equity to investors. We reviewed estimates of the expected budget cost  associated with Treasury’s equity funding support programs under TARP,  CPP and the Targeted Investment Program (TIP), as well as a valuation  analysis commissioned by the Congressional Oversight Panel. Some of  the benefits that accrued to banks from participation in equity funding  support programs are likely to be proportional to the expected budgetary  cost (also known as subsidy rates) estimated for accounting purposes.  Treasury and Congressional Budget Office estimates of subsidy rates are  based on a net present value analysis—the price and terms which are  offered by a federal agency are compared to the lifetime expected cost  (net present value) of the equity, and the difference is known as a  subsidy. The valuation analysis commissioned by the Congressional  Oversight Panel explicitly compared the prices received by Treasury with  market-based valuations of securities it determined to be comparable.  Estimates of subsidy rates by Treasury, the Congressional Budget Office,  and the Congressional Oversight Panel were generally similar for CPP,  while the Congressional Budget Office’s estimates for TIP were  substantially lower than those of Treasury and the Congressional  Oversight Panel (see fig. 1). Based on these three analyses, these  estimated subsidy rates suggest that the prices Treasury paid for equity in  financial institutions were 18 to 27 percent over estimated market prices  for CPP and 26 to 50 percent over estimated market prices for TIP equity.  Estimates reflect differences in timing, methodology, and institutions  included in the analyses, which we discussed previously and in the note  to figure 1.
FDIC’s DGP. For the DGP guarantees that we analyzed, the fees for  FDIC’s DGP were on average 278 basis points below the private cost of  similar guarantees during crisis conditions, but more expensive than  similar guarantees that were available in the private market during normal  credit conditions. This pricing is consistent with a policy goal to promote  financial stability by improving access to sources of debt funding. FDIC’s  DGP provided guarantees for certain newly issued senior unsecured debt  for banks, bank holding companies, and other eligible institutions. When  DGP was created in October 2008, lending to financial institutions in  public debt markets had dropped dramatically. The fees for participation  in DGP were based on the maturity of guaranteed liabilities (the longer  the maturity the higher the fee) and the type of financial institution. We  analyzed the 100-basis point fee that DGP charged to guarantee debt  with a maturity of 1 year, plus the 10-basis point premium charged to  bank holding companies. We compared the total DGP fee with the  weighted average price of 1-year bank CDS for certain bank holding  companies because the guarantee is essentially similar to a private party  insuring against the risk of default using a CDS. Our analysis covered  the period from the failure of Lehman Brothers (in September 2008)  through the date DGP became operational (in October 2008). We found  that the cost of insuring against bank default on the private market  exceeded the FDIC fee terms by on average 278 basis points, with  considerable variation across users—varying from over 1,000 basis  points above the DGP fee terms to a few basis points below. We also  applied the DGP pricing rule for guaranteeing bank holding company debt  to a 2-month period in 2006, before the crisis, and found that DGP pricing  would have exceeded the private cost of guarantees by roughly 100 basis  points. This pricing suggests that DGP would have become less attractive  to participants as market conditions improved. For more detail on our  analysis of the prices and terms of all of the emergency programs, please  see appendix III.
section_title: Programs Provided Support to Banking Organizations of Various Sizes and Some Programs Supported Funding Sources Used More by Larger Firms
paragraphs: Emergency government programs to stabilize financial markets provided  funding support to bank holding companies and insured depository  institutions (collectively, banking organizations) of various sizes. This  section also focuses on the programs that provided the most significant  funding support directly to bank holding companies and their subsidiaries  (listed previously in table 1). Agencies made these programs available to  specific types of institutions regardless of their size, and institutions of  various sizes participated in these programs. Differences in the level of  program use by institutions of various sizes were driven in part by  differences in how institutions funded themselves. For example,  compared to smaller bank holding companies, larger bank holding  companies relied to a greater extent on short-term credit markets that  were the most severely disrupted during the crisis and participated more  in programs intended to address disruptions in these markets. Smaller  banking organizations relied more on deposits to fund their activities.
To compare the extent to which banking organizations of various sizes  used emergency programs, we calculated the percentage of banking  organization assets that were supported by emergency programs—either  through capital injections, loans, or guarantees—at quarter-end dates for  2008 through 2012. Capital provided by emergency programs includes  capital investments by Treasury under CPP and TIP. Loans provided by  emergency programs include TAF, TSLF, PDCF, and CPFF loans from  the Federal Reserve System. Funding guaranteed by emergency  programs includes deposits guaranteed by FDIC through TAGP and debt  guaranteed by FDIC through DGP. We then calculated each of these  three types of liabilities as a percentage of assets for banking  organizations by size for quarter-end dates from mid-2008 to the end of  2012. Finally, for each of the three types of liabilities, we decomposed  average liabilities as a percentage of assets for banking organizations of  different sizes into two components: (1) the rate of participation in  emergency programs by banking organizations of different sizes and (2)  the average liabilities as a percentage of assets for those participants.
We found that the extent to which banking organizations of different sizes  used emergency programs varied over time and across programs. For  example, the largest bank holding companies—those with more than  $500 billion in assets as of June 30, 2013—used the programs to varying  degrees but had exited most of the programs by the end of 2009.  Moreover, as of December 31, 2008, average use of emergency  programs generally was higher for banking organizations with $50 billion  or more in assets than it was for banking organizations with less than $50  billion in assets. Total loans outstanding from Federal Reserve System  programs (TAF, TSLF, PDCF, and CPFF) combined were at least 2  percent of assets on average for banking organizations with $50 billion or  more in assets but less than 1 percent of assets on average for smaller  banking organizations. CPP and TIP capital investments were at least 1.5  percent of assets on average for banking organizations with $50 billion or  more in assets and less than 1 percent of assets on average for smaller  organizations. Finally, DGP-guaranteed debt and TAGP-guaranteed  deposits together were at least 6 percent of assets on average for  banking organizations with $50 billion or more in assets and were less  than 4 percent of assets on average for smaller banking organizations.  However, by December 31, 2010, the Federal Reserve System’s loan  programs had closed, and differences in use of remaining programs by  banking organizations of different sizes had diminished. For a more  detailed discussion of our analysis of utilization of these programs by  banking organizations of various sizes, see appendix IV.
Several factors influenced the extent to which eligible institutions used  emergency programs. As explained above, one factor driving an  institution’s level of participation in a program was the extent to which it  relied on the type of funding assisted by the program. In addition, market  conditions and the speed with which eligible firms recovered affected the  amount and duration of use of the programs by different firms. Agencies  generally designed program terms and conditions to make the programs  attractive only for institutions facing liquidity strains. Use of several of the  programs peaked during the height of the financial crisis and fell as  market conditions recovered. Federal Reserve Board officials told us that  even as markets recovered, funding conditions improved for certain  borrowers but not others. As a result, in PDCF, TSLF, and CPFF, several  participants remained in the programs while others exited. Participants in  CPP required the approval of their primary federal regulator before exiting  the program. In addition, several of the programs included limits on the  amount of assistance an entity could receive. Under CPP, qualified  financial institutions were eligible to receive an investment of between 1  and 3 percent of their risk-weighted assets, up to a maximum of $25  billion. To prevent excessive use of CPFF that would be inconsistent with  its role as a backstop, the Federal Reserve Board limited the maximum  amount a single issuer could have outstanding at CPFF to the greatest  amount of U.S.-dollar-denominated commercial paper the issuer had had  outstanding on any day between January 1 and August 31, 2008. The  Federal Reserve Board also set limits on the maximum amount that  institutions could bid in each TAF and TSLF auction. Finally, in some  cases, institutions accepted emergency government assistance at the  encouragement of their regulators. For example, several institutions  accepted TARP capital investments at the encouragement of Treasury or  their regulator. However, participation in other programs appears to  have been driven by market conditions and other factors.
section_title: The Federal Reserve Board Granted Exemptions to Allow Banks to Provide Liquidity Support to the Nonbanking Sector and for Other Purposes
paragraphs: During the financial crisis, the Federal Reserve Board granted a number  of exemptions to requirements under Section 23A of the Federal Reserve  Act for a range of purposes, such as allowing banks to provide greater  liquidity support to the nonbank sector. The number of exemptions  granted increased significantly during the crisis, and the majority of these  exemptions were granted to U.S. bank holding companies and other firms  with $500 billion or more in total assets (see fig. 2). Section 23A of the  Federal Reserve Act imposes quantitative limits on certain transactions  between an insured depository institution and its affiliates, prohibits banks  from purchasing low-quality assets from their nonbank affiliates, and  imposes collateral requirements on extensions of credit to affiliates. In  letters documenting its approval of exemptions to Section 23A, the  Federal Reserve Board has indicated that the twin purposes of Section  23A are (1) to protect against a depository institution suffering losses in  transactions with its affiliates, and (2) to limit the ability of a depository  institution to transfer to its affiliates the subsidy arising from the  institution’s access to the federal safety net. In other words, these  restrictions are intended to protect the safety and soundness of banks  and to prevent them from subsidizing the activities of nonbank affiliates by  passing on any benefits they may receive through access to deposit  insurance and the discount window. The Federal Reserve Act granted the  Federal Reserve Board authority to exempt transactions and relationships  from Section 23A restrictions if such exemptions were in the public  interest and consistent with statutory purposes. Prior to the Dodd-Frank  Act, the Federal Reserve Board had exclusive authority to grant  exemptions to Section 23A.
During the financial crisis, the Federal Reserve Board granted a number  of exemptions from the requirements of Section 23A, for a range of  purposes that included, but were not limited to, the following:
Facilitating Liquidity Support for Holders of Mortgage-Related Assets.
In August 2007, the Federal Reserve Board issued three similar  exemption letters granting Section 23A exemptions to three of the  largest U.S. bank holding companies (Citigroup Inc., Bank of America  Corporation, and JP Morgan Chase & Co.) to allow their bank  subsidiaries (Citibank, N.A.; Bank of America, N.A.; and JPMorgan  Chase Bank, N.A.) to engage in securities financing transactions with  their affiliated broker-dealers. The purpose of these exemptions was  to allow each of these banks to extend up to $25 billion of credit  (using their broker-dealer affiliates as conduits) to unaffiliated market  participants in need of short-term liquidity to finance their holdings of  certain mortgage loans and other assets. The Federal Reserve  Board’s letters noted that these exemptions would provide significant  public benefits by allowing banks to provide a substantial amount of  liquidity into the market for these mortgage-related assets.
Facilitating Liquidity Support for Holders of Auction-Rate Securities. In  December 2008 and January 2009, the Federal Reserve Board  granted exemptions to allow four large banks (Fifth Third Bank, BB&T  Company, Northern Trust Company, and Wachovia Bank, N.A.) to  purchase auction-rate securities and variable rate demand notes from  their securities affiliates or parent company. The Federal Reserve  Board’s letters noted that these exemptions were intended to facilitate  the provision of liquidity by these banks to customers of their affiliates  that were holding illiquid auction-rate securities or variable rate  demand notes. The securities affiliates of banks had been active in  underwriting and selling auction-rate securities and when these  securities became illiquid, the affiliates repurchased them from clients  that sought to liquidate their positions. In this case, 23A exemptions  allowed banks to provide financing for these purchases. The size of  transactions permitted under these exemptions ranged from $600  million for The Northern Trust Company to approximately $7 billion for  Wachovia Bank, N.A.
Facilitating Liquidity Support to Money Market Funds and Repurchase  Agreement Markets. In addition to exemptions granted to individual  institutions, the Federal Reserve Board granted broad-based  exemptions from Section 23A to enable banks to provide liquidity  support to repurchase agreement markets and money market mutual  funds (MMMF). First, on September 14, 2008, concurrent with the  decision to expand eligible collateral types for PDCF and TSLF, the  Federal Reserve Board adopted an interim final rule granting a  temporary exemption to allow banks to provide their securities  affiliates with short-term financing for assets that they ordinarily would  have financed through the repurchase agreements markets. The  purpose of this exemption was to improve the ability of broker-dealers  to continue financing their securities and other assets despite the  liquidity shortage in the triparty repurchase agreement market.  Several days later, on September 19, the Federal Reserve Board  amended Regulation W to grant a temporary exemption from Section  23A requirements for member banks’ purchases of ABCP from  affiliated money market funds, subject to certain conditions. The  purpose of this exemption was to enable banks to take full advantage  of the Asset-Backed Commercial Paper Money Market Mutual Fund  Liquidity Facility (AMLF), a program authorized by the Federal  Reserve Board to provide loans to banks to fund the purchase of  ABCP from MMMFs.
Facilitating Acquisitions of Failing Firms. The Federal Reserve Board  also granted Section 23A exemptions in connection with its efforts to  facilitate private acquisitions of firms whose failure could have  destabilized financial markets. Such acquisitions included JP Morgan  Chase & Co.’s acquisition of Bear Stearns and Wells Fargo &  Company’s acquisition of Wachovia Corporation. JP Morgan Chase &  Co. received exemptions that allowed JP Morgan Chase Bank, N.A.  to, among other things, extend credit to, and issue guarantees on  behalf of, former Bear Stearns entities and to purchase a derivatives  portfolio valued at approximately $44 billion from Bear Stearns. In  November 2008, the Federal Reserve Board granted an exemption to  allow Wells Fargo Bank, N.A., to extend up to $17 billion in credit to  Wachovia Bank, N.A. to assist it in meeting its short-term funding  obligations until the merger was completed.
For many of these cases, the Federal Reserve Board granted an  exemption to help facilitate liquidity support to nonbank entities as part of  its actions to reduce systemic risk and promote financial stability. In  granting exemptions, the Federal Reserve Board imposed conditions that  were intended to mitigate risks to the bank that would be providing credit,  purchasing assets, or engaging in other transactions with affiliates.  However, one expert has raised concerns that such conditions might not  offer sufficient protection for an insured depository institution during crisis  conditions and that these exemptions in aggregate resulted in a large- scale transfer of safety net benefits created for banks to the nonbank, or  “shadow banking,” system. As discussed in the next section of this  report, the Dodd-Frank Act made changes to Section 23A of the Federal  Reserve Act.
section_title: Some Large Bank Holding Companies Benefited from Individual Institution Assistance or Regulatory Relief
paragraphs: In addition to introducing emergency programs with broad-based  eligibility, federal government agencies took special actions with respect  to individual financial institutions on several occasions in 2008 and 2009.  While these actions were intended to benefit a range of market  participants and the broader financial system, some large U.S. bank  holding companies received substantial direct benefits from these actions.  Such actions included (1) assistance from multiple agencies to rescue or  facilitate the acquisition of troubled firms whose failures posed significant  risks to the financial system, and (2) the Federal Reserve Board granting  bank holding company status to several nonbank financial companies and  providing liquidity support to the London broker-dealers of a few of the  largest bank holding companies.
On several occasions in 2008 and early 2009, the federal government  provided extraordinary support to or facilitated the acquisition of large  financial institutions, which benefitted recipients of this assistance and  other market participants, such as firms that had large risk exposures to  these institutions.
Assistance to Facilitate JP Morgan’s Acquisition of Bear Stearns. In  2008, the Federal Reserve Board authorized emergency assistance to  avert the failure of Bear Stearns Companies, Inc. (Bear Stearns) and  facilitate the acquisition of the firm by JP Morgan Chase & Co. On  Friday, March 14, 2008, the Federal Reserve Board voted to authorize  FRBNY to provide a $12.9 billion loan to Bear Stearns to enable the  firm to avoid bankruptcy and to provide time for potential acquirers,  including JP Morgan Chase & Co, to assess its financial condition. On  Sunday, March 16, 2008, the Federal Reserve Board announced that  FRBNY would lend up to $30 billion against certain Bear Stearns  assets to facilitate JP Morgan Chase & Co’s acquisition of Bear  Stearns. During the following week, the terms of this assistance were  renegotiated, resulting in the creation of a new lending structure under  which a $28.82 billion FRBNY senior loan and a $1.15 billion JP  Morgan Chase & Co subordinated loan funded the purchase of certain  Bear Stearns’s assets. FRBNY also provided certain regulatory  exemptions to JP Morgan Chase & Co. in connection with its  agreement to acquire Bear Stearns. For example, the Federal  Reserve Board granted an 18-month exemption to allow JP Morgan  Chase & Co to exclude certain Bear Stearns assets from its risk- weighted assets for purposes of applying risk-based capital  requirements.
Assistance to Government-Sponsored Enterprises. Extraordinary  government support to Fannie Mae and Freddie Mac helped to  stabilize mortgage markets and the broader financial markets and  provided specific benefits to bank holding companies and other firms  that likely would have incurred losses if the federal government had  allowed these government-sponsored enterprises to fail. On  September 6, 2008, the Federal Housing Finance Agency placed  Fannie Mae and Freddie Mac into conservatorship out of concern that  their deteriorating financial condition threatened their safety and  soundness and their ability to fulfill their public mission. Treasury’s  investments in Fannie Mae and Freddie Mac under the Senior  Preferred Stock Purchase Agreements program represent the federal  government’s single largest risk exposure remaining from its  emergency actions to assist the financial sector. As of June 30,  2013, cumulative cash draws by the GSEs under this program totaled  $187.4 billion and cumulative dividends paid by the GSEs to Treasury  totaled $131.6 billion.
Assistance to AIG. Federal government actions to prevent the failure  of AIG benefitted AIG and its counterparties—which included some of  the largest U.S. and foreign financial institutions—and were intended  to benefit the broader financial system. In September 2008, the  Federal Reserve Board and Treasury determined that market events  could have caused AIG to fail, which would have posed systemic risk  to financial markets. The Federal Reserve Board and Treasury  collaborated to make available up to $182.3 billion in assistance to  AIG. This assistance, which began with a revolving credit facility of up  to $85 billion from FRBNY, was provided in several stages and was  restructured over time. In November 2008, the Federal Reserve  Board authorized the creation of two special-purpose vehicles— Maiden Lane II LLC and Maiden Lane III LLC—to purchase certain  AIG-related assets. Maiden Lane II was created to alleviate capital  and liquidity pressures arising from a securities lending portfolio  operated by certain AIG subsidiaries by purchasing residential MBS  held in this portfolio. Maiden Lane III helped to fund the purchase of  collateralized debt obligations from AIG counterparties that had  purchased CDS from AIG to protect the value of those assets. AIG  repaid all loans and capital investments it received from government  entities during the crisis. In December 2012, Treasury sold its  remaining investments in AIG, resulting in a total positive return of  $22.7 billion for Treasury and FRBNY.
Extraordinary Assistance to Citigroup. On November 23, 2008,  Treasury, the Federal Reserve Board, and FDIC announced a  package of additional assistance to Citigroup Inc. (Citigroup) that  included $20 billion of capital from TIP and a loss-sharing agreement  with the government entities that was intended to assure market  participants that Citigroup would not fail in the event of larger-than- expected losses on certain of its assets. As discussed in our April  2010 report on Treasury’s use of the systemic risk determination,  Treasury, FDIC, and the Federal Reserve Board said they provided  emergency assistance to Citigroup because they were concerned that  a failure of a firm of Citigroup’s size and interconnectedness would  have systemic implications. As of September 30, 2008, Citigroup  was the second largest banking organization in the United States, with  total consolidated assets of approximately $2 trillion. In June 2009,  Treasury entered into an agreement to exchange the $25 billion in  Citigroup preferred shares purchased in its initial CPP investment for  Citigroup common shares to help improve Citigroup’s capital  position. In December 2009, Citigroup repaid the $20 billion TIP  investment. On December 23, 2009, Citigroup announced that it had  entered into an agreement with FDIC, FRBNY, and Treasury to  terminate the loss- sharing agreement. As part of the termination  agreement, Citigroup agreed to pay a $50 million termination fee to  FRBNY.
Extraordinary Assistance to Bank of America. On January 16, 2009,  Treasury, the Federal Reserve Board, and FDIC announced a similar  package of assistance to Bank of America Corporation (Bank of  America). The additional assistance included capital through TIP and  a loss-sharing agreement that was similar to the one executed for  Citigroup. While Bank of America received $20 billion in capital  through TIP, the government entities never finalized the announced  loss-sharing agreement with Bank of America. In September 2009,  the agencies agreed to terminate the loss-sharing agreement with  Bank of America. As part of the agreement to terminate the  agreement-in-principle, Bank of America paid fees of $276 million to  Treasury, $57 million to the Federal Reserve Board, and $92 million to  FDIC. Bank of America repaid its $20 billion TIP investment in  December 2009.
In late 2008, at the height of the financial crisis, the Federal Reserve  Board approved applications by several large nonbank financial firms to  convert to bank holding company status. Becoming bank holding  companies provided these firms with greater access to emergency  government funding support, while subjecting them to oversight by the  Federal Reserve System and other requirements under the Bank Holding  Company Act. Eligibility for TARP capital investments under CPP and  debt guarantees through TLGP were generally restricted to depository  institutions and their holding companies, and several large firms that  became bank holding companies in late 2008 subsequently participated  in one or both of these programs. Among the largest firms converting to  bank holding companies during the crisis were two investment banks  (Goldman Sachs Group, Inc. and Morgan Stanley), two companies that  were large providers of credit card products and other services (American  Express Company and Discover Financial Services), and two other  financial firms (CIT Group Inc. and GMAC LLC). In many cases, obtaining  bank holding company status involved firms converting an industrial loan  corporation (ILC) into a bank. Federal Reserve Board officials noted that  these firms already had access to the discount window through their ILCs  and converting these ILCs to banks did not change their access to the  discount window, but their access to discount window liquidity was limited  by the amount of assets these subsidiaries—first as ILCs and later as  banks—could pledge to the discount window as collateral. According to  Federal Reserve Board documents, deposits held by these firms were a  small fraction of their total consolidated assets at the time they became  bank holding companies. While bank holding companies are subject to  restrictions on nonbanking activities under the Bank Holding Company  Act, Federal Reserve Board orders approving bank holding company  applications described nonbanking activities of the companies that were  permissible under the act and noted that the act provides each newly  formed bank holding company 2 years to conform its existing nonbanking  investments and activities to the act’s requirements.
On September 21, 2008, the Federal Reserve Board announced that  FRBNY would extend credit—on terms similar to those applicable for  PDCF loans—to the U.S. and London broker-dealer subsidiaries of  Goldman Sachs Group, Inc., Morgan Stanley, and Merrill Lynch & Co. to  provide support to these subsidiaries as they became part of bank holding  companies that would be regulated by the Federal Reserve System. On  November 23, 2008, in connection with other actions taken by Treasury,  FDIC, and the Federal Reserve Board to assist Citigroup, the Federal  Reserve Board authorized FRBNY to extend credit to the London-based  broker-dealer of Citigroup on terms similar to those applicable to PDCF  loans.
section_title: Dodd-Frank Aims to Restrict Future Government Support, but Implementation Is Incomplete and Effectiveness Remains Uncertain
paragraphs: Enacted in July 2010, the Dodd-Frank Act contains provisions intended to  modify the scope of federal safety nets for financial firms, place limits on  agency authorities to provide emergency assistance, and strengthen  regulatory oversight of the largest firms, among other things. FDIC and  the Federal Reserve Board have finalized certain changes to traditional  safety nets for insured banks, but impacts of the act’s provisions to limit  the scope of financial transactions that benefit from these safety nets will  depend on how they are implemented. The act also prohibits regulators’  use of emergency authorities to rescue an individual institution and places  other restrictions on these authorities. For example, the act effectively  removes FDIC’s authority to provide assistance to a single, specific failing  bank outside of receivership and grants FDIC new authority to resolve a  large failing institution outside of bankruptcy. FDIC has made progress  toward implementing its new resolution authority and continues to work to  address potential obstacles to the viability of its resolution process as an  alternative to bankruptcy, such as challenges that could arise when  resolving more than one large institution concurrently. The act also places  new restrictions and requirements on the Federal Reserve Board’s  emergency lending authority. However, the Federal Reserve Board has  not yet completed its process for drafting policies and procedures  required by the act to implement these changes or set timeframes for  doing so. Finalizing such procedures would help ensure that any future  use of this authority complies with Dodd-Frank Act requirements. Finally,  the Federal Reserve Board has made progress towards implementing  certain enhanced regulatory standards that are intended to reduce the  risks that the largest financial institutions pose to the financial system.
subsections: section_title: Agencies Have Finalized Changes to Traditional Safety Nets, but Have Not Fully Implemented Provisions to Limit the Scope of Transactions That Have Access
paragraphs: The Dodd-Frank Act instituted a series of reforms related to the traditional  safety nets for insured banks, including changes to deposit insurance and  discount window reporting requirements. In addition, the act contains  provisions intended to limit the scope of financial transactions that benefit  from access to these traditional safety nets. These provisions include  revisions to the Federal Reserve Board’s authority to permit certain  transactions between banks and their affiliates under Section 23A of the  Federal Reserve Act, restrictions on the ability of bank holding companies  to engage in proprietary trading; and restrictions on the ability of insured  banks to engage in certain derivatives transactions.
FDIC has implemented Dodd-Frank Act provisions that increased the  deposit insurance limit and required FDIC to change the calculation for  premiums paid by insured depository institutions. Section 335 of the  Dodd-Frank Act permanently raised the standard maximum deposit  insurance amount from $100,000 to $250,000 for individual deposit  accounts, as previously discussed. FDIC issued and made effective a  final rule instituting the increase in August 2010 and required insured  depository institutions to comply by January 2011. Section 343 of the  act provided temporary unlimited deposit insurance coverage for certain  uninsured deposits from December 2010 through December 2012. This  coverage expired on December 31, 2012, and transaction accounts can  now only be insured to the $250,000 ceiling. Section 331 of the Dodd- Frank Act required FDIC to amend its regulation and modify the definition  of an insured depository institution’s assessment base, which can affect  the amount of deposit insurance assessment the institution pays into the  deposit insurance fund. Under the Dodd-Frank Act, the assessment base  changed from total domestic deposits to average consolidated total  assets minus average tangible equity (with some possible exceptions).  FDIC issued a final rule changing the assessment base in February 2011,  and the rule became effective in April 2011. According to FDIC, the  change in the assessment base calculation shifted some of the overall  assessment burden from community banks to larger institutions that rely  less on domestic deposits for their funding than smaller institutions, but  without affecting the overall amount of assessment revenue collected. In  the quarter after the rule became effective, those banks with less than  $10 billion in assets saw a 33 percent drop in their assessments (from  about $1 billion to about $700 million), while those banks with over $10  billion in assets saw a 17 percent rise in their assessments (from about  $2.4 billion to about $2.8 billion).
The Dodd-Frank Act made changes to the Federal Reserve Board’s  reporting requirements to increase the transparency for discount window  transactions. During and after the crisis, some members of Congress and  others expressed concern that certain details of the Federal Reserve  System’s discount window and emergency lending activities, including the  names of borrowers receiving loans, were kept confidential. Section 1103  of the Dodd-Frank Act requires the Federal Reserve Board to disclose  transaction-level details for discount window loans and open market  transactions on a quarterly basis after a 2-year delay. The Dodd-Frank  Act established similar reporting requirements for the Federal Reserve  Board’s Section 13(3) authority, as discussed later. No rulemaking was  required, and the Federal Reserve Board began to post the data publicly  on its website in September 2012. The first set of releases covered loans  made between July and September 2010, and data for subsequent  periods are being published quarterly with a 2-year lag. The Dodd-Frank  Act also grants GAO authority to audit certain aspects of discount window  transactions occurring after July 21, 2010.
The Dodd-Frank Act made numerous changes to Section 23A of the  Federal Reserve Act that both significantly expanded the scope of  activities covered by Section 23A’s restrictions and created new  requirements for participation by FDIC and the OCC in granting  exceptions. As previously discussed, the Federal Reserve Board  granted a number of exemptions to Section 23A during the crisis. Some  observers have raised concerns that these exemptions in aggregate  resulted in a large scale transfer of federal safety net benefits to the  nonbank, or “shadow banking,” system. The changes listed below, with  the exception of changes related to investments in private funds, did not  require rulemakings and became effective on July 21, 2012.
The Dodd-Frank Act gave FDIC and OCC, jointly with the Federal  Reserve Board, the authority to grant Section 23A exemptions by  order for institutions they supervise. The Dodd-Frank Act requires the  regulators to notify FDIC of any proposed exemption and give FDIC  60 days to object in writing, should FDIC determine the proposed  exemption constitutes an unacceptable risk to the deposit insurance  fund. The Federal Reserve retains the authority to grant exemptions  by regulation.
The Dodd-Frank Act expanded the scope of activities that are covered  by Section 23A by amending the definition of covered transactions to  include derivatives transactions with affiliates and transactions with  affiliates that involve securities lending and borrowing that may cause  a bank to face credit exposure to an affiliate. The Dodd-Frank Act  also removed the exception from the 10 percent quantitative limit for  certain covered transactions between a bank and its financial  subsidiary and extended section 23A and 23B to cover permitted  investments in certain private funds.
The Dodd-Frank Act changed the collateral requirements for 23A  transactions by requiring banks to maintain the correct level of  collateral at all times for covered transactions subject to  collateralization. Previously, banks only had to post collateral at the  time of entrance into the covered transaction. This change was  designed to strengthen the protection granted to banks extending  credit to their affiliates by ensuring that the collateral remains correctly  valued and simultaneously shields the bank’s interest from  fluctuations in market prices of collateralized assets.
As of October 2013, the Federal Reserve Board has granted only two  exemptions since the enactment of the Dodd-Frank Act, according to  available information on its website. How the Federal Reserve Board,  FDIC, and OCC might respond to requests for exemptions in the future is  uncertain. Representatives from one large bank told us that their primary  regulator advised them that that because of FDIC’s required approval,  they should not expect exemptions to be available going forward.  However, one academic has expressed concern about how exemptions  might be applied under different circumstances, such as in periods of  economic stress.
Proprietary Trading (Volcker  Rule)
Agencies have not yet issued final rules to implement the Dodd-Frank  Act’s restrictions on proprietary trading—trading activities conducted by  banking entities for their own account as opposed to those of their clients.  A number of market participants and researchers with whom we spoke  maintain that the ability of banking entities to use federally insured  deposits to seek profits for their own account provides incentives for them  to take on excessive risk. To address these concerns, Section 619 of the  Dodd-Frank Act (also known as the Volcker Rule) generally prohibits  proprietary trading by insured depository institutions and their affiliates  and places restrictions on sponsorship or investment in hedge and private  equity funds. An FSOC study noted that implementing the act’s  restrictions on proprietary trading will be challenging because certain  trading activities exempted from the act’s restrictions may appear very  similar to proprietary trading activities that the act seeks to restrict. While  regulators issued proposed rules in November 2011 and February 2012,  no final or interim final rules have been issued.
Section 716 of the Dodd-Frank Act requires banks that are registered  dealers of derivatives known as swaps to transfer certain swap activities  to nonbank affiliates, or lose access to deposit insurance and the Federal  Reserve System liquidity provided through the discount window for  certain activities taken in connection with the swap entity’s swap  business. Section 716’s prohibition on federal assistance to swaps  entities became effective in July 2013, but the law allowed for an initial 2- year extension as well as an additional 1-year extension. Several banks  applied for and were granted 2-year extensions by the Federal Reserve  Board and OCC, and those financial institutions now have until July 2015  to comply, with the additional option of applying for another 1-year  exemption.
section_title: Dodd-Frank Restricts Certain FDIC Authorities but Provides New Resolution Authority
paragraphs: The Dodd-Frank Act restricts emergency authorities used by financial  regulators during the most recent financial crisis, such as FDIC’s open  bank assistance authority; provides FDIC with new resolution authority to  resolve a large, complex failing firm in a manner that limits the disruption  to the financial system; and establishes a requirement for certain firms to  develop and submit to regulators resolution plans (known as living wills)  for their resolution under bankruptcy.
The Dodd-Frank Act restricts FDIC’s authority to provide open bank  assistance to an individual failing bank outside of receivership and  replaces it with a new authority, subject to certain restrictions and a joint  resolution of congressional approval, to create a debt-guarantee program  with broad-based eligibility. Previously, FDIC could provide open bank  assistance upon a joint determination by FDIC, the Federal Reserve  Board, and the Secretary of the Treasury that compliance with certain  cost limitations would result in serious adverse effects on economic  conditions or financial stability and that such assistance could mitigate  these systemic effects. Sections 1104 through 1106 of the Dodd-Frank  Act provide permanent authority for FDIC to establish a widely available  program to guarantee certain debt obligations of solvent insured  depository institutions or solvent bank holding companies during times of  severe economic distress, upon a liquidity event finding. In addition,  institutions would have to pay fees for these guarantees as they did under  TLGP during the crisis. In order for FDIC to exercise the authority, the  Dodd-Frank Act requires the Secretary of the Treasury (in consultation  with the President) to determine the maximum amount of debt  outstanding that FDIC can guarantee, and the guarantee authority  requires congressional approval. Furthermore, the Dodd-Frank Act  amendments to the Federal Deposit Insurance Act that provided for  temporary unlimited deposit insurance for noninterest-bearing transaction  accounts were repealed as of January 1, 2013. The FDIC may not rely on  this authority or its former systemic risk exception authority to provide  unlimited deposit insurance for transaction accounts in a future crisis.
The Dodd-Frank Act includes two key reforms intended to facilitate the  orderly resolution of a large failing firm without a taxpayer-funded rescue:  (1) the Orderly Liquidation Authority (OLA), through which FDIC can  liquidate large financial firms outside of the bankruptcy process; and (2)  requirements for bank holding companies with $50 billion or more in  assets and nonbank financial companies designated by FSOC to  formulate and submit to regulators resolution plans (or “living wills”) that  detail how the companies could be resolved in bankruptcy in the event of  a material financial distress or failure.
OLA gives FDIC the authority, subject to certain constraints, to liquidate  large financial firms, including nonbanks, outside of the bankruptcy  process. This authority allows for FDIC to be appointed receiver for a  financial firm if the Secretary of the Treasury determines that the firm’s  failure and its resolution under applicable federal or state law, including  bankruptcy, would have serious adverse effects on U.S. financial stability  and no viable private sector alternative is available to prevent the default  of the financial company. While the Dodd-Frank Act does not specify  how FDIC must exercise its OLA resolution authority and while a number  of approaches have been considered, FDIC’s preferred approach to  resolving a firm under OLA is referred to as Single Point-of-Entry (SPOE).  Under the SPOE approach, FDIC would be appointed receiver of a top- tier U.S. parent holding company of the financial group determined to be  in default or in danger of default following the completion of the  appointment process set forth under the Dodd-Frank Act. Immediately  after placing the parent holding company into receivership, FDIC would  transfer some assets (primarily the equity and investments in  subsidiaries) from the receivership estate to a bridge financial holding  company. By taking control of the firm at the holding company level, this  approach is intended to allow subsidiaries (domestic and foreign) carrying  out critical services to remain open and operating. One key factor for the  success of the SPOE approach is ensuring that the holding company  builds up sufficient loss-absorbing capacity to enable it to recapitalize its  subsidiaries, if necessary.
In a SPOE resolution, at the parent holding company level, shareholders  would be wiped out, and unsecured debt holders would have their claims  written down to reflect any losses that shareholders cannot cover. Under  the Dodd-Frank Act, officers and directors responsible for the failure  cannot be retained. FDIC expects the well-capitalized bridge financial  company and its subsidiaries to borrow in the private markets and from  customary sources of liquidity. The new resolution authority under the  Dodd- Frank Act provides a back-up source for liquidity support, the  Orderly Liquidation Fund, which could provide liquidity support to the  bridge financial company if customary sources of liquidity are  unavailable. The law requires FDIC to recover any losses arising from a  resolution by assessing bank holding companies with $50 billion or more  in consolidated assets, nonbank financial holding companies designated  for supervision by the Federal Reserve System, and other financial  companies with $50 billion or more in consolidated assets.
Progress has been made to implement the reforms related to resolving  large, complex financial institutions. FDIC has largely completed the core  rulemakings necessary to carry out its systemic resolution responsibilities.  For example, FDIC approved a final rule implementing OLA that  addressed the priority of claims and the treatment of similarly situated  creditors. The FDIC plans to seek public comment on its resolution  strategy by the end of 2013. In addition, FDIC has worked with other  financial regulatory agencies, both domestic and foreign, to make  extensive preparations and to conduct planning exercises in order to be  as prepared as possible to successfully resolve a firm whose failure could  threaten the stability of the financial system.
Although progress has been made, FDIC and others have acknowledged  that OLA is new and untested, and several challenges to its effectiveness  remain. For example, FDIC could face difficulties in effectively managing  the failure of one or more large bank holding companies or credibly  imposing losses on the creditors of those holding companies. These  challenges include the following:
Financial stability concerns. FDIC may find it difficult to impose losses  on all creditors of failing financial institutions because of concerns  about financial stability. FDIC could in principle transfer certain bank  holding company liabilities to a bridge holding company in order to  protect those creditors. This concern has been subject to debate. For  example, a report by the Bipartisan Policy Center, a think-tank,  emphasized the importance of protecting short-term creditors of  systemically important firms, while an industry association report  emphasized the importance of imposing losses on short-term  creditors in order to maintain market discipline. While the Dodd- Frank Act allows FDIC to treat similarly situated creditors differently, it  places restrictions on FDIC’s ability to do so. Any transfer of liabilities  from the receivership to the bridge financial company that has a  disparate impact upon similarly situated creditors will only be made if  such a transfer will maximize the return to those creditors left in the  receivership and if such action is necessary to initiate and continue  operations essential to the bridge financial company.
Global cooperation. Some experts have questioned how FDIC would  handle issues related to the non-U.S. subsidiaries of a failed firm. For  example, if a global U.S. firm were at risk of being placed in  receivership under OLA, foreign regulators might act to ring-fence  assets of a non-U.S. subsidiary to prevent these assets from being  transferred abroad where they would not be available to protect  counterparties in their jurisdiction. Such a development could increase  financial instability by reducing the assets available to a U.S. firm to  satisfy creditors’ claims. Because SPOE involves losses borne only by  holding company creditors, some observers have suggested this  approach would avoid potential challenges associated with the failure  of foreign subsidiaries or actions of foreign regulators to ring-fence the  assets of a subsidiary. For example, if subsidiary liabilities were  guaranteed under SPOE, foreign regulators would not need to ring- fence foreign subsidiaries in order to protect foreign customers or  creditors.
Multiple, simultaneous insolvencies. Experts have questioned whether  FDIC has sufficient capacity to use OLA to handle multiple failures of  systemically important firms and thus prevent further systemic  disruption. In addition, FDIC may find it more difficult to impose losses  on creditors when multiple large institutions are failing at once, which  could reduce the credibility of OLA. According to a survey of investors,  few respondents believed that FDIC could effectively use OLA to  handle the resolution of multiple firms simultaneously.
Title I of the Dodd-Frank Act requires bank holding companies with $50  billion or more in consolidated assets and nonbank financial companies  designated by FSOC to formulate and submit to FDIC, the Federal  Reserve Board, and FSOC resolution plans (or “living wills”) that detail  how the companies could be resolved in the event of material financial  distress or failure. The Federal Reserve Board and FDIC finalized rules  relating to resolution plans, and the large financial institutions that were  the first firms required to prepare such plans submitted these to  regulators as expected in July 2012. Regulators reviewed these initial  plans and developed guidance on what information should be included in  2013 resolution plan submissions.
Experts have expressed mixed views on the usefulness of the living wills.  Some experts have noted that resolution plans may provide regulators  with critical information about a firm’s organizational structure that could  aid the resolution process or motivate complex firms to simplify their  structures, and this simplification could help facilitate resolution. However,  other experts have told us that resolution plans may provide limited  benefits in simplifying firm structures, in part because tax, jurisdictional,  and other considerations may outweigh the benefits of simplification.  Furthermore, some experts commented that although resolution plans  may assist regulators in gaining a better understanding of the structures  and activities of complex financial firms, the plans may not be useful  guides during an actual liquidation—in part because the plans could  become outdated or because the plans may not be helpful during a crisis.
section_title: Dodd-Frank Restricts Emergency Lending Authority, but the Federal Reserve Board Has Not Completed its Process for Drafting Required Procedures
paragraphs: The Dodd-Frank Act creates new restrictions and requirements  associated with the Federal Reserve Board’s Section 13(3) authority.  Generally, the act prohibits use of Section 13(3) authority to assist an  individual institution (as the Federal Reserve Board did with Bear Stearns  and AIG). While the act continues to allow the Federal Reserve Board to  use 13(3) authority to authorize programs with broad-based eligibility, it  sets forth new restrictions and requirements for such programs. For  example, the act prohibits a Reserve Bank from lending to an insolvent  firm through a broad-based program or creating a program designed to  remove assets from a single and specific institution’s balance sheet.  According to Federal Reserve Board staff, under its current Section 13(3)  authority, the Federal Reserve Board could re-launch emergency  programs to assist the repurchase agreement, commercial paper, and  other credit markets, if these markets became severely strained and if the  program is broad-based and meets the other requirements imposed by  the Dodd-Frank Act. The Dodd-Frank Act also includes additional  transparency and reporting requirements should the Federal Reserve  Board exercise its Section 13(3) authority.
Although the Dodd-Frank Act requires the Federal Reserve Board to  promulgate regulations that establish policies and procedures governing  any future lending under Section 13(3) authority, Federal Reserve Board  officials told us that they have not yet completed the process for drafting  these policies and procedures. Federal Reserve Board staff have made  progress in drafting these policies and procedures by regulation, but have  not set time frames for completing and publicly proposing a draft  regulation. While there is no mandated deadline for completion of the  procedures, the Dodd-Frank Act does require the Federal Reserve Board  to establish the policies and procedures “as soon as is practicable.”  According to a Federal Reserve Board official, in implementing its  regulatory responsibilities under the Dodd-Frank Act, the Federal Reserve  Board has focused first on the required regulations that have statutory  deadlines and the regulations which are specifically directed at enhancing  the safety and soundness of the financial system. Although the act did not  set a specific deadline, the Federal Reserve Board can better ensure  accountability for implementing rulemaking and more timely completion of  these procedures by setting internal timelines for completing the  rulemaking process. Furthermore, finalizing these policies and  procedures could help the Federal Reserve Board to ensure that any  future emergency lending does not assist an insolvent firm and complies  with other Dodd-Frank Act requirements.
Completing these policies and procedures could also address prior  recommendations we made with respect to the Federal Reserve System’s  emergency assistance programs. For example, in our July 2011 report,  we recommended that the Chairman of the Federal Reserve Board direct  Federal Reserve Board and Reserve Bank staff to set forth the Federal  Reserve Board’s process for documenting its justification for each use of  section 13(3) authority. We noted that more complete documentation  could help the Federal Reserve Board ensure that it is complying with the  Dodd-Frank Act’s requirement on its use of this authority. The Federal  Reserve Board agreed that this prior report’s recommendations would  benefit its response to future crises and agreed to strongly consider how  best to respond.
section_title: Enhanced Prudential Standards for Large Financial Firms Have Not Been Fully Implemented
paragraphs: The Dodd-Frank Act also introduced a number of regulatory changes  designed to reduce the risks that the largest financial institutions pose to  the financial system. A notable change is a set of new prudential  requirements and capital standards designed to strengthen the regulatory  oversight and capital base of large financial institutions. The Federal  Reserve Board has made progress towards implementing these  enhanced regulatory standards.
The Dodd-Frank Act requires the Federal Reserve Board to create  enhanced capital and prudential standards for bank holding companies  with $50 billion or more in consolidated assets and nonbank financial  holding companies designated by FSOC. The act’s provisions related  to enhanced prudential standards for these covered firms include the  following:
Risk-based capital requirements and leverage limits. The Federal  Reserve Board must establish capital and leverage standards, which  as proposed would include a requirement for covered firms to develop  capital plans to help ensure that they maintain capital ratios above  specified standards, under both normal and adverse conditions. In  addition, the Federal Reserve Board has announced its intention to  apply capital surcharges to some or all firms based on the risks firms  pose to the financial system.
Liquidity requirements. The Federal Reserve Board must establish  liquidity standards, which as proposed would include requirements for  covered firms to hold liquid assets that can be used to cover their  cash outflows over short periods.
Single-counterparty credit limits. The Federal Reserve Board must  issue rules that, in general, limit the total net credit exposure of a  covered firm to any single unaffiliated company to 25 percent of its  total capital stock and surplus.
Risk management requirements. Publicly traded covered firms must  establish a risk committee and be subject to enhanced risk  management standards.
Stress testing requirements. The Federal Reserve Board is required  to conduct an annual evaluation of whether covered firms have  sufficient capital to absorb losses that could arise from adverse  economic conditions.
Debt-to-equity limits. Certain covered firms may be required to  maintain a debt-to-equity ratio of no more than 15-to-1.
Early remediation. The Federal Reserve Board is required to  establish a regulatory framework for the early remediation of financial  weaknesses of covered firms in order to minimize the probability that  such companies will become insolvent and the potential harm of such  insolvencies to the financial stability of the United States.
Some of these rules have been finalized, while others have not. For  example, in October 2012, the Federal Reserve Board issued a final rule  implementing the supervisory and company-run stress test  requirements. In December 2012, the Federal Reserve Board issued  proposed regulations designed to implement enhanced prudential  standards and early remediation requirements for foreign banking  organizations and foreign nonbank financial companies.
The Federal Reserve Board intends to satisfy some aspects of the Dodd- Frank Act’s heightened prudential standards rules for bank holding  companies with total consolidated assets of $50 billion or more through  implementation of the new Basel Committee on Banking Supervision  standards, known as Basel III. The new standards seek to improve the  quality of regulatory capital and introduce a new minimum common equity  requirement. Basel III also raises the quantity and quality of capital  required and introduces capital conservation and countercyclical buffers  designed to better ensure that banks have sufficient capital to absorb  losses in a future crisis. In addition, Basel III establishes for the first time  an international leverage standard for internationally active banks.
Consistent with that intention, in July 2013 FDIC, the Federal Reserve  Board, and OCC finalized a rule that revised risk-based and leverage  capital requirements for banking organizations. The interim final rule  implements a revised definition of regulatory capital, a new common  equity Tier 1 minimum capital requirement, a higher minimum Tier 1  capital requirement, and a supplementary leverage ratio that incorporates  a broader set of exposures in the denominator.
In addition, in July 2013 FDIC, the Federal Reserve Board, and OCC  proposed a rule to establish a new leverage buffer. Specifically, the  proposed rule requires bank holding companies with more than $700  billion in consolidated total assets or $10 trillion in assets under custody  to maintain a Tier 1 capital leverage buffer of at least 2 percent above the  minimum supplementary leverage ratio requirement of 3 percent, for a  total of 5 percent. In addition to the leverage buffer for covered bank  holding companies, the proposed rule would require insured depository  institutions of covered bank holding companies to meet a 6 percent  supplementary leverage ratio to be considered “well capitalized” for  prompt corrective action purposes. The proposed rule would take effect  beginning on January 1, 2018.
section_title: Conclusions
paragraphs: During the 2007-2009 financial crisis, federal agencies determined that  expanding support to insured banks through traditional safety nets—the  discount window and deposit insurance—would not be sufficient to stem  disruptions to important credit markets. The Federal Reserve System,  Treasury, and FDIC introduced new programs to provide general funding  support to the financial sector, and some of these programs provided  support at the bank holding company level or directly to nonbank financial  institutions. These programs helped to improve financial conditions, and  bank holding companies and their subsidiaries also experienced  individual benefits from participating in particular programs, including  liquidity benefits from programs that allowed them to borrow at lower  interest rates and at longer maturities than might have been available in  the markets. In addition, the Federal Reserve Board granted exemptions  to allow banks to channel additional funding support to nonbank financial  firms that lacked direct access to the federal safety nets for insured  depository institutions. Government assistance to prevent the failures of  large financial institutions—such as Fannie Mae, Freddie Mac, and AIG— also benefited bank holding companies, their subsidiaries, and other firms  that had large risk exposures to these institutions. While these actions  collectively helped to avert a more severe crisis, they raised concerns  about moral hazard and the appropriate scope of federal safety nets for  the financial sector.
The Dodd-Frank Act contains provisions that aim to restrict future  government support for financial institutions, but the effectiveness of  these provisions will depend in large part on how agencies implement  them. Among other things, the act places new restrictions on the Federal  Reserve Board and FDIC’s emergency authorities and grants FDIC new  resolution authority to resolve a large failing institution outside of the  bankruptcy process. While the act continues to allow the Federal Reserve  Board to use its authority under Section 13(3) of the Federal Reserve Act  to authorize programs with broad-based eligibility, it sets forth new  restrictions and requirements for such programs, including a requirement  that lending not assist insolvent firms. The act also requires the Federal  Reserve Board to establish policies and procedures governing future  actions under this authority. As of the date of this report, the Federal  Reserve Board has not yet completed its process for drafting these  policies and procedures and has not set time frames for doing so. A  Federal Reserve Board official indicated that the Board of Governors has  focused first on completion of other required regulations that have  statutory deadlines and the regulations that are specifically directed at  enhancing the safety and soundness of the U.S. financial system. While  the act did not set a specific deadline, setting time frames could help  ensure more timely completion of these policies and procedures.  Moreover, finalizing these procedures could help the Federal Reserve  Board to ensure that any future emergency lending does not assist a  failing firm and complies with other new requirements. Consistent with the  changes to Federal Reserve Board authorities, the act removes FDIC’s  authority to provide open bank assistance under the systemic risk  exception while allowing FDIC (subject to congressional approval) to  provide certain assistance through a broadly available program. FDIC  continues to work to implement its new resolution authority. The viability  and credibility of its resolution process as an alternative to placing a  systemically important firm into bankruptcy is a critical part of removing  market expectations of future extraordinary government assistance. The  act also contains provisions to limit the scope of financial transactions that  benefit from access to federal safety nets, although it remains to be seen  how these provisions will be implemented. For example, the act could  result in fewer regulatory exemptions allowing banks to provide additional  funding to their nonbank affiliates. Finally, certain provisions of the act  that require the Federal Reserve Board to subject the largest financial  firms to heightened prudential standards have not been fully implemented  but could reduce the risks that those institutions pose to the financial  system.
section_title: Recommendation for Executive Action
paragraphs: To better ensure that the design and implementation of any future  emergency lending programs comply with Dodd-Frank Act requirements  in a timely manner, we recommend that the Chairman of the Board of  Governors of the Federal Reserve System set timeframes for completing  the process for drafting policies and procedures governing the use of  emergency lending authority under Section 13(3) of the Federal Reserve  Act.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided copies of this draft report to the FDIC, the Federal Reserve  Board, FSOC, OCC, and Treasury for their review and comment. We also  provided excerpts of the draft report for technical comment to the Federal  Housing Finance Agency.  All of the agencies provided technical  comments, which we have incorporated, as appropriate.
In its written comments, which are reprinted in appendix V, the Federal  Reserve Board accepted our recommendation and noted that it has made  progress toward completing draft policies and procedures governing the  use of its emergency lending authority under Section 13(3) of the Federal  Reserve Act.  The Federal Reserve Board’s letter referred to its  Chairman’s July 2013 remarks on the status of these efforts.  The  Chairman said that he was hopeful that a final product would be  completed relatively soon, perhaps by the end of this year.  He further  noted that in the meantime, the law is clear about what the Federal  Reserve Board can and cannot do.  Based on these remarks, we  conducted further audit work at the Federal Reserve Board and revised  our draft to include additional information about the Federal Reserve  Board’s progress towards drafting the required policies and procedures.   While the Federal Reserve Board has made progress on a draft  regulation, it has not set timeframes for completing the drafting process  and issuing a final regulation. Setting timeframes for completing draft and  final policies and procedures would help to ensure more timely  completion of the rulemaking process.  Furthermore, while certain  restrictions outlined in the act may not require clarification by rulemaking,  the Dodd-Frank Act explicitly directs the Federal Reserve Board to draft  policies and procedures to help ensure that it complies with the full set of  new restrictions and requirements the act imposes on its emergency  lending authority.
In its response, the Federal Reserve Board also noted that Federal  Reserve System and FDIC assistance was repaid with interest and  suggested that it would be helpful for GAO, perhaps in a future report, to  analyze the offsetting costs paid by financial institutions assisted through  the emergency programs.  We note that our draft report contained some  information and analyses related to such offsetting costs.  In table 1 on  pages 14 through 16, we describe the key terms of selected broad-based  programs, including interest, fees, and dividends that participating  institutions were required to pay for this assistance. Furthermore, our  draft report noted that one indicator of the extent to which an institution  benefitted from participation in an emergency government program is the  relative price of estimated market alternatives to the program. On pages  21 through 29, we report the results of our analyses of the pricing terms  of some of the largest programs that provided funding support to bank  holding companies and other eligible financial institutions. While past  GAO reports have reported on the income earned by the Federal Reserve  System, FDIC, and Treasury on their crisis interventions, this information  is not relevant to this report’s discussion of the support that bank holding  companies received during the government’s attempt to stabilize the  financial system. As we discussed, these government interventions  helped to avert a more severe crisis, but raised questions about moral  hazard as market participants may expect similar emergency actions in  future crises.
Treasury also provided written comments, which are reprinted in  appendix VI. Treasury noted that the emergency programs discussed in  the report were necessary to prevent a collapse of the financial system  and that they created economic benefits not only for individual firms, large  and small, but also for the financial system and the broader economy.
Treasury also observed that the Dodd-Frank Act reforms discussed in our  draft report were consistent with its commitment to ending “too big to fail.”  In separate comments provided via email, Treasury and FSOC provided  suggestions related to the report’s analyses of the pricing and utilization  of selected emergency programs. In response to these suggestions, we  added additional information about the exclusion of observations from our  pricing analyses, and added data on average assets per institution to  Table 3 in appendix IV, among other changes.  Treasury and FSOC also  suggested that GAO consider using different benchmarks for analyzing  the pricing for the Federal Reserve System’s CPFF and FDIC’s DGP.  While analyses of these suggested benchmarks (short-dated bond prices  for CPFF and 2-3 year bond prices for DGP borrowers) could provide  useful insights into the robustness of our results, these analyses also  have limitations and would not necessarily improve on the analyses of the  benchmarks that we conducted. We concluded that the analyses included  in our report are appropriate. As noted in the report, while these analyses  have limitations, we determined that they are sufficient for our purposes.  We note that Federal Reserve System and FDIC staff with whom we  discussed our selected benchmarks for these programs agreed that the  benchmarks we used in our pricing analysis are appropriate.
We are sending copies of this report to FDIC, the Federal Reserve Board,  FSOC, OCC, Treasury, interested congressional committees, members,  and others. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staffs have any questions regarding this report, please  contact me at (202) 512-8678 or EvansL@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: The objectives of our report were to examine: (1) support banks and bank  holding companies received as a result of government efforts to stabilize  financial markets during the financial crisis of 2007-2009; and (2) recent  statutory and regulatory changes related to government support for banks  and bank holding companies and factors that could impact the  effectiveness of these changes. In terms of scope, the first section of this  report addresses benefits that bank holding companies and their  subsidiaries received during the crisis from actual government support  provided through emergency actions. It does not address benefits that  some financial institutions may have received and may continue to  receive from perceived government support. In a second report to be  issued in 2014, we will report the results of our examination into whether  the largest bank holding companies have received funding cost or other  economic advantages as a result of expectations that the government  would not allow them to fail.
To address our first objective, we reviewed documents from financial  regulatory agencies—the Board of Governors of the Federal Reserve  System (Federal Reserve Board), the Federal Deposit Insurance  Corporation (FDIC), and the Department of the Treasury (Treasury) and  analyzed agency data on emergency government actions to stabilize  financial markets. Our review focused on (1) emergency government  programs that provided funding support to bank holding companies or  their subsidiaries as well as other eligible financial institutions, (2)  government actions that provided extraordinary assistance to individual  financial institutions, and (3) regulatory exemptions that allowed banks to  engage in certain transactions with their nonbank affiliates. To identify the  programs that provided the most significant funding support directly to  bank holding companies or their subsidiaries, we reviewed program  eligibility rules and data on program participation for programs created  during the 2007-2009 financial crisis by Treasury, FDIC, and the Federal  Reserve System.  Specifically, we identified a set of emergency  programs created during the crisis that provided at least $10 billion in  direct funding support to bank holding companies or their subsidiaries.
We determined that these programs included Treasury’s Capital  Purchase Program (CPP); FDIC’s Temporary Liquidity Guarantee  Program (TLGP); and the Federal Reserve System’s Term Auction  Facility (TAF), Primary Dealer Credit Facility (PDCF), Term Securities  Lending Facility (TSLF), and Commercial Paper Funding Facility (CPFF).  To describe the purpose, terms, and conditions of these programs and  other emergency government actions discussed in our first objective, we  reviewed agency documents and included information and analyses from  prior GAO work on the Troubled Asset Relief Program (TARP), the  Federal Reserve System’s emergency programs, and other emergency  assistance provided to the financial sector. To obtain perspectives on the  benefits that bank holding companies received from emergency  government actions, we reviewed papers by staff of regulators and other  subject-matter experts and interviewed federal financial regulators,  representatives of bank holding companies that received emergency  government assistance, and academics. For the Federal Reserve System  and FDIC programs that were among the programs that provided the  most significant funding support, we compared the pricing and terms of  this assistance (such as interest rates and fees) to indicators of funding  market conditions during normal and crisis conditions. While this analysis  provides a measure of program pricing versus potential market  alternatives, it does not produce a precise quantification of the benefits  that accrued to participating financial institutions. To determine the extent  to which emergency equity support programs, CPP and the Targeted  Investment Program (TIP), were priced more generously than estimated  market alternatives, we reviewed estimates of the expected budget cost  associated with equity funding support programs as well as a valuation  analysis commissioned by the Congressional Oversight Panel (COP).   For more information about the methodology for our analysis of the  pricing and terms of these programs and associated limitations, see  appendix III. For programs that provided the most significant direct  funding support, to compare the extent to which banking organizations of  various sizes used these emergency programs, we calculated the  percentage of banking organization assets that were supported by  emergency programs—either through capital injections, loans, or  guarantees—at quarter-end dates for 2008 through 2012. For more  information about our methodology for analyzing program utilization, see  appendix IV. Finally, we obtained and analyzed Federal Reserve Board  documentation of Federal Reserve Board decisions to grant exemptions  to Section 23A of the Federal Reserve Act and approve applications from  financial companies to convert to bank holding company status.
To address our second objective, we identified and reviewed relevant  statutory provisions, regulations, and agency documents. To identify  recent statutory and regulatory changes related to government support for  banks and bank holding companies, we reviewed sections of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  that change rules or create new requirements for safety net programs for  insured depository institutions; further restrict the types of financial  activities that can be conducted by insured depository institutions or their  holding companies; make changes to agencies’ emergency authorities to  assist or resolve financial institutions; and subject the largest bank  holding companies to enhanced regulatory oversight and standards. To  corroborate our selection of Dodd-Frank Act provisions, we obtained the  views of regulatory officials and financial markets experts on the  provisions that are related to government support for banks and bank  holding companies. To update the status of agencies’ efforts to implement  these provisions, we reviewed agencies’ proposed and final rules, and  interviewed staff from FDIC, the Federal Reserve Board, the Office of the  Comptroller of the Currency, and Treasury. We also reviewed relevant  congressional testimonies and other public statements by agency  officials. We identified statutory provisions or requirements that agencies  had not fully implemented and interviewed agency staff about planned  steps to complete implementation. To describe factors that could impact  the effectiveness of relevant provisions, we reviewed prior GAO work on  the potential impacts of Dodd-Frank Act provisions. To obtain additional  perspectives on factors that could impact the effectiveness of these  provisions, we interviewed and reviewed the public statements and  analyses of agency officials, academics, and market experts.
For parts of our work that involved the analysis of computer-processed  data, we assessed the reliability of these data and determined that they  were sufficiently reliable for our purposes. Data sets for which we  conducted data reliability assessments include Federal Reserve Board  transaction data for TAF, PDCF, TSLF, and CPFF; Treasury transaction  data for CPP and TIP; and FDIC transaction data for TLGP programs (the  Debt Guarantee Program and the Transaction Account Guarantee  Program). We have relied on Federal Reserve Board and Treasury  transaction data for their respective emergency programs for past reports,  and we determined that these data were sufficiently reliable for the  purpose of presenting and analyzing the pricing and utilization of these  programs. To assess the reliability of FDIC’s TLGP data, we interviewed  FDIC staff about steps they took to maintain the integrity and reliability of  program data. We also assessed the reliability of data sources used to  provide indicators of the pricing and terms for market alternatives that  could have been available to institutions that participated in these  programs. These data sources were interbank interest rates (the London  Interbank Offered Rate), additional interest rates from the Federal  Reserve, credit default swap spreads from Bloomberg, repurchase  agreement interest rates from IHS Global Insight, and repurchase  agreement haircuts from the Federal Reserve Bank of New York. To  assess the reliability of these data we took a number of steps including  inspecting data for missing observations, corroborating interest rate data  with other sources, and discussing data with agency officials. We  determined these data were sufficiently reliable for measuring market  alternatives that might have been available to participants in emergency  programs. To calculate the average percentage of assets supported by  emergency programs for banking organizations of different sizes, in  addition to the program transaction data discussed above, we used Y-9  data for bank holding companies from the Federal Reserve Bank of  Chicago, demographic data for bank holding companies and other  emergency program participants from the Federal Reserve System’s  National Information Center and SNL Financial, balance sheet and  demographic data for depository institutions from FDIC, and gross  domestic product price index data from the Bureau of Economic Analysis.  To assess the reliability of these data, we reviewed relevant  documentation. In addition, for the Y-9 data for bank holding companies  from the Federal Reserve Bank of Chicago and the balance sheet data  for depository institutions from FDIC, we conducted electronic testing of  key variables.
We conducted this performance audit from January 2013 through  November 2013 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: Overview of Selected Federal Government Programs That Provided Emergency Funding Support to Banking Entities during the 2007-2009 Financial Crisis
paragraphs: During the financial crisis, the Federal Reserve System, Treasury, and  FDIC introduced new programs with broad-based eligibility to provide  general funding support to the banking sector and stabilize the financial  system. Federal government interventions that provided the most  significant direct funding support to U.S. bank holding companies or their  subsidiaries were:
Treasury’s capital investments through the Troubled Asset Relief  the Federal Reserve System’s credit and liquidity programs;
FDIC’s guarantees of certain newly issued debt and previously  uninsured deposits through the Temporary Liquidity Guarantee  Program (TLGP).
The first of these interventions occurred in late 2007 when the Federal  Reserve System modified discount window terms and launched a new  program to auction discount window loans to banks to address strains in  interbank credit markets.
Discount window. In August 2007, the cost of term funding (loans  provided at terms of 1 month or longer) spiked suddenly—primarily  due to investor concerns about banks’ actual exposures to various  mortgage-related securities—and commercial banks increasingly had  to borrow overnight to meet their funding needs. The Federal  Reserve Board feared that the disorderly functioning of interbank  lending markets would impair the ability of commercial banks to  provide credit to households and businesses. To ease stresses in  these markets, on August 17, 2007, the Federal Reserve Board  approved two temporary changes to discount window terms: (1) a  reduction of the discount rate—the interest rate at which the Reserve  Banks extended collateralized loans at the discount window—by 50  basis points; and (2) an extension of the discount window lending  term from overnight to up to 30 days, with the possibility of renewal.  This change initially resulted in little additional borrowing from the  discount window. After subsiding in October 2007, tensions in term  funding markets reappeared in late November, possibly driven by a  seasonal contraction in the supply of year-end funding.
Term Auction Facility (TAF). On December 12, 2007, the Federal  Reserve Board announced the creation of TAF to address continuing  disruptions in U.S. term interbank lending markets. TAF provided  term funding to depository institutions eligible to borrow from the  discount window. In contrast to the traditional discount window  program, which loaned funds to individual institutions at the discount  rate, TAF auctioned loans to many eligible institutions at once at a  market-determined interest rate. Federal Reserve Board officials  noted that one important advantage of this auction approach was that  it could address concerns among eligible borrowers about the  perceived stigma of discount window borrowing. TAF was the largest  Federal Reserve System emergency program in terms of the dollar  amount of funding support provided, with TAF loans outstanding  peaking at $493 billion in March 2009.
In March 2008, the Federal Reserve Board invoked its emergency  authority under Section 13(3) of the Federal Reserve Act to authorize two  new programs to support repurchase agreement markets—large, short- term collateralized funding markets—that many financial institutions rely  on to finance a wide range of securities. The Federal Reserve Board  limited eligibility for these programs to the primary dealers, a designated  group of broker-dealers and banks that transact with the Federal Reserve  Bank of New York (FRBNY) in its conduct of open market operations.  Many of the primary dealers are subsidiaries of U.S. bank holding  companies or large foreign banking organizations.
Term Securities Lending Facility (TSLF). On March 11, 2008, the  Federal Reserve Board announced the creation of TSLF to auction  28-day loans of U.S. Treasury securities to primary dealers to  increase the amount of high-quality collateral available for these  dealers to borrow against in the repurchase agreement markets. In  early March, the Federal Reserve Board found that repurchase  agreement lenders were requiring higher haircuts for loans against a  range of securities and were becoming reluctant to lend against  mortgage-related securities. As a result, many financial institutions  increasingly had to rely on higher-quality collateral, such as U.S.  Treasury securities, to obtain cash in these markets, and a shortage  of such high quality collateral emerged. Through competitive auctions  that allowed dealers to bid a fee to exchange harder-to-finance  collateral for easier-to-finance Treasury securities, TSLF was intended  to promote confidence among lenders and to reduce the need for  dealers to sell illiquid assets into the markets, which could have  further depressed the prices of these assets. The market value of  TSLF securities loans outstanding peaked at $236 billion in October  2008.
Primary Dealer Credit Facility (PDCF). On March 16, 2008, the  Federal Reserve Board announced the creation of PDCF to provide  overnight collateralized cash loans to the primary dealers. In the days  following the March 11 announcement of TSLF, one of the primary  dealers, Bear Stearns, experienced a run on its liquidity. Because the  first TSLF auction would not be held until later that month, Federal  Reserve Board and FRBNY staff worked to ready PDCF for launch by  Monday, March 17, 2008, when Federal Reserve Board officials  feared a Bear Stearns bankruptcy announcement might trigger runs  on the liquidity of other primary dealers. Although the Bear Stearns  bankruptcy was averted, PDCF commenced operation on March 17,  2008. Eligible PDCF collateral initially included collateral eligible for  open-market operations as well as investment-grade corporate  securities, municipal securities, and asset-backed securities, including  private label mortgage-backed securities. The Federal Reserve Board  later expanded eligible collateral types for both TSLF and PDCF.
In late 2008, the bankruptcy of Lehman Brothers triggered an  intensification of the crisis and the Federal Reserve System, Treasury  and FDIC took a range of new actions to provide additional support to  financial institutions and key credit markets.
Federal Reserve System actions. In September and October 2008,  the Federal Reserve Board modified its existing programs, launched  new programs, and took other actions to address worsening market  conditions.
Modifications to TSLF, PDCF, and TAF. On September 14, 2008,  shortly before Lehman Brothers announced it would file for  bankruptcy, the Federal Reserve Board announced changes to  TSLF and PDCF to provide expanded liquidity support to primary  dealers. Specifically, the Federal Reserve Board announced that  TSLF-eligible collateral would be expanded to include all  investment-grade debt securities and PDCF-eligible collateral  would be expanded to include all securities eligible to be pledged  in the tri-party repurchase agreements system, including  noninvestment grade securities and equities. On September 29,  2008, the Federal Reserve Board also announced expanded  support through TAF by doubling the amount of funds that would  be available in each TAF auction cycle from $150 billion to $300  billion.
Commercial Paper Funding Facility (CPFF). On October 7, 2008,  the Federal Reserve Board announced the creation of CPFF  under its Section 13(3) authority to provide a liquidity backstop to  U.S. issuers of commercial paper. Commercial paper is an  important source of short-term funding for U.S. financial and  nonfinancial businesses. CPFF became operational on October  27, 2008, and was operated by FRBNY. In the weeks leading up  to CPFF’s announcement, the commercial paper markets showed  signs of strain: the volume of commercial paper outstanding  declined, interest rates on longer-term commercial paper  increased significantly, and increasing amounts of commercial  paper were issued on an overnight basis as money-market funds  and other investors became reluctant to purchase commercial  paper at longer-dated maturities. By standing ready to purchase  eligible commercial paper, CPFF was intended to eliminate much  of the risk that commercial paper issuers would be unable to issue  new commercial paper to replace their maturing commercial paper  obligations.
Other actions. The Federal Reserve System launched other new  programs that provided liquidity support for other market  participants, but did not serve a major source of direct support for  U.S. bank holding companies or their subsidiaries.
Troubled Asset Relief Program. On October 3, 2008, the Emergency  Economic Stabilization Act of 2008 (EESA) was signed into law to  help stem the financial crisis. EESA provided Treasury with the  authority to create the Troubled Asset Relief Program (TARP), under  which it could buy or guarantee up to almost $700 billion of the  “troubled assets” that it deemed to be at the heart of the crisis,  including mortgages, mortgage-backed securities, and any other  financial instruments, such as equity investments. Treasury created  the Capital Purchase Program (CPP) in October 2008 to provide  capital to viable financial institutions by using its authority to purchase  preferred shares and subordinated debt. In return for its investments,  Treasury received dividend or interest payments and warrants. On  October 14, 2008, Treasury allocated $250 billion of the original $700  billion in overall TARP funds for CPP. The allocation was  subsequently reduced in March 2009 to reflect lower estimated  funding needs, as evidenced by actual participation rates. The  program was closed to new investments on December 31, 2009.  Smaller capital infusion programs included the Targeted Investment  Program (TIP) and the Community Development Capital Initiative  (CDCI).
Temporary Liquidity Guarantee Program. In October 2008, FDIC  created TLGP to complement the Federal Reserve and Treasury  programs in restoring confidence in financial institutions and repairing  their capacity to meet the credit needs of American households and  businesses. TLGP’s Debt Guarantee Program (DGP) was designed  to improve liquidity in term-funding markets by guaranteeing certain  newly issued senior unsecured debt of financial institutions and their  holding companies. By guaranteeing payment of these debt  obligations, DGP was intended to address the difficulty that  creditworthy institutions were facing in replacing maturing debt  because of risk aversion in the markets. TLGP’s Transaction Account  Guarantee Program (TAGP) also was created to stabilize an  important source of liquidity for many financial institutions. TAGP  temporarily extended an unlimited deposit guarantee to certain  noninterest-bearing transaction accounts to assure holders of the  safety of these deposits and limit further outflows. By facilitating  access to borrowed funds at lower rates, Treasury, FDIC, and the  Federal Reserve expected TLGP to free up funding for banks to make  loans to creditworthy businesses and consumers. Furthermore, by  promoting stable funding sources for financial institutions, they  intended TLGP to help avert bank and thrift failures that would impose  costs on the insurance fund and taxpayers and potentially contribute  to a worsening of the crisis.
section_title: Appendix III: Methodology for Analysis of Pricing and Terms for Financial Stability Programs
paragraphs: Although imperfect, one indicator of the extent to which an institution  benefited from participation in an emergency program is the relative price  of estimated market alternatives to the program. To determine how  pricing of the emergency assistance compared to market rates, we  compared the interest rates and fees charged by the Federal Reserve  and FDIC for participation in the emergency lending and guarantee  programs with market alternatives that might have been available to  program participants. We considered a number of potential indicators of  market interest rates available to financial institutions, including a survey  of interbank interest rates (the London Interbank Offered Rate or LIBOR),  commercial paper interest rates published by the Federal Reserve Board,  spreads on bank credit default swaps (CDS), and interest rates on  repurchase agreements. These interest rates and spreads provide a  general indication of market alternatives available to participants but are  imperfect and hence unlikely to reflect available alternatives for all  participants at all points in time.  For example, participants’ access to  market alternatives may have been limited, there may be only limited data  on the relevant private market, or market alternatives could vary across  participants in ways that we do not observe in the data. Furthermore,  once programs were introduced, they probably influenced the price of  market alternatives, making it difficult to interpret differences between  program pricing to contemporary market pricing while programs were  active. Where possible—when programs had pricing rules (PDCF, CPFF,  and DGP)—we applied program pricing rules during time periods that  were not influenced by the program itself to compare program pricing with  counterfactual market prices. By choosing high and low financial stress  time periods, we can estimate the extent to which participants may have  benefitted from program pricing during the financial crisis as well as the  extent to which program pricing became less attractive as financial  conditions returned to normal.
Programs with auction-based pricing (TAF and TSLF) raise particular  challenges in interpreting differences between program pricing and  market pricing. Under certain assumptions, bidders would bid program  pricing up to their market alternatives, which could limit potential benefits  from the program as well as eliminate any difference between program  and market pricing. In addition, without a pricing rule we cannot apply  pricing for auction-based programs to high or low financial stress time  periods not influenced by the program itself—in other words,  contemporaneous pricing is contaminated by the program itself, making it  difficult to determine the true market alternative. As a result, deviations  between program and market pricing could indicate differences in terms  rather than a benefit to participating financial institutions. These  challenges suggest that our estimates of the difference between program  and market pricing for auction-based programs should be interpreted with  caution. TAF and TSLF also had minimum pricing determined by the  Federal Reserve that was prescribed when auctions were  undersubscribed. In these instances prices were no longer auction- determined in the traditional sense although the outcome of the auction  (undersubscription) determined when the minimum pricing would apply.
It is important to note that, among other limitations, our indicators do not  capture all the benefits associated with program participation. Because  our proxies for market alternatives are imperfect, market prices appear on  occasion to be lower than emergency program pricing despite significant  participation by financial institutions at these times. Participation by itself  suggests that program prices and/or terms were relatively attractive in  comparison to available alternatives—benefits could arise from price,  quantity available, or other nonprice characteristics of the assistance  (loan term, eligible collateral, etc.). Therefore, we discarded values of  spreads between program pricing and market alternatives when they  were zero or negative since negative spreads are unlikely to capture the  benefits that accrued to participants. If these truly reflected market  alternatives for the pool of potential participants, then there would be no  participation or the participation would have been based on other  nonprice considerations. We assume that the true (unobserved) market  alternatives overlap at times with our observed proxies. At other times the  market alternatives we are able to observe and measure may not overlap  with the true market alternatives for participants (including when observed  market alternatives indicate programs are more expensive than market  rates).
Because PDCF operated similarly to repurchase agreement markets, we  compared collateral haircuts in PDCF with select asset classes in the  triparty (intermediated by a clearing bank) repurchase agreement  markets. We selected those asset classes where we were able to draw  clear parallels between categories of collateral allowed under PDCF and  categories identified in data based on private repurchase agreement  market we received from the Federal Reserve Bank of New York. The  haircut is an important loan term in repurchase agreement contracts and  collateralized lending, the amount of additional collateral required over the  value of the loan that is required to secure the loan. Securities with  greater risk or less liquidity generally have larger haircuts (i.e., more  collateral is required). PDCF borrowers might have utilized triparty  repurchase agreement markets for alternative sources of secured  borrowing during the 2007-2009 financial crisis.
To determine the extent to which emergency equity support programs,  CPP and TIP, were priced more generously than estimated market  alternatives, we reviewed estimates of the expected budget cost  associated with equity funding support programs as well as a valuation  analysis commissioned by the Congressional Oversight Panel (COP).  The benefits that accrued to banks from participation in equity funding  support programs are likely to be proportional to the subsidy rates  estimated for accounting purposes. Estimates of subsidy rates are based  on a net present value analysis—the price and terms which are offered by  a federal agency are compared to the lifetime expected cost (net present  value) of the equity and the difference is known as a subsidy. Because  private market participants might have charged a price based on a  comparable net present value analysis, banks would have benefitted to  the extent that the prices offered by Treasury for their equity exceed what  they were likely to receive based on the net present value. The valuation  analysis commissioned by COP explicitly compared the prices received  by Treasury with market-based valuations of similar securities. We  assume that the net present values estimated for accounting purposes by  Treasury and CBO are reasonable proxies for the market valuations that  are more directly estimated in the COP analysis. We used the earliest  available estimates from the Congressional Budget Office (CBO) and  Treasury as they were closest to market conditions at the time that  programs were initiated. Estimates of these subsidy rates depended on  timing and market conditions and the size of these subsidy rates likely fell  over time as market conditions improved.
section_title: Appendix IV: Use of Financial Stability Programs by Banking Organizations of Different Sizes
subsections: section_title: Data
paragraphs: Emergency government programs to stabilize financial markets resulted  in funding support to bank holding companies and insured depository  institutions (collectively, banking organizations) of various sizes. To  compare use of emergency funding programs by banking organizations of  different sizes, we analyzed quarterly data on bank holding companies  and depository institutions for the period from 2008 to 2012 along with  data on emergency program transactions that occurred during that period.  We used quarterly balance sheet and demographic data on bank holding  companies for the period from the first quarter of 2008 through the fourth  quarter of 2012 from the Federal Reserve Bank of Chicago and the  Federal Reserve System’s National Information Center (NIC), quarterly  balance sheet and demographic data on depository institutions from FDIC  for the period from the first quarter of 2008 through the fourth quarter of  2012, and quarterly data on the GDP price index from the Bureau of  Economic Analysis (BEA) for the period from the first quarter of 2008  through the fourth quarter of 2012. We also used data on Debt Guarantee  Program (DGP) and TAGP transactions from FDIC, data on Commercial  Paper Funding Facility, Primary Dealer Credit Facility, TAF, and TSLF  transactions from the Board of Governors of the Federal Reserve System,  and data on CPP and TIP transactions from the U.S. Department of the  Treasury. Finally, we used demographic data on emergency funding  program participants obtained from NIC and from SNL Financial.
section_title: Methodology
paragraphs: We organized depository institutions and bank holding companies into  groups—hereafter banking organizations—based on their regulatory high  holder (the highest holding company in a tiered organization), where  depository institutions or bank holding companies that did not indicate a  high holder are assumed to be their own high holder. We calculated  consolidated assets for each banking organization, excluding banking  organizations for which we cannot reliably calculate consolidated assets.  We excluded banking organizations with a high holder that was not in our  data, e.g., banking organizations with foreign high holders. For banking  organizations with a high holder that was in our data and that included at  least one bank holding company, we excluded those for which the high  holder did not report consolidated assets, those for which the high holder  reported consolidated assets but they were less than its parent-only  assets, those for which the high holder’s consolidated assets were less  than consolidated assets reported by some other bank holding company  in the organization, those for which none of the bank holding companies  reported consolidated assets, and those that did not contain any  depository institutions. For all remaining banking organizations that  contained at least one bank holding company, we set consolidated assets  for the group equal to consolidated assets reported by the high holder.  Note that consolidated assets for a bank holding company include the  assets of all consolidated subsidiaries, which generally include all  companies for which the bank holding company owns more than 50  percent of the outstanding voting stock. For banking organizations with a  high holder in our data that did not include a bank holding company, such  as standalone depository institutions, we set consolidated assets for the  banking organization equal to the depository institution’s consolidated  assets.
Banking organizations for which we could reliably calculate consolidated  assets constitute our analysis sample. Small bank holding companies  (those with assets less than $500 million) generally report their  consolidated assets in the second and fourth quarters of each year, but  they generally do not do so in the first and third quarters of each year. To  maintain consistency in the composition of the analysis sample over time,  we ultimately used results for only the second and fourth quarters of each  year from 2008 to 2012. Companies that converted to bank holding  companies during the crisis are included in our analysis only for the  quarters for which they filed financial statements for bank holding  companies with the Federal Reserve. For example, both Goldman Sachs  Group, Inc. and Morgan Stanley became bank holding companies in  September 2008 but neither filed form FR Y-9C, the source of our data on  consolidated assets for large bank holding companies, until the first  quarter of 2009. As a result, these two companies are not part of our  analysis sample until 2009. We assigned banking organizations in our  analysis sample to one of six size groups based on their consolidated  assets, adjusted for inflation and expressed in fourth quarter 2012 dollars:  less than $500 million; at least $500 million and less than $1 billion; at  least $1 billion and less than $10 billion; at least $10 billion and less than  $50 billion; at least $50 billion and less than $250 billion; and $250 billion  or more. Table 3 shows the numbers of banking organizations in our  analysis sample by size group and the numbers of banking organizations  excluded from our analysis sample for the second and fourth quarters of  each year from 2008 to 2012.
Table 3. Numbers and average assets of banking organizations in analysis sample by size and quarter, June 30, 2008 to  December 31, 2012.
For each banking organization in our analysis sample, we calculated the  percentage of assets funded by capital provided, loans provided, and  liabilities guaranteed by emergency programs at quarter-end for the  second and fourth quarters of 2008 through 2012. Capital provided by  emergency programs includes capital investments by Treasury under  CPP and TIP. Loans provided by emergency programs include TAF,  TSLF, PDCF, and CPFF loans from the Federal Reserve System.  Funding guaranteed by emergency programs includes deposits  guaranteed by FDIC through TAGP and debt guaranteed by FDIC  through DGP. To compare the extent to which banking organizations of  various sizes used emergency programs, we calculated the percentage of  banking organization assets that were supported by emergency  programs—either through capital injections, loans, or guarantees—at  quarter-end dates from mid-2008 through the end of 2012. In addition, for  each of the three types of support, we decomposed average support as a  percentage of assets for banking organizations of different sizes into its  two components: (1) the rate of participation in emergency programs by  banking organizations of different sizes as measured by the percentage  of banking organizations using funds provided or guaranteed by the  emergency programs and (2) average support as a percentage of assets  for those participants.
section_title: Results
paragraphs: Federal Reserve System programs. TAF was established in December  2007, PDCF and TSLF were established in March 2008, and CPFF  began purchasing commercial paper in October 2008. As of the end of  2008, combined CPFF, PDCF, TAF, and TSLF loans outstanding ranged  from about 0.01 percent of assets on average for all banking  organizations with less than $500 million in assets to about 2.5 percent of  assets on average for all banking organizations with at least $50 billion  but less than $250 billion in assets (see fig. 3). For banking organizations  with $250 billion or more in assets, combined CPFF, PDCF, TAF, and  TSLF loans outstanding were about 2.0 percent of assets on average. As  of mid-2009, loans outstanding for these four programs combined had  declined to less than 1 percent of assets on average for banking  organizations of all sizes, and as of the end of 2009, they had declined to  less than half a percent of assets on average.
Through mid-2009, the larger banking organizations participated in the  four Federal Reserve System programs we analyzed at higher rates than  smaller banking organizations (see Panel A of table 4). However, by the  end of 2009, banking organizations with $250 billion or more in assets  had completely exited all of these programs, but of the remaining  institutions, larger banking organizations continued to participate at higher  rates than smaller banking organizations. These programs all closed in  the first quarter of 2010.
Among banking organizations that participated in at least one of the four  Federal Reserve programs, average combined CPFF, PDCF, TAF, and  TSLF loans outstanding as a percentage of assets were generally larger  for smaller participants (see Panel B of table 4). As of the end of 2008,  among participating banking organizations, combined CPFF, PDCF, TAF,  and TSLF loans outstanding ranged from about 2.6 percent of assets on  average for participants with $250 billion or more in assets to about 6.0  percent of assets on average for participants with less than $500 million  in assets. As of the end of 2009, combined CPFF, PDCF, TAF, and TSLF  loans outstanding ranged from about 2.1 percent of assets for participants  with at least $50 billion but less than $250 billion in assets to about 7.9  percent of assets for banking organizations with less than $500 million in  assets, while banking organizations with $250 billion or more in assets  were no longer participating in these programs.
Treasury capital investments. Treasury began making equity  investments in banking organizations through CPP in October 2008 and it  established TIP in December 2008. As of the end of 2008, CPP  investment amounts outstanding ranged from about 0.01 percent of  assets on average for banking organizations with less than $500 million in  assets to about 1.9 percent of assets on average for banking  organizations with at least $50 billion but less than $250 billion in assets  (see fig. 4). CPP and TIP investment amounts outstanding for banking  organizations with $250 billion or more were about 1.6 percent of assets  on average. As of mid-2010, banking organizations with $250 billion or  more in assets had repaid Treasury and exited CPP and TIP. At the same  time, CPP investment amounts had fallen to less than 1 percent of assets  on average for banking organizations in all smaller size groups. As of the  end of 2012, banking organizations with at least $50 billion but less than  $250 billion in assets had repaid Treasury and exited CPP, and CPP  investment amounts had fallen to less than 0.25 percent of assets on  average for banking organizations in all smaller size groups.
At the end of 2008, participation rates in CPP and TIP were higher for  larger banking organizations and ranged from about 0.5 percent for  banking organizations with less than $500 million in assets to about 87.5  percent for banking organizations with $250 billion or more in assets (see  Panel A of Table 5). As of the end of 2010, all banking organizations with  $250 billion or more in assets had repaid Treasury and were no longer  participating in CPP or TIP. For banking organizations that continued to  participate in CPP, participation rates ranged from about 4.8 percent for  banking organizations with less than $500 million in assets to 35 percent  for banking organizations with at least $50 billion but less than $250  billion in assets. As of the end of 2012, all banking organizations with $50  billion or more had exited CPP and TIP. For banking organizations that  continued to participate in CPP, participation rates ranged from about 2.4  percent for banking organizations with less than $500 million in assets to  about 6.5 percent for banking organizations with $1-10 billion in assets  (see Panel A of table 5). For participating banking organizations of all  sizes, average CPP and TIP amounts outstanding were 2 to 3 percent of  assets in most quarters (see Panel B of table 5).
FDIC’s TLGP. FDIC implemented DGP and TAGP, the two components  of TLGP, in October 2008. As of the end of 2008, average DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding  altogether as a percentage of assets were higher for larger banking  organizations than smaller banking organizations and ranged from about  1.5 percent of assets on average for banking organizations with less than  $500 million in assets to 7.7 percent of assets on average for banking  organizations with $250 billion or more in assets (see fig. 5). By the end  of 2010, differences in utilization of DGP and TAGP across banking  organizations of different sizes had diminished somewhat, with DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding  altogether ranging from 1.4 percent for banking organizations with $250  billion or more in assets to about 3.2 percent for banking organizations  with at least $1 billion but less than $10 billion in assets. TAGP expired on  December 31, 2010, and by the end of 2011, DGP-guaranteed debt  amounts outstanding were less than 1 percent of assets on average for  banking organizations of all sizes. DGP expired on December 31, 2012,  so none of the assets of any banking organization were funded using  DGP-guaranteed debt after that date.
In general, 50 percent or more of the banking organizations in every size  group were using either DGP-guaranteed debt or TAGP-guaranteed  deposits (or both) as funding through the end of 2010 (see Panel A of  table 6). At the end of 2008, participation rates ranged from about 66.3  percent for banking organizations with less than $500 million in assets to  about 92.9 percent for banking organizations with at least $1 billion but  less than $10 billion in assets. At the end of 2010, participation rates  ranged from about 50 percent for banking organizations with at least $50  billion but less than $250 billion in assets to 100 percent for banking  organizations with $250 billion or more in assets. Participation rates for  banking organizations with less than $50 billion in assets fell after TAGP  expired on December 31, 2010, and in mid-2011 ranged from about 0.04  percent for banking organizations with less than $500 million in assets to  about 3.1 percent for banking organizations with at least $1 billion but  less than $10 billion in assets. Participation rates were about 42.1 percent  and 100 percent for banking organizations with at least $50 billion but  less than $250 billion in assets and with $250 billion or more in assets,  respectively, at that time. By mid-2012, only banking organizations with  $50 billion or more were participating in DGP, which then expired at the  end of 2012.
At the end of 2008, average DGP-guaranteed debt and TAGP- guaranteed deposit amounts outstanding were higher as a percentage of  assets for larger participants than for smaller participants and ranged  from about 2.3 percent for participants with less than $500 million in  assets to about 8.8 percent for participants with $250 billion or more in  assets (see Panel B of table 6). At the end of 2010, average DGP- guaranteed debt and TAGP-guaranteed deposit amounts outstanding as  a percentage of assets had fallen for banking organizations with $50  billion or more in assets but not for smaller banking organizations. At that  time, DGP-guaranteed debt and TAGP-guaranteed deposit amounts  outstanding ranged from about 1.4 percent of assets on average for  participants with $250 billion or more in assets to about 5.6 percent of  assets on average for participants with $10-50 billion in assets. TAGP  expired on December 31, 2010, and as of the end of 2011, DGP- guaranteed debt amounts outstanding were less than 2 percent of assets  on average for banking organizations of all sizes. DGP expired on  December 31, 2012.
Lastly, our analysis found that the six largest bank holding companies as  of December 31, 2012—all with consolidated assets greater than $500  billion—used the emergency programs to varying degrees but had exited  most by the end of 2009. Table 7 shows the percentage of consolidated  assets funded by DGP-guaranteed debt, TAGP-guaranteed deposits,  TAF loans, CPFF loans, PDCF loans, TSLF loans, and CPP and TIP  equity investments for the largest bank holding companies at year-end  from 2008 to 2012. For comparison purposes we also show the average  percent of assets funded by the same programs for the six banking  organization size groups over the same period.
Table 7. Average outstanding amounts of equity provided, loans provided, and liabilities guaranteed by emergency programs  for select bank holding companies and for banking organizations by size at year end, 2008-2012.
Goldman Sachs Group, Inc. and Morgan Stanley became bank holding companies in September  2008 but did not file form FR Y-9C, the source of our data on consolidated assets, for the fourth  quarter of 2008.
section_title: Appendix V: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix VI: Comments from the Department of the Treasury
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, Karen Tremba (Assistant  Director), Jordan Anderson, Bethany M. Benitez, Stephanie Cheng, John  Fisher, Michael Hoffman, Risto Laboski, Courtney LaFountain, Jon  Menaster, Marc Molino, Robert Rieke, and Jennifer Schwartz made key  contributions to this report.