Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration
Published: 2007-03-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As financial institutions increasingly operate globally and diversify their businesses, entities with an interest in financial stability cite the need for supervisors to oversee the safety and soundness of these institutions on a consolidated basis. Under the Comptroller General's Authority, GAO reviewed the consolidated supervision programs at the Federal Reserve System (Federal Reserve), Office of Thrift Supervision (OTS), and Securities and Exchange Commission (SEC) to (1) describe policies and approaches that U.S. consolidated supervisors use to oversee large and small holding companies; (2) review the management of the consolidated supervision programs, including use of program objectives and performance measures; and (3) evaluate how well consolidated supervisors are collaborating with other supervisors and each other in their activities. In conducting this study, GAO reviewed agency policy documents and supervisory reports and interviewed agency and financial institution officials.
section_title: What GAO Found
paragraphs: The Federal Reserve, OTS, and SEC have responded to the dramatic changes in the financial services industry and for many of the largest financial services firms the agencies focus on the firms' consolidated risks, controls, and capital. Reflecting in part differences in structure, traditional roles and responsibilities, and the length of time they have had to develop and refine their programs, the agencies employ somewhat differing policies and approaches for their consolidated supervision programs. Consolidated supervision becomes more important in the face of changes in the financial services industry, particularly with respect to the increased importance of enterprise risk management by large, complex financial services firms. Consolidated supervision provides a basis for the supervisors to oversee the risks of financial services firms on the same level that the firms manage those risks. GAO found that while all of these agencies were meeting international standards for effective oversight of large, internationally active conglomerates and have broad goals for supervision, they could more clearly articulate the specific objectives and performance measures for their evolving consolidated supervision programs. Both Federal Reserve and OTS, for example, focus on the safety and soundness of the depository institution but could take steps to better measure how consolidated supervision contributes to this in ways that differ from primary supervision of the depository institution. Such objectives and measures would help the agencies ensure consistent treatment of the firms that are subject to consolidated supervision. More effective collaboration can occur if agencies take a more systematic approach to agreeing on roles and responsibilities and establishing compatible goals, policies, and procedures on how to use available resources as efficiently as possible. While the three agencies coordinate and exchange information, they could take a more systematic approach to collaboration with respect to their consolidated supervision programs. For instance, SEC and OTS have authority for some of the same firms with no effective mechanism to prevent duplication, assign accountability, or resolve potential conflicts. Similarly, while the Federal Reserve and other federal bank supervisory agencies have taken steps to share information and examination activities when the Federal Reserve is not the primary supervisor of the lead bank in a bank holding company, some duplication and lack of accountability remain. As a result, consolidated supervision of U.S. financial institutions is not as efficient and effective as it could be if agencies collaborated more systematically. GAO has noted in the past that it is difficult to collaborate within the fragmented U.S. regulatory system and has recommended that Congress modernize or consolidate the regulatory system. However, if the current system is maintained, it is increasingly important for agencies to collaborate to ensure effective and efficient consolidated supervision, consistent treatment of financial services firms, and clear accountability of the agencies for their supervisory activities.

section_title: Letter
paragraphs: Increasingly, financial institutions headquartered in the United States, and  their competitors, operate on a global basis, engage in a variety of  businesses, and manage themselves from a consolidated perspective.  Partly in response to these changes, entities with an interest in financial  institutions have increasingly cited the need for supervisors to oversee the  safety and soundness of these firms on a consolidated basis, mirroring the  risk management practices of the firms. This increased focus is reflected  in U.S. laws that provide holding company supervisors with authority to  examine the financial and operating risks faced by holding companies and  the controls for these risks on a consolidated basis. Similarly, the  European Union’s (EU) Financial Conglomerates Directive, implemented  in 2005, requires conglomerates to have a consolidated supervisor—either  an EU supervisor or a home supervisor that has demonstrated it provides  equivalent consolidated supervision—and focuses on the risks, controls,  and capital levels of holding companies.
In the United States, consolidated supervision generally is equated with  holding company supervision at the top tier or ultimate holding company  in a financial enterprise. Three federal agencies—the Federal Reserve  System (Federal Reserve), the Office of Thrift Supervision (OTS), and the  Securities and Exchange Commission (SEC)—engage in oversight of  financial services holding companies on a consolidated basis: the Federal  Reserve oversees bank holding companies (including financial holding  companies, which are bank holding companies qualified to engage in many  nonbanking financial services), OTS oversees thrift holding companies,  and SEC oversees consolidated supervised entities (CSE). Each of these  agencies oversees large, complex financial institutions.
In addition, the Federal Reserve and OTS provide consolidated  supervision for the vast majority of U.S. financial institutions organized as  holding companies that have remained relatively small, and are not  complex. Under U.S. law, consolidated supervisors are to rely on primary  bank and functional supervisors with respect to the supervision of  regulated financial subsidiaries such as banks, broker-dealers, and  insurers. The Federal Deposit Insurance Corporation (FDIC) and the  Office of the Comptroller of the Currency (OCC), for instance, are the  primary federal supervisors for state-chartered banks that are not  members of the Federal Reserve System and for national banks,  respectively. SEC is the primary regulator of broker-dealers and state  insurance supervisors of insurers.
As is generally the case for supervisors dealing with the financial viability  of the entities they oversee, holding company supervisors face the  challenge of striking the appropriate balance between adequately  assessing the risks and controls of financial services firms and placing  undue regulatory burdens on those enterprises. At the consolidated level  the effects of not having the right balance could be unacceptable losses to  the depository insurance fund, systemic failures that could threaten  financial stability, competitive disadvantages for U.S. firms as a whole or  for a firm or group of firms relative to their U.S. competitors, or higher  costs or lower returns for consumers of financial services products or the  owners of those firms.
In previous reports, we have noted the challenges confronting the U.S.  regulatory system:  The present federal financial regulatory structure evolved largely as a  result of periodic ad hoc responses to crises such as financial panics.  In the last few decades, however, the financial services industry,  especially as represented by the largest firms, has evolved, becoming  more global, more concentrated, complex, and consolidated across  sectors, and increasingly converging in terms of product offerings.  Multiple specialized regulators bring critical skills to bear in their areas  of expertise but have difficulty seeing the total risk exposure at large  conglomerate firms or identifying and preemptively responding to  risks that cross industry lines.
In particular, we previously concluded that while the strength and vitality  of the U.S. financial services industry demonstrates that the regulatory  structure has not failed, there are questions whether that structure is  appropriate in today’s environment, particularly with respect to large,  complex firms managing their risks on a consolidated basis. We suggested  that Congress consider several alternative structures, including  consolidating some or all of the current regulatory agencies or having a  single regulator oversee complex, internationally active firms. However,  this report evaluates consolidated supervision under the existing  regulatory structure and does not address proposals to consolidate federal  financial regulation.
In recognition of the increasing importance of consolidated supervision  for the federal financial regulatory system raised in these earlier reports,  we undertook a review of consolidated supervision in the United States  under the Comptroller General’s Authority to initiate reviews. This report     describes the policies and approaches U.S. consolidated supervisors use to  oversee large and small holding companies in the financial services  industry; reviews the supervisory agencies’ management of their consolidated  supervision programs, including program objectives and performance  measures; and    evaluates how well consolidated supervisors are collaborating with other  supervisors and each other in their activities.
To meet our objectives, we reviewed the structure, policies, and activities  of the Federal Reserve, OTS, and SEC as they relate to these agencies’  consolidated supervision programs. We reviewed laws and regulations  pertinent to each agency’s consolidated supervision, as well as agency  planning and performance documents, and regulatory planning and  examination reports and letters for a group of 14 large, complex firms  selected because they had at least one of these characteristics: (1) major  international operations, so that they were subject to the EU Financial  Conglomerates Directive; (2) operations in several business lines; or (3)  oversight by one or more consolidated supervisors. We also interviewed  agency officials and examiners and officials from some of the selected  group of firms to determine their view of the regulatory process. In  addition, for the Federal Reserve and OTS, we reviewed examination  materials related to the supervision of smaller, less complex institutions.  To determine the adequacy of management practices at the agencies, we  analyzed the goals for holding company supervision, the strategies  agencies employ to achieve their goals, including collaboration, and how  agencies monitor their performance. We also reviewed officials’ and  examiners’ statements and other examination materials to determine the  degree to which consolidated supervision programs have effective internal  control, key management practices that provide agencies with reasonable  assurance that the programs are operating efficiently and effectively. This  included an evaluation of how agencies coordinate their activities relative  to the practices for effective collaboration that we have identified. We  conducted our work between November 2005 and February 2007 in  accordance with generally accepted government auditing standards in  Washington, D.C.; Boston; and locations where financial institutions we  visited are headquartered. See appendix I for additional details on the  objectives, scope, and methodology used in this report.
subsections: section_title: Background
paragraphs: Modern financial services firms use a variety of holding company  structures to manage risk inherent in their businesses. The United States  regulatory system that consists of primary bank supervisors, functional  supervisors, and consolidated supervisors oversees these firms in part to  ensure that they do not take on excessive risk that could undermine the  safety and soundness of the financial system. Primary bank supervisors  oversee banks according to their charters, and functional supervisors— primarily, SEC, self-regulatory organizations (SRO), and state insurance  regulators—oversee entities engaged in the securities and insurance  industries as appropriate. Consolidated supervisors oversee holding  companies that contain subsidiaries that have primary bank or functional  supervisors. They are chartered, registered, or licensed as banks,  securities firms, commodity trading firms, and insurers. International  bodies have provided some guidance for consolidated supervision.
subsections: section_title: Modern Financial Services Firms Use Holding Company Structures to Manage Risk
paragraphs: Many modern financial firms are organized as holding companies that may  have a variety of subsidiaries. In recent years, the financial services  industry has become more global, consolidated within traditional sectors,  formed conglomerates across sectors, and converged in terms of  institutional roles and products. The holding company structure, which  allows firms to expand geographically, move into other permissible  product markets, and obtain greater financial flexibility and tax benefits,  has facilitated these changes. Financial services holding companies now  range in size and complexity from small enterprises that own only a single  bank and are being used for financial flexibility and tax purposes to large  diversified businesses with hundreds of subsidiaries—including banks,  broker-dealers, insurers, and commercial entities—that have centralized  business functions that may be housed in the holding company. In  addition, modern financial corporate structures often consist of several  tiers of holding companies.
To varying degrees, all financial institutions are exposed to a variety of  risks that create the potential for financial loss associated with  failure of a borrower or counterparty to perform on an obligation—credit  risk;   broad movements in financial prices—interest rates or stock prices— failure to meet obligations because of inability to liquidate assets or obtain  funding—liquidity risk; inadequate information systems, operational problems, and breaches in  internal controls—operational risk;    negative publicity regarding an institution’s business practices and  subsequent decline in customers, costly litigation, or revenue reductions— reputation risk;   breaches of law or regulation that may result in heavy penalties or other  risks that an insurance underwriter takes in exchange for premiums— insurance risk; and    events not covered above, such as credit rating downgrades or factors  beyond the control of the firm, such as major shocks in the firm’s  markets—business/event risk.
In addition, the industry as a whole is exposed to systemic risk, the risk  that a disruption could cause widespread difficulties in the financial  system as a whole.
As firms have diversified, some holding companies have adopted  enterprisewide risk management practices where they manage and control  risks across the entire holding company rather than within subsidiaries.  These firms have global risk managers who manage credit, market,  liquidity, and other risks across the enterprise rather than within  individual subsidiaries, such as securities, banking, or insurance  businesses or subsidiaries in foreign countries. In addition, these firms  generally provide services such as information technology on a firmwide  basis and have firmwide compliance and internal audit functions.
section_title: The U.S. Regulatory System Includes Many Agencies
paragraphs: We have previously reported that most financial services firms are subject  to federal oversight designed to limit the risks these firms take on because  (1) consumers/investors do not have adequate information to impose  market discipline on the institutions and (2) systemic linkages may make  the financial system as a whole prone to instability. In the United States,  this oversight is provided by primary bank and functional supervisors as  well as by consolidated supervisors.
subsections: section_title: Primary Bank and Functional Supervisors Oversee Holding Company Subsidiaries
paragraphs: As table 1 illustrates, in the United States a variety of federal bank  supervisors oversee banks that are subsidiaries of holding companies.  State bank supervisors also participate in the oversight of banks with state  charters. Similarly, securities supervisors that include SEC and SROs, such  as the New York Stock Exchange and NASD, oversee broker-dealer  subsidiaries and state insurance supervisors oversee insurance companies  and products. While each of the agencies has multiple goals, all are  involved in assessing the financial solvency of the institutions they  regulate.
All of the primary bank supervisors use the same framework to examine  banks for safety and soundness and compliance with applicable laws and  regulations. Among other things, they examine whether   the bank has adequate capital on the basis of its size, composition of its  assets and liabilities, and its credit and market risk profile; the bank has an appropriate asset quality based on the credit risk of loans  in its portfolio;  the bank’s earnings trend measures up to that of its peers; the competence and integrity of the bank’s management and board of  directors to manage the risks of the bank’s activities and their record of  complying with banking regulations and other laws;  the bank has adequate liquidity based on its deposit volatility, credit  conditions, loan commitments and other contingent claims on the bank’s  assets and its perceived ability to raise funds on short notice at acceptable  market rates; and the bank adequately identifies and manages its exposures to changes in  interest rates and, as applicable, foreign exchange rates, commodity and  equity prices.
Primary bank examiners rate banks in each of the areas; these ratings are  usually referred to as CAMELS ratings (capital adequacy, asset quality,  management ability, earnings, liquidity, and, where appropriate, sensitivity  to market risk).
SROs oversee certain aspects of broker-dealer activity. SEC concurrently  oversees these SROs and independently examines broker-dealers. SEC  considers its enforcement authority crucial for its protection of investors.  Under this authority, it brings actions against broker-dealers and other  securities firms and professionals for infractions such as insider trading  and providing false or misleading information about securities or the  companies that issue them. However, to protect investors, SEC also  requires broker-dealers to maintain a level of capital that should allow the  broker-dealer to satisfy the claims of its customers, other broker-dealers,  and creditors in the event of potential losses from proprietary trading or  operational events. SEC and the SROs examine broker-dealers to  determine if they are maintaining required capital and evaluate broker- dealers’ internal controls.
The central purpose of insurance regulation is to protect consumers by  monitoring the solvency of insurers and their business practices.  Insurance companies are supervised on a state-by-state basis, although  states often follow general standards promulgated by the National  Association of Insurance Commissioners (NAIC), a private voluntary  association for insurance regulators. For example, insurance supervisors  generally require insurance firms to prepare their quarterly and annual  financial statements in a format unique to insurance known as statutory  accounting principles that are maintained by NAIC. Insurance supervisors  impose capital requirements on insurance companies to try to limit  insurance company failures and ensure their long-run viability. In addition,  all state insurance supervisors monitor insurers’ business practices and  terms of insurance contracts in their states.
section_title: Consolidated Supervisors Oversee Holding Companies
paragraphs: In the United States, three agencies provide consolidated supervision—the  Federal Reserve oversees bank holding companies, OTS oversees thrift  holding companies, and SEC oversees certain CSEs on a consolidated  basis. As table 2 shows, the number and type of institutions these agencies  oversee varies.
As the table shows, SEC, under its CSE program, oversees only large  complex firms. These include Bear Stearns & Co., Goldman Sachs & Co.,  Lehman Brothers Inc., Merrill Lynch & Co. Inc., and Morgan Stanley & Co.,  while the Federal Reserve and OTS oversee firms that vary significantly in  size and complexity. Among larger firms, the Federal Reserve oversees  Bank of America Corporation, Citigroup, and JPMorgan Chase, and OTS  oversees American International Group Inc., General Electric Company,  General Motors Corporation, Merrill Lynch & Co. Inc., and Washington  Mutual Inc. Most of the large bank holding companies that the Federal  Reserve oversees are primarily in the business of banking but to a lesser  extent engage in securities or other nonbank activities as well. Many of the  large firms OTS oversees are engaged in commercial businesses, as well as  securities and insurance. The Federal Reserve and OTS also oversee the  vast majority of U.S. financial institutions that have remained relatively  small and are not complex.
The Federal Reserve and OTS base their consolidated supervision  programs on their long-standing authority to supervise holding companies,  while SEC has only recently become a consolidated supervisor. The  Federal Reserve’s authority is set forth primarily in the Bank Holding  Company Act of 1956, which contains the supervisory framework for  holding companies that control commercial banks. OTS’s consolidated  supervisory authority is set forth in the Home Owners Loan Act of 1933, as  amended, which provides for the supervision of holding companies that  control institutions with thrift charters (other than bank holding  companies). SEC bases its authority on section 15(c)(3) of the Securities  Exchange Act of 1934. Specifically, in 2004, SEC adopted the Alternative  Net Capital Rule for CSEs based on its authority under that provision,  which authorizes SEC to adopt rules and regulations regarding the  financial responsibilities of broker-dealers that it finds necessary or  appropriate in the public interest or for the protection of investors. Under  the CSE rules, qualified broker-dealers can elect to be supervised by SEC  on a consolidated basis. If the holding company of the broker-dealer also  is a bank holding company, SEC defers to the Federal Reserve’s  supervision of the holding company. At the same time that it issued the  CSE rules, SEC promulgated final rules for the consolidated supervision of  supervised investment bank holding companies (SIBHC) pursuant to a  provision in the Gramm-Leach-Bliley Act (GLBA). The GLBA provision  established a supervisory framework for SIBHCs—qualified investment  bank holding companies that do not control an insured depository  institution—similar to the approach prescribed in the act for the  supervision of bank and thrift holding companies. As of this date, no firm  has elected to be regulated under the SIBHC scheme.
The Federal Reserve, SEC, and OTS vary in their missions in that the  Federal Reserve and SEC have responsibilities outside of the supervision  and regulation of financial institutions. The Federal Reserve is the central  bank of the United States, established by Congress in 1913 to provide the  nation with a safer, more flexible, and more stable monetary and financial  system. It is responsible for conducting the nation’s monetary policy;  protecting the credit rights of consumers; playing a major role in operating  the nation’s payment system; and providing certain financial services to  the U.S. government, the public, financial institutions, and foreign official  institutions. The Federal Reserve consists of the Board of Governors  (Board) and 12 Districts, each with a Federal Reserve Bank (District  Bank). SEC is responsible for, among other things, overseeing the  disclosure activities of publicly traded companies and the activities of  stock markets.
The three agencies engaged in consolidated supervision are financed  differently. The Federal Reserve primarily is funded by income earned  from U.S. government securities that it has acquired through open market  operations; OTS primarily by assessments on the firms it supervises; and  SEC by congressional appropriations. SEC collects fees on registrations,  certain securities transactions, and other filings and reports. However,  unlike the banking regulators, SEC deposits its collections in an SEC- designated account at the U.S. Treasury that is used by SEC’s  congressional appropriators for, among other things, providing  appropriations to SEC.
section_title: International Bodies Provide Some Guidance for Consolidated Supervision
paragraphs: International bodies in which U.S. supervisors participate have developed  guidance for consolidated supervision of large, complex, internationally  active financial firms or conglomerates. The Basel Committee on Banking  Supervision (BCBS) does not have formal supervisory authority; rather, it  provides an international forum for regular cooperation on banking  supervisory matters, including the formulation of broad supervisory  standards and guidelines. BCBS has recently revised its “Core Principles  for Effective Banking Supervision,” which include countries’ requiring that  banking groups be subject to consolidated supervision, although the  definition of a banking group does not always include a top-tier holding  company. These principles include a number of specific criteria that are  presented in appendix II of this report. BCBS also has developed the Basel  Capital Standards, which have been adopted in various forms by specific  countries; a revised set of standards, Basel II, is currently under  consideration for adoption in the United States. These standards require  that holding companies engaged in banking meet specific risk-based  capital requirements.
In addition, the Joint Forum, an international group of supervisors  established in 1996 under the aegis of BCBS and equivalent bodies for  securities and insurance regulators to consider issues related to the  supervision of financial conglomerates, has issued supervisory guidance.  The guidance focuses on risks and controls and specifically directs  examiners to review the organizational structure, capital level, risk  management, and control environment of conglomerates.
The EU promulgated rules for consolidated supervision of certain firms  operating in Europe that took effect in 2005. U.S.-headquartered firms with  operations in EU countries are among those affected by these rules,  which, therefore, has had implications for consolidated supervision in the  United States. The Financial Conglomerates Directive (FCD) requires that  all financial conglomerates operating in EU countries have a consolidated  supervisor. Conglomerates not headquartered in the EU must have an  equivalent consolidated supervisor in their home country that has been  approved by a designated supervisor from an EU member state in which  the company operates. That supervision focuses on capital adequacy,  intragroup transactions, risk management, and internal controls.
section_title: Agencies Employ Differing Policies and Approaches to Provide Consolidated Supervision
paragraphs: The Federal Reserve, OTS, and SEC have all responded to the dramatic  changes in the financial services industry, and now, for many of the  largest, most complex financial services firms in the United States, these  agencies examine risks, controls, and capital levels on a consolidated  basis. Given the differences in their authorities and in the institutions that  they supervise, as well as other factors, the agencies’ specific policies and  procedures differ. Also, the agencies divide responsibilities for developing  and implementing policies across a number of agency components. The  Federal Reserve and OTS generally set policy centrally and implement it  through District Banks or regional offices, respectively. At SEC, Market  Regulation has primary responsibility for policy and for overseeing how  CSEs manage risks, while SEC’s examination offices scrutinize more  control-oriented activities. The oversight of complex firms involves  multiple regulators. Finally, for their smaller or less complex firms, the  Federal Reserve and OTS use abbreviated examination programs.
subsections: section_title: All Agencies Examine Consolidated Risks, Controls, and Capital Levels of Their Largest, Most Complex Firms, but Specific Policies and Approaches Differ
paragraphs: All of the agencies have responded to the dramatic changes in the financial  services industry, including dramatic growth, increased complexity in  terms of the products and services firms offer, more global operations, and  greater use of enterprisewide risk management. Now, for many of the  largest, most complex financial services firms in the United States, the  agencies focus on the firms’ risks, controls, and capital levels on a  consolidated basis. However, the agencies have developed and revised  their programs over different time frames and used different frameworks.  The Federal Reserve, beginning in the mid-1990s, has developed a  systematic risk-focused approach for large, complex banking  organizations (LCBO); OTS began to move toward a more consistent, risk- focused approach for some large, complex firms in 2003; and SEC’s CSE  program, implemented in 2004, is new and evolving. Both the Federal  Reserve and OTS have approaches to supervision of smaller, less complex  holding companies that reflect the risks of these institutions.
subsections: section_title: The Federal Reserve Has a Systematic Risk-Focused Approach for Large, Complex Banking Organizations
paragraphs: In the mid-1990s, the Federal Reserve began to develop a systematic risk- focused approach for the supervision of LCBOs. The program focuses on  those business activities posing the greatest risk to holding companies and  managements’ processes for identifying, measuring, monitoring, and  controlling those risks. According to the Federal Reserve, LCBOs have  significant on- and off-balance sheet risk exposures, offer a broad range of  products and services at the domestic and international levels, are  overseen by multiple supervisors in the United States and abroad, and  participate extensively in large-value payment and settlement systems. As  of December 31, 2005, there were 21 LCBOs that together controlled 62  percent of all banking assets in the United States.
In issuing a revised rating system in 2004, the Federal Reserve  acknowledged that the firms it oversees had become even more  concentrated and complex. In addition, it noted that the growing depth  and sophistication of financial markets in the United States and around the  world have led to a wider range of activities being undertaken by banking  institutions. This new rating system has components for the bank holding  company’s risk management, financial condition, and potential impact of  the parent (and its nondepository subsidiaries) on the insured depository  institution, as well as a composite rating of the holding company’s  managerial and financial condition and potential risk to its depositories;  the system also includes the supervisory ratings for the subsidiary  depository institution.
Generally policy changes for the consolidated supervision program are  made by the Board and implemented by the 12 District Banks which are  responsible for day-to-day examination activities of banks and bank  holding companies. However, the distinction between policy setting and  implementation blurs at the edges. Board staff may participate in exams  and District Bank officials serve on committees that provide input for  policy development and ensure that supervision is provided at some level  of consistency across District Banks.
The Federal Reserve requires that all bank holding companies with  consolidated assets of $500 million or more meet risk-based capital  requirements developed in accordance with the Basel Accord and has  proposed, with the other bank supervisors, revised capital adequacy rules  to implement Basel II for the largest bank holding companies. In addition,  the Federal Reserve requires that all bank holding companies serve as a  source of financial and managerial strength to their subsidiary banks.
The Federal Reserve’s supervisory cycle for LCBOs generally begins with  the development of a systematic risk-focused supervisory plan, follows  with the implementation of that plan, and ends with a rating of the firm.  The rating includes an assessment of holding companies’ risk management  and controls; financial condition, including capital adequacy; and impact  on insured depositories. The Federal Reserve noted that in addition to its  other activities, it obtains financial information from LCBOs in a uniform  format through a variety of periodic regulatory reports that other holding  companies also provide. Table 3 provides detailed descriptions for each of  the steps.
For LCBOs, a management group, which consists of District Bank and  Board officials, provides additional review of supervisory plans and  examination findings. Annually, the management group chooses three or  four topics for horizontal exams—coordinated supervisory reviews of a  specific activity, business line, or risk management practice conducted  across a group of peer institutions. Horizontal reviews are designed to (1)  identify the range of practices in use in the industry, (2) evaluate the safety  and soundness of specific activities across business lines or across  systemically important institutions, (3) provide better insight into the  Federal Reserve’s understanding of how a firm’s operations compare with  a range of industry practices, and (4) consider revisions to the formulation  of supervisory policy. Horizontal examination topics have included stress- testing practices at the holding company level and the banks compliance  with the privacy provision in GLBA. Staff from more than one District  Bank likely participate in the review. In addition, because many of the  large bank holding companies have national banks, nonmember banks, or  nonbank operations overseen by another governmental agency, Federal  Reserve guidance instructs staff, consistent with the requirements of  GLBA, to leverage information and resources from OCC, FDIC, SEC, and  other agencies, as applicable. After the examinations are completed, the  Federal Reserve informs firms generally on how they compare with their  peers and may provide information on good practices as well.
The Federal Reserve has a range of formal and informal actions it can take  to enforce its regulations for holding companies. The agency’s formal  enforcement powers are explicitly set forth in federal law. Federal  Reserve officials noted that the law provides explicit authority for any  formal actions that may be warranted and incentives for firms to address  concerns promptly or through less formal enforcement actions, such as  corrective action resolutions adopted by the firm’s board of directors or  memorandums of understanding (MOU) entered into with the relevant  District Bank. According to Federal Reserve officials, in 2006 the Federal  Reserve took six formal enforcement actions against holding companies.
section_title: OTS Is Moving to a Broader, More Systematic Approach to Consolidated Risks for Some of Its Largest, Most Complex Firms
paragraphs: In 2003, OTS revised its handbook for holding company supervision to  reflect new guidance for its large, complex firms or conglomerates that it  says relies on the international consensus (as evident in Joint Forum  publications) of what constitutes appropriate consolidated oversight of  conglomerates and also responds to the EU’s FCD. While the guidance is  presented in OTS’s standard CORE—capital, organization, relationship,  and earnings—format, it differs from OTS’s standard guidance in that it  focuses on consolidated risks, internal controls, and capital adequacy  rather than on a more narrow view of the holding company’s impact on  subsidiary thrifts. As with the Federal Reserve, OTS headquarters officials  generally set nationwide policies and programs and regional office staff  conduct examinations. However, the Complex and International  Organizations group (CIO), which was established in 2004 in OTS  headquarters, both sets policy for holding company supervision of  conglomerates and oversees examiners for three firms that must meet the  FCD. CIO is developing a process that is similar in some respects to the  Federal Reserve’s. First, on-site examination teams consisting of lead  examiners and others who focus on specific risk areas provide continuous  supervision. Second, while examiners for firms in the CIO group we spoke  with had not had a formal supervisory plan in past years, these examiners  are now preparing plans that focus on the coming year and, unlike the  Federal Reserve, take a longer 3-year prospective as well. A CIO official  said that this planning framework allows them to examine high-risk areas  on an annual basis while ensuring that lower risk areas are covered at  least every 3 years. The plans we reviewed were less detailed than those of  the Federal Reserve; however, the official in charge of this program said  that the group is looking to develop more systematic risk analyses and has  reviewed those being used by the Federal Reserve and their counterparts  in Europe.
Although OTS’s guidance for its large, complex firms provides explicit  directions on determining capital adequacy, OTS does not have specific  capital requirements for holding companies. Generally, OTS requires that  firms hold a “prudential” level of capital on a consolidated basis to support  the risk profile of the holding company. For its most complex firms, OTS  requires a detailed capital calculation that includes an assessment of  capital adequacy on a groupwide basis and identification of capital that  might not be available to the holding company or its other subsidiaries  because it is required to be held by a specific entity for regulatory  purposes. The EU’s European Financial Conglomerates Committee’s  guidance to EU country supervisors on the U.S. regulatory system noted  OTS’s lack of capital standards; however, the United Kingdom’s Financial  Services Authority (FSA) has designated OTS as an equivalent supervisor  for the two firms it has reviewed, and in February 2007, the French  supervisory body, Commission Bancaire, approved OTS as an equivalent  supervisor for another complex conglomerate.
As noted, only three firms currently are subject to the increasingly  systematic, detailed analysis of risks being implemented through the CIO  program. Regional staff oversee other large, complex conglomerate thrift  holding companies and use OTS’s standard CORE framework, which  focuses more directly on the risks to the thrift posed by its inclusion in the  holding company structure rather than an assessment of the risk  management strategy of the holding company (see table 4). We also found  that OTS regional examination staff were expanding their risk analyses of  some large, complex holding companies, but they had not adopted the CIO  program.
Similar to the Federal Reserve, OTS has explicit authority to take  enforcement actions against thrift holding companies that are in violation  of laws and regulations. According to OTS officials, in 2005 OTS took  three formal enforcement actions against holding companies.
section_title: SEC’s CSE Program Is New and Evolving
paragraphs: In 2004, SEC adopted its CSE program partly in response to international  developments, including the need for some large U.S. securities firms to  meet the FCD. However, SEC says that the program is a natural extension  of activities that began as early as 1990 when, under the Market Reform  Act, SEC was given supervisory responsibilities aimed at assessing the  safety and soundness of securities activities at a consolidated or holding  company level. Formally, SEC supervision under the CSE program  consists of four components: a review of firms’ applications to be admitted  to the program; a review of monthly, quarterly, and annual filings; monthly  meetings with senior management at the holding company; and an  examination of books and records of the holding company, the broker- dealer, and material affiliates that are not subject to supervision by a  principal regulator.
Under the net capital rule establishing the CSE program, the Division of  Market Regulation has responsibility for administering the program.  Market Regulation recommends policy changes to SEC Commissioners  and, through its Office of Prudential Supervision, performs continuous  supervision of the five firms that have been designated as CSEs. Each firm  is overseen by three analysts, and each of these analysts oversees at least  two firms. This office includes a few additional specialists as well.  Although the rule did not specify a role for the Office of Compliance  Inspections and Examinations (OCIE), this office, with the assistance of  the Northeast Regional Office (NERO), examines firms’ controls and  capital calculations. Each of these offices has designated staff positions  for the CSE program but also uses staff from SEC’s broker-dealer  examination program.
Market Regulation generally is responsible for overseeing the financial and  operational condition of CSEs, including how they manage their risks, but  does not provide written detailed guidance for examiners. During the  reviews of the firms’ applications for admittance to the CSE program, staff  reviewed market, credit, liquidity, operational, and legal and compliance  risk management, as well as the internal audit function, and continue to do  so on an ongoing basis. The firms are to provide SEC with monthly,  quarterly, and annual filings, such as consolidated financial statements and  risk reports, substantially similar to those provided to the firm’s senior  managers. Unlike the Federal Reserve and OTS that have their examiners  continuously on site at some of their larger more complex firms, Market  Regulation staff are not on site at the companies. However, Market  Regulation staff meet at least monthly with senior risk managers and  financial controllers at the holding company level to review this material  and share the written results of these meetings among themselves and  with the SEC Commissioners. These reports show that meetings with the  firms cover a variety of subjects, such as fluctuations in firmwide and  asset-specific value-at-risk, changes to risk models, and the impact of  recent trends and events such as Hurricane Katrina. Market Regulation  staff also review activities across firms to ensure that firms are all held to  comparable standards and that staff understand industry trends. Market  Regulation staff has conducted some horizontal reviews of activities such  as hedge fund derivative products and event-driven lending that are similar  in some ways to the Federal Reserve’s horizontal examinations. In  addition, one staff member attends all monthly meetings that Market  Regulation staff hold with the firms in a given month. That staff member  identifies common themes and includes these in the monthly reports.
OCIE generally is responsible for testing the control environments of the  CSEs, focusing on compliance issues. OCIE and NERO staff followed  detailed examination guidance when reviewing CSE applications but,  unlike the Federal Reserve and OTS, this guidance is not publicly  available. They reviewed firms’ compliance with the CSE rule, including  whether unregulated material affiliates were in compliance with certain  rules that had previously applied only to registered broker-dealers. OCIE  and NERO staff continue to conduct exams of the holding companies, the  registered broker-dealers, and unregulated material affiliates. During our  review of the program, NERO completed the first examination of one of  the CSEs, which included a review of the capital computations for the  holding company and broker-dealer, the firm’s internal controls around  managing certain risks, and internal audit.
As a condition of CSE status, CSEs agree to compute a capital adequacy  measure at the holding company in accordance with the new Basel II  standards, and OCIE and NERO validated the firms’ calculations as part of  their reviews of firms’ CSE applications. The U.S. bank supervisory  agencies have proposed rules to implement Basel II standards for the  largest, most complex banking organizations, and SEC officials said they  will continue to monitor these developments and will adopt rules that are  largely consistent with the banking agencies’ final rules implementing the  Basel II standards. According to Market Regulation staff, CSEs’ use of the  Basel II capital standards should allow for greater comparability between  CSEs’ financial position and that of other securities firms and banking  institutions. As part of their supervisory activities, Market Regulation staff  review the models or other methodologies firms used to calculate capital  allowances for certain types of risks. While the CSEs’ broker-dealers are  also required to compute capital according to Basel standards, these  broker-dealers are required to maintain certain capital measures above  minimum levels. SEC staff also noted that CSEs are required to have  sufficient liquidity so that capital would be available to any entity within  the holding company if it were needed.
Unlike the bank regulatory agencies, SEC does not have a range of  enforcement actions that it can take for violations of the CSE regulations  because participation in the CSE program is voluntary. That is, a violation  of the CSE regulations can disqualify a broker-dealer from the benefits of  CSE status without resulting in a violation of SEC regulations or laws that  could lead to an enforcement action. SEC staff noted, however, that the  prospect of not being qualified to operate as a CSE served as an effective  incentive for complying with CSE requirements.
section_title: Supervision of Complex Firms Involves Multiple Regulators
paragraphs: Large firms generally contain a number of subsidiaries that are overseen  by primary bank and functional supervisors in the United States as well as  by supervisors in other countries; however, in some cases, the holding  company’s supervisor may also be the primary bank or functional  supervisor for subsidiaries in these holding companies. Figure 1 illustrates  this regulatory complexity for a hypothetical financial holding company. A  hypothetical thrift holding company and CSE would differ in that it would  not have national or state member bank subsidiaries and potentially could  have commercial subsidiaries. GLBA instructed the Federal Reserve, SEC,  and OTS, in their roles as consolidated supervisors, to generally rely on  primary bank and functional supervisors for information about regulated  subsidiaries of the holding company.
While the Federal Reserve is the primary federal bank supervisor for the  lead bank in some bank holding companies, OCC and FDIC are more often  the primary bank supervisor for the lead banks in these holding  companies. OCC, because of the growth in the national banking system  over the past 10 years, is now most likely to be the supervisor of the lead  banks that are owned by bank holding companies in the Federal Reserves’  LCBO program. In examining these banks, OCC uses a systematic, risk- focused process similar to that of the Federal Reserve. Specifically, OCC’s  process begins with a risk analysis that drives the examination process  over the course of the examination cycle. According to OCC’s handbook,  in assessing the bank’s condition examiners must consider not only risks  in the bank’s own activities but also risks of activities engaged in by  nonbanking subsidiaries and affiliates in the same holding company.  FDIC is the primary federal supervisor of the lead bank in some larger  bank holding companies and of most of the banks in smaller holding  companies. In addition, as part of its deposit insurance role, FDIC  officials told us that they have a continuous on-site presence at six of the  largest LCBOs where OCC is the primary bank supervisor of the lead bank  and the Federal Reserve is the consolidated supervisor. Larger bank  holding companies also include a number of other regulated subsidiaries,  including broker-dealers and thrifts.
Except when a thrift is in a bank holding company, OTS serves as the  supervisor for both the thrift and the thrift holding company. While most  of these firms are in the business of banking, as table 5 shows, OTS also  oversees a number of complex holding companies that are primarily in  businesses other than banking, and some of these are in regulated  industries, especially insurance. In addition, a number of thrift holding  companies contain industrial loan companies (ILC), state-chartered  institutions overseen by FDIC, and some have broker-dealers as well.
OTS oversees a large number of firms where insurance is the primary  business of the firm and thus shares some responsibilities with state  insurance supervisors that have adopted their own holding company  framework. In addition, OTS and FDIC share responsibilities when thrift  holding companies include ILCs. Generally, OTS guidance refers to  protecting thrifts in thrift holding companies rather than more broadly to  the protection of insured depositories. However, thrifts and ILCs in the  same thrift holding company may face similar threats to their safety and  soundness.
As the consolidated supervisor of CSEs, SEC oversees large, complex  entities that include insured depositories that have FDIC or OTS as their  primary federal supervisor. Those CSEs that have thrifts are also  supervised at the consolidated level by OTS. SEC’s consolidated  supervisory activities focus on the financial and operational condition of  the holding company and, in particular, activities conducted in  unregulated material affiliates that may pose risks to the group. SEC staff  noted that they generally rely on the primary bank supervisor with respect  to examination of insured depositories.
section_title: Federal Reserve and OTS Use Abbreviated Approach for Smaller or Less Complex Holding Companies
paragraphs: In recent years, the Federal Reserve has limited the resources it uses to  oversee the 4,325 small shell bank holding companies (i.e., companies that  are noncomplex with assets of less than $1 billion) because it perceives  that those entities pose few risks to the insured depositories they own.  The Board has adopted a special supervisory program for these companies  that includes off-site monitoring and relies heavily on primary federal  supervisors’ bank examinations. For these companies, the Federal Reserve  assigns only risk and composite ratings, which generally derive from  primary bank supervisors’ examinations. Also, in addition to the primary  bank supervisors’ examinations, Federal Reserve examiners review a set  of computer surveillance screens that include the small shells’ financial  information and performance, primarily to determine if the firms need  more in-depth reviews.
Federal Reserve staff told us that they spend a limited amount of time on  small shell holding company inspections. For example, a Board official  said they spend on average about 2 to 2.5 hours annually on each small  shell bank holding company. According to Federal Reserve guidance, the  only documentation required for small shell ratings where no material  outstanding company or consolidated issues are otherwise indicated are  bank examination reports and a copy of the letter transmitting the ratings  to the company.
Similarly, OTS uses an abbreviated version of its CORE program for its  low-risk and noncomplex or Category I firms, which make up 401 of the  476 holding companies OTS oversees. Once examiners determine that the  holding company is a shell, they are directed to the abbreviated program,  which differs from the full CORE in that it requires less detailed  information in each of the four CORE areas. For example, the abbreviated  CORE does not require that examiners calculate leverage and debt-to- total-asset ratios in the capital component of the examination, while these  are required in the full CORE program. However, the handbook advises  examiners to refer to the full CORE program for more detailed steps  whenever they feel it is warranted. In addition, the handbook advises  examiners to consider the specific issues that relate to certain holding  company populations, such as those containing insurance firms. At one  regional office, managers told us that examinations of shell holding  companies take 5 to 10 days; however, because the holding company  examination is conducted concurrently with the thrift examination, OTS  cannot determine the exact number of hours spent reviewing the holding  company. An OTS official noted that for shell holding companies, the  difference in examiners’ activities between holding company and thrift  examinations is largely a matter of perspective rather than a difference in  what examiners review.
section_title: Improved Program Objectives and Performance Measures Could Enhance Agencies’ Consolidated Supervision Programs
paragraphs: In recent decades, the environment in which the financial services  industry operates, and the industry itself, have undergone dramatic  changes that include globalization, consolidation within traditional  sectors, conglomeration across sectors, and convergence of institutional  roles and products. The industry now is dominated by a relatively small  number of large, complex, and diversified financial services firms, and  these firms generally manage their risks on an enterprisewide or  consolidated basis. Consolidated supervision provides the basis for  supervisory oversight of this risk management, but managing consolidated  supervision programs in an efficient and effective manner presents  challenges to the supervisory agencies. We found that the Federal Reserve,  OTS, and SEC were providing supervision consistent with international  standards for comprehensive, consolidated supervision for many of the  largest, most complex financial services firms in the United States. While  the agencies have articulated anticipated benefits or broad strategic goals  for their supervision programs in testimony and other documents, the  objectives for their consolidated supervision programs are not always  clearly defined or distinguished from the objectives for their primary  supervision programs. Without more specific program objectives,  activities linked to these objectives, and performance measures identified  to assess the extent to which these objectives are achieved, the agencies  have a more difficult task of ensuring efficient and effective oversight. In  particular, with the financial services industry’s increased concentration  and convergence in product offerings, paired with a regulatory structure  that includes multiple agencies, it is more difficult to ensure that the  agencies are providing oversight that is not duplicative and is consistent  with that provided by primary, functional, or other consolidated  supervisors. As a result, the agencies could better ensure that consolidated  supervision was being provided efficiently, with the minimal regulatory  burden consistent with maintaining safety and soundness, by more clearly  articulating the objectives of their consolidated supervision programs,  developing and tracking performance measures that are specific to the  programs, and improving supervisory guidance.
subsections: section_title: Developments in the Financial Services Industry Have Affected the Environment Facing Financial Supervisors
paragraphs: The environment in which the financial services industry operates, and the  industry itself, have undergone dramatic changes. Financial services  firms have greater capacity and increased regulatory freedom to cross  state and national borders, and technological advances have also lessened  the importance of geography. Increasingly, the industry is dominated by a  relatively small number of large, complex conglomerates that operate in  more than one of the traditional sectors of the industry. These  conglomerates generally manage their risks on an enterprisewide, or  consolidated, basis.
Generally, the greater ability of firms to diversify into new geographic and  product markets would be expected to reduce risk, with new products and  risk management strategies providing new tools to manage risk. Because  of linkages between markets, products, and the way risks interact,  however, the net result of the changes on an individual institution or the  financial system cannot be definitively predicted.
Consolidated supervision provides a basis for the supervisory agencies to  oversee the way in which financial services firms manage risks and to do  so on the same basis that many firms’ manage their risk. While primary  bank and functional supervisors retain responsibility for the supervision of  regulated banks, broker-dealers, or other entities, the consolidated  supervisor’s approach can encompass a broader, more comprehensive  assessment of risks and risk management at the consolidated level.
section_title: Agencies Are Providing Comprehensive Consolidated Supervision for Many Conglomerates with Depository Institutions
paragraphs: The international consensus on standards or “best practices” for  supervising conglomerates that include banks includes the review of risks  and controls at the consolidated level, capital requirements at the  consolidated level, and the authority to take enforcement actions against  the holding company. As described above, we found that the Federal  Reserve generally met these standards for its LCBO firms. OTS meets  these standards for those firms overseen by CIO. For other firms that  might be considered conglomerates, OTS does a more limited review of  the risk posed to insured thrifts by activities outside the thrift and does not  require that holding companies meet specific capital standards. Officials at  both the Federal Reserve and OTS emphasized that the agencies’ authority  to examine, obtain reports from, establish capital requirements for, and  take enforcement actions against the holding company was separate from  the authority that primary bank supervisors have.
A full assessment of SEC’s CSE program is difficult given the newness of  the program; however, it appears that for the CSE firms dominated by  broker-dealers, SEC is monitoring risks and controls on a consolidated  basis and requires that CSEs meet risk-based capital standards at the  holding company level. However, with regard to SEC’s ability to take  enforcement actions at the holding company level. SEC staff  acknowledged that SEC does not have the same ability, under the CSE  program, to take enforcement actions as the Federal Reserve or OTS.  Nonetheless, they noted that the potential removal of a firm’s exemption  from the net capital rule and notification of EU regulators that a firm was  no longer operating under the CSE program would serve as effective  deterrents. SEC is also authorized to impose additional supervisory  conditions or increase certain multiplication factors used by the CSE in its  capital computation.
section_title: Clear Program Objectives and Performance Measures Are Essential for Ensuring Accountability and Efficiency
paragraphs: Management literature on internal controls, enterprisewide risk  management, and government accountability suggest that to achieve  accountability and efficiency requires that agencies clearly state program  objectives, link their activities to those objectives, and measure  performance relative to those objectives. This literature also recognizes  the increased importance of these management activities in the face of  substantial change in the external environment or in the face of the  adoption of new “products” internally. When applied to the consolidated  supervision programs at the Federal Reserve, OTS, and SEC, clearly  defined objectives of consolidated supervision programs, agency activities  of these programs linked to those objectives, and performance measures  to determine how well the programs are operating are the management  approaches that would contribute to the desired accountability and  efficiency for the programs.
The importance of these management activities is heightened because all  three agencies face substantial changes in the external environment,  including rapid growth in the financial sector, greater consolidation of  firms leading to larger, more complex firms, and greater linkages among  financial sectors and markets. In addition, the Federal Reserve and OTS  have made substantial changes in their consolidated supervisory  programs—particularly with the CIO program at OTS—and SEC has  adopted a program that for the first time has staff providing formal  prudential oversight at the consolidated level. Adopting sound  management and control activities will help ensure that agencies are  accountable for exercising the authority for their consolidated supervision  programs and achieving the objectives of consolidated supervision, in  ways that are effective and efficient. As a result, the regulatory burden  would be as low as possible, consistent with maintaining safety and  soundness of financial institutions and markets.
The agencies face challenges in devising performance measures for  consolidated supervision, including rapid changes in the industry. U.S.  financial institutions and their competitors increasingly operate worldwide  and engage in a number of businesses. Consequently, the global financial  system is highly integrated and ensuring financial stability is even more  important than in the past. Developing sound measures in such an  environment can be difficult, and it is a challenge for agencies to  distinguish how much of their work contributes to financial stability, in  contrast to other goals such as protecting insured depositories. Further,  these objectives are concepts that are not easy to measure. Development  and use of appropriate performance measures, however, are critical to  efficiently managing the risks that the agencies have in their consolidated  supervision programs.
section_title: Goals and Performance Measures Address Supervision Broadly, Rather Than Consolidated Supervisory Programs Specifically
paragraphs: Generally we found that the three agencies stated goals for all of their  supervision programs broadly or that specific objectives for consolidated  supervision were the same as those for their primary supervision  programs. As a result, the contributions consolidated supervision  programs make to the safety and soundness of financial institutions and  markets could not be assessed separately from other agency programs.  Clearer objectives specific to the consolidated supervision programs  would facilitate linking program activities to those objectives and the  authority that the agencies have to conduct consolidated supervision. In  addition, clear program objectives would facilitate the development of  specific performance measures to measure the contribution of these  programs to those objectives as well as broader agency goals.
subsections: section_title: Federal Reserve
paragraphs: Agencies’ strategic and performance plans sometimes contain objectives  for important programs. In its strategic plan, the Federal Reserve identifies  objectives for all of its supervision programs: promoting a safe, sound,  competitive, and accessible banking system and stable financial markets.  However, the only discussion specific to consolidated supervision in the  Federal Reserve’s strategic plan relates to how the program complements  its central bank functions by providing the Federal Reserve with important  knowledge, expertise, relationships, and authority.
In other statements, Federal Reserve officials have identified a number of  potential benefits of consolidated supervision that reflect the changed  environment. The then-Chairman of the Federal Reserve Board testified  before Congress in 1997 that the knowledge of the financial strength and  risk inherent in a consolidated holding company can be critical to  protecting an insured subsidiary bank and resolving problems once they  arise. In 2006, he noted further that consolidated supervision provides a  number of benefits, including protection for insured banks within holding  companies, protection for the federal safety net that supports those  banks, aiding the detection and prevention of financial crises, and, thus,  mitigating the potential for systemic risk in the financial system. In  congressional testimony delivered in 2006, a Board official noted that the  goals of consolidated supervision are to understand the financial and  managerial strengths and risks within the consolidated organization as a  whole and to give the Federal Reserve the ability to address significant  deficiencies before they pose a danger to the organization’s insured banks  and the federal safety net. An official at the New York District Bank  identified the goals of consolidated supervision as protecting the safety  and soundness of depository institutions in the holding company,  promoting the health of the holding company itself, and mitigating  systemic risk.
In its Bank Holding Company Supervision Manual, the Federal Reserve  says that the inspection process is intended to increase the flow of  information to the Federal Reserve System concerning the soundness of  financial and bank holding companies. The manual goes on to explain how  the purpose of bank holding company supervision has evolved since the  passage of the Bank Holding Company Act in 1956, whose primary  objective was to ensure that bank holding companies did not become  engaged in nonfinancial activities. According to the manual, an inspection  is to be conducted to  1. inform the Board of the nature of the operations and financial  condition of each bank holding company and its subsidiaries,  including—  a.  the financial and operational risks within the holding company  system that may pose a threat to the safety and soundness of any  depository institution subsidiary of such bank holding company,  and   b.  the systems for monitoring and controlling such financial and  2.  monitor compliance by any entity with the provisions of the Bank  Holding Company Act or any other federal law that the Board has  specific jurisdiction to enforce against the entity, and to monitor  compliance with any provisions of federal law governing transactions  and relationships between any depository institution subsidiary of a  bank holding company and its affiliates.
The Federal Reserve also noted that the objectives of consolidated  supervision are discussed in its supervisory guidance on the Framework  for Financial Holding Company supervision introduced after GLBA. In  the guidance, the Federal Reserve says that the objective of overseeing  financial holding companies (particularly those engaged in a broad range  of financial activities) is to evaluate, on a consolidated or groupwide basis,  the significant risks that exist in a diversified holding company in order to  assess how these risks might affect the safety and soundness of depository  institution subsidiaries.
The Federal Reserve has also developed a quality management program to  evaluate its supervision programs overall. Board officials told us that each  of the District Banks has established a quality management department  that include quality planning, control, and improvement. As part of its  quality management program, the Board evaluates and reports on District  Banks’ supervision function in its operations reviews across the major  supervision and support functions. According to a Board document, each  review assesses how well the Reserve Bank carries out its supervisory  responsibilities, focusing not only on the effectiveness and efficiency of  individual functional areas but also on how well the Officer in Charge of  Supervision organizes and allocates departmental resources, and  facilitates integration among those resources. However, in the three  operations review reports we reviewed, the performance of consolidated  supervisory activities was not assessed independently from the  performance of other supervisory activities.
Not clearly establishing specific objectives for the consolidated  supervision, however, potentially lessens the Federal Reserve’s ability to  ensure that its consolidated supervision program provides comprehensive  and consistent oversight with minimal regulatory burden. The Federal  Reserve has authority for holding company supervision distinct from that  for supervision of the insured depository itself. Specific objectives and  performance measures would enhance the Federal Reserve’s ability to  ensure its accountability and the efficiency of its consolidated supervisory  activities.
OTS consistently identifies the protection of insured depositories as the  objective of consolidated supervision. However, like the Federal Reserve,  OTS generally does not distinguish between the objectives for holding  company supervision and those for primary thrift supervision. In addition,  OTS’s activities often vary significantly across firms, depending in part on  the risk and complexity of the firms. While the varying activities largely  reflect the differences among the institutions, a clear link between these  activities and the objectives of its consolidated supervision program would  enhance OTS’s ability to provide effective and consistent oversight with  minimal regulatory burden.
OTS identifies several strategic goals in its strategic plan, placing  particular emphasis on achieving a safe and sound thrift industry, and its  Holding Companies Handbook identifies protection of insured thrifts as  an objective of holding company supervision; however, these documents  distinguish the objectives of the holding company supervision program  from those of primary thrift supervision in only one area. The strategic  plan says that one objective of OTS’s cross-border discussions is to receive  additional equivalency determinations under EU directives, including the  FCD, and its handbook focuses on international standards in its discussion  of changes in its conglomerate oversight. In its strategic plan, OTS has five  performance measures for supervision, including the percentage of thrifts  that are well-capitalized and the percentage of safety and soundness  examinations started as scheduled, but these largely relate directly to  OTS’s authority as a primary bank supervisor rather than as a holding  company supervisor.
Because OTS is almost always both the lead bank supervisor and the  holding company supervisor for the holding companies it supervises,  accountability for its supervision of thrift institutions is clear. However,  for those thrift holding companies whose primary business activities are  not banking, accountability for parts of the institution may still not be  clear. Further, whether an agency is providing consistent and efficient  oversight with minimal regulatory burden for all firms is still at issue. For  firms overseen by CIO, OTS devotes substantial resources to the oversight  of risk and controls consolidated at the highest financial holding company  level, and assesses capital at that level. However, for some other firms that  had some similar characteristics to the CIO-supervised conglomerates,  OTS uses relatively fewer resources in the oversight of these firms at the  holding company level. For these firms, consistent with its standard CORE  program, OTS looks to see that the holding company is not relying on the  thrift to pay off debt or expenses and then limits its oversight to that part  of the firm that might directly place the thrift at risk.
Similarly, SEC identifies a number of objectives and performance  measures for the agency in its strategic plan, annual performance reports,  and annual budget documents. However, none of these is specific to the  consolidated supervision program. Instead, these documents provide goals  and performance measures for other areas such as enforcement. Enforcing  compliance with federal securities laws is one of SEC’s strategic goals, and  it measures performance in that area by reporting the number of  enforcement cases successfully resolved in its 2005 Performance and  Accountability Report. The only mention of the new CSE program in these  documents is a listing as a “milestone” for Market Regulation in SEC’s 2004  Performance and Accountability Report. SEC 2006 and 2007 budget  requests note that OCIE will examine CSEs under the strategic goal of  enforcing compliance with federal securities laws. The 2006 budget  request also includes the need to modify and interpret the rules for CSEs  to maintain consistency with the Basel Standards, in light of amendments  to the Basel Capital Accord, to meet the goal of sustaining an effective and  flexible regulatory environment.
On the Web site created by Market Regulation in June 2006, SEC says that  the aim of the CSE program is to reduce the likelihood that weakness in  the holding company or an unregulated affiliate endangers a regulated  entity or the broader financial system. In addition, SEC officials have said  that the purpose of the program was to provide consolidated oversight for  firms required to meet the EU’s FCD. However, CSE oversight activities  are not always linked to these aims and the extent to which these activities  contribute to the aims is not measured.
SEC officials have told us they have developed a draft that would establish  program objectives, link activities to these objectives, and establish  criteria for assessing the performance of the CSE program.
section_title: Agencies Have Opportunities to Better Ensure Effective and Consistent Supervision, with Minimal Regulatory Burden
paragraphs: Because the U.S. regulatory structure assigns responsibility for financial  supervision to multiple agencies, and a single firm may be subject to  consolidated and primary or functional supervision by different agencies,  not having objectives and performance measures for consolidated  supervision programs increases the difficulty of ensuring effective,  efficient, and consistent supervision with minimal regulatory burden and  ensuring that each agency is appropriately accountable for its activities.
The potential for duplication was demonstrated in three financial holding  companies where we discussed Federal Reserve oversight with Federal  Reserve and OCC examiners and with bank officials. Based on our  interviews with OCC examiners, we noted some duplication in Federal  Reserve and OCC activities, despite efforts to coordinate supervision by  the two agencies. In particular, since these institutions manage some risks  on an enterprisewide basis, OCC needed to assess consolidated risk  management or other activities outside the national bank to assess the  banks’ risks. Some OCC officials said that the consolidated supervisor  structure created by GLBA was primarily designed for bank holding  companies with insurance subsidiaries, but this structure is not prevalent.  The primary value of consolidated supervision, they said, is to prevent  gaps in supervision, but the benefit for firms that hold primarily bank  assets is unclear. Federal Reserve officials, on the other hand, noted that  because OCC is a bank supervisor, and not a consolidated supervisor, it  does not have the same authority as the Federal Reserve to conduct  examinations of, obtain reports from, establish capital requirements for, or  take enforcement action against a bank holding company or its nonbank  subsidiaries. With more clearly articulated objectives for consolidated  supervision that distinguish this authority from the primary supervisor’s  authority, linking consolidated supervisory activities to those goals and  measuring performance would clarify accountability and facilitate greater  reliance by each agency on the other’s work, lessening regulatory burden.
According to officials of the Federal Reserve Board, it takes a number of  actions to ensure that the large banking organizations they oversee are  treated similarly in its consolidated supervision program. These include a  review of LCBO supervisory plans and other elements of the supervisory  process as well as some centralized staffing. However, we found that  because of the autonomy of the District banks and the lack of detailed  guidance, the four District Banks in our study differed in the ways they  identified examination or supervisory findings, prioritized them, and  communicated these findings to firm management.
For example, the Federal Reserve Bank of Atlanta more clearly defines  different types of findings, provides criteria to examiners for determining  and prioritizing findings, and uses this framework to communicate  findings to firm management. At some other District Banks we visited,  examiners did not provide us with explicit criteria for determining and  prioritizing findings. As a result, it is more difficult to ensure that bank  holding companies operating in different Federal Reserve districts are  subject to consistent oversight and receive consistent supervisory  feedback and guidance. To mitigate this potential for inconsistency, as we  noted above, for large, complex institutions, committees such as the LCBO  management group review supervisory findings. In addition, a Board  official said that the Federal Reserve was considering implementing  Atlanta’s framework across the system. Without objectives and  performance measures specific to the consolidated supervision program,  however, the Federal Reserve is less able to gauge the value of the Federal  Reserve Bank of Atlanta’s more specific guidance to its examination staff.
In part, because OTS oversees a diverse set of firms and has been changing  some of its consolidated supervisory activities, consistency is a difficult  challenge. An OTS official told us that OTS created the CIO in its  headquarters to promote more systematic and consistent supervision for  certain holding companies. In addition, OTS has issued guidance to help  standardize policies and procedures related to providing continuous  supervision. However, the criteria are not clear for determining whether a  firm is overseen by CIO with continuous comprehensive consolidated  supervision or remains in the regional group where it receives more  limited oversight under the CORE program. In a speech in November 2006,  OTS’s Director identified seven internationally active conglomerates OTS  oversees at the holding company level. Of these, three are overseen by  CIO, one receives oversight under the standard CORE program, and two  others are overseen regionally but are receiving greater scrutiny than in  the past. The three firms receiving comprehensive consolidated oversight  by CIO are the firms that have designated OTS as their consolidated  supervisor for meeting the EU equivalency requirements, while three of  the others have opted to become CSEs.
While the small size of SEC’s CSE program limits opportunities for treating  firms differently, the lack of more complete written guidance and the  decision to keep guidance confidential limit the ability of industry  participants, analysts, and policymakers to determine whether firms are  being treated consistently. In addition, Market Regulation staff said that  more complete written guidance would reduce the risks of inconsistency  should staff turnover occur. We also found that SEC’s lack of program  objectives, performance measures, and written public guidance led to  firms’ receiving inconsistent feedback from SEC’s divisions and offices.  According to the CSEs and application examinations we reviewed, OCIE  conducted highly detailed audits that resulted in many findings related to  the firms’ documentation of compliance with rules and requirements,  while Market Regulation looked broadly at the risk management of the  firm. OCIE shared its findings with the firms, but Market Regulation  determined that many of them did not meet its criteria for materiality and  did not include them in its summary memorandums to the SEC  Commissioners recommending approval of the applications. However,  either a full or summary OCIE examination report was included as an  appendix to these memorandums. Market Regulation staff said they drew  on their own knowledge in deciding which findings were material and  explained that a finding is material when the issue threatens the viability  of the holding company. Further, Market Regulation staff told us that  because they rely on managements’ openness in their ongoing reviews of  CSE’s risk management, they do not always share supervisory results with  OCIE staff. Market Regulation and OCIE staff stated that they are working  on an agreement to facilitate communication between the offices.
Finally, even if each agency provided consistent treatment and feedback to  firms, there would be no assurance that consistent consolidated  supervision would be provided across the agencies. We have noted before  that, over time, firms in different sectors increasingly face similar risks  and compete to meet similar customer needs. Thus, competitive  imbalances could be created by different regulatory regimes, including  holding company supervision, both here and abroad.
section_title: Systematic Collaboration Could Enhance Consolidated Supervision Programs
paragraphs: Providing consistent efficient, effective oversight of individual financial  institutions has become more difficult as institutions increasingly manage  their more complex operations on an enterprisewide basis, often under the  oversight of multiple federal financial supervisors. And providing efficient  and effective oversight across the financial sector has become more  challenging as institutions in different sectors and countries increasingly  take on similar risks that may pose issues for a broad swath of the  developed world’s financial institutions in a crisis.
The industry’s increased concentration and convergence in product  offerings, paired with a regulatory structure with multiple agencies, means  that different large financial services firms, offering similar products, may  be subject to supervision by different agencies. This leads to risks that the  agencies may provide inconsistent supervision and regulation not  warranted by differences in the regulated institutions. Supervisors in  different agencies engaged in the oversight of a single institution take  some steps to share information, avoid duplication, and jointly conduct  some examination activities. However, these agencies did not consistently  and systematically collaborate in these efforts, thus limiting the efficiency  and effectiveness of consolidated supervision. For the three agencies  engaged in consolidated supervision, changes in the firms they oversee  have led to the firms facing similar risks and competing with each other  across industry segments. As a result, it is essential for consolidated  supervisors to systematically collaborate so that competitive imbalances  are not created.
subsections: section_title: Systematic Collaboration Is Essential for Multiple Agencies Sharing Common Responsibilities
paragraphs: In a system that is characterized by multiple supervisory agencies  providing supervision for a single holding company and its subsidiaries as  well as several agencies providing consolidated supervision for firms that  provide similar services, collaboration among the supervisory agencies is  essential for ensuring that the supervision is effective, efficient, and  consistent.
Through a review of government programs and the literature on effective  collaboration, we have identified some key collaborative elements, which  are listed in table 6. These elements stress the need to ensure, to the  extent possible, that the agencies are working toward a common goal, that  they minimize resources expended by leveraging resources and  establishing compatible policies and procedures, and that they establish  accountability for various aspects of these programs and for their efforts  to collaborate.
We have noted in our previous work that running throughout these  elements are a number of factors, including leadership, trust, and  organizational culture, that are necessary for a collaborative working  relationship. We have also noted that agencies may encounter a range of  barriers when they attempt to collaborate, including missions that are not  mutually reinforcing, or may conflict, and agencies’ concerns about  protecting jurisdiction over missions and control over resources.
As we have noted in the past, the U.S. financial regulatory agencies meet in  a number of venues to improve coordination. These venues include the  President’s Working Group, the Federal Financial Institutions  Examination Council, and the Financial and Banking Information  Infrastructure Committee. In addition, the agencies told us they have  frequent informal contact with each other. These contacts address several  of the key elements of collaboration identified above, but opportunities  remain to enhance collaboration in response to the changes in the  financial services industry. These opportunities exist both for agencies  that could collaborate in oversight of individual firms where agencies  share supervisory responsibility as well as for collaboration among the  consolidated supervisors to ensure consistent approaches to common  risks.
section_title: In the Oversight of Individual Firms, Supervisors from Different Agencies Take Steps to Work Together but Could Collaborate More Systematically
paragraphs: Enterprisewide risk management in large financial firms has complicated  the task of regulating them, since agency jurisdiction is defined by legal  entities. When an agency oversees both the ultimate holding company and  its major bank or broker-dealer subsidiary, examination activities tend to  be well-integrated. When consolidated and primary bank or functional  supervisors of a firm’s major subsidiaries are from different agencies, they  take some actions to work together and share information. However, we  found instances of duplication and regulatory gaps that could be  minimized through more systematic collaboration.
subsections: section_title: Moving to Enterprisewide Management and Other Organizational Changes Increases the Potential for Several Agencies to Share Responsibilities
paragraphs: Large, complex firms are increasingly managing themselves on an  enterprisewide basis, further blurring the distinctions between regulated  subsidiaries and their holding companies. Many of the banking and  securities firms included in our review were managing by business lines  that cut across legal entities, especially those institutions engaged  primarily in banking or securities. At least three of the companies in our  review primarily engaged in banking were simplifying their corporate  structures, either by reducing the number of bank charters or bringing  activities that had been outside an insured depository into the depository  or its subsidiaries. Some of these entities had been unregulated by a  primary federal bank or functional supervisor and thus had been the  primary responsibility of the holding company supervisor or were  regulated by a primary bank supervisor different from the supervisor  overseeing the lead bank. Finally, we found that several firms that are  CSEs, thrift holding companies, or both were conducting extensive  banking operations out of a structure that includes an ILC and a thrift and  that these entities, which are overseen by different primary bank  supervisors, might not be receiving similar oversight from a holding  company perspective.
As a result of changes in corporate structures and management practices,  there are increasing opportunities for collaboration among supervisors  with safety and soundness objectives at the subsidiary level and holding  company supervisors. For example, primary bank and functional  supervisors involved in safety and soundness supervision need to review  the organizational structure of the holding company and have to evaluate  increasingly centralized risk management activities and the controls  around those activities as they may apply to the regulated subsidiary, but  the consolidated supervisor is responsible for understanding the  organizational structure and monitoring risks and controls at the holding  across the entire organization.
When the large enterprises we reviewed had the same agency overseeing  their ultimate holding company and its lead bank (or its broker-dealer, in  the case of CSEs), supervisory activities tended to be well-integrated. For  the financial holding company that was dominated by a state member  bank and the thrift holding company dominated by a federal thrift  institution, we found that the oversight of the dominant financial  subsidiary and the ultimate holding company were conducted jointly with  the same examination team, a single planning document, and the same  timeline. In the case of the CSEs dominated by a broker-dealer, SEC  supervises both the holding company and the broker-dealer; NERO  completed targeted examinations of one firm in 2006 on an integrated  basis.
The relationship between the consolidated supervisor and other agencies  that serve as primary or functional supervisors for subsidiaries is governed  by law, which does provide for some information exchange among the  agencies. Under the regulatory structure established by GLBA, the Federal  Reserve and OTS are to rely on the primary supervisors of bank  subsidiaries in holding companies (the appropriate federal and state  supervisory authorities) and the appropriate supervisors of nonbank  subsidiaries that either are functionally regulated or are determined by the  consolidated regulator to be comprehensively supervised by a federal or  state authority. Consistent with this scheme, GLBA limits the  circumstances under which the Federal Reserve Board and OTS may  exercise their examination and monitoring authorities with respect to  functionally regulated subsidiaries and depository institutions that are not  subject to primary supervision by the Board or OTS. GLBA also provides  that the consolidated supervisor is to rely on reports that holding  companies and their subsidiaries are required to submit to other  regulators and on examination reports made by functional regulators,  unless circumstances described in the act exist. Among other things,  GLBA specifically directs the Federal Reserve and OTS, to the fullest  extent possible, to use the reports of examinations of depository  institutions made by the appropriate federal and state depository  institution supervisory authority. Also, consolidated supervisors are  directed to rely, to the extent possible, on the reports of examination  made of a broker-dealer, investment adviser, or insurance company by  their functional regulators and defer to the functional regulators’  examinations of these entities. GLBA also provides for the sharing of  information between federal consolidated supervisors and bank  supervisors on the one hand and state insurance regulators on the other  hand. The act authorizes these regulators to share information pertaining  to the entities they supervise within a holding company. For example, with  respect to the holding company, the act authorizes the Board to share  information regarding the financial condition, risk management policies,  and operations of the holding company and any transaction or relationship  between an insurance company and any affiliated depository institution.  The consolidated supervisor also may provide the insurance regulator any  other information necessary or appropriate to permit the state insurance  regulator to administer and enforce applicable state insurance laws.
Consistent with GLBA, consolidated supervisors have negotiated MOUs or  other formal information sharing agreements with functional supervisors  and were reviewing reports from them. The supervisors had also entered  into MOUs with relevant foreign supervisors. For example, OTS had  negotiated MOUs with 48 state insurance departments, 7 foreign  supervisors, and with the EU. Similarly, the Federal Reserve has a number  of MOUs with regulators. One provides for SEC to share information  concerning broker-dealer examinations for broker-dealers owned by  financial holding companies. Most MOUs include agreements to share  information on an informal basis. For example, the Federal Reserve and  SEC have a “pilot program” that allows the Federal Reserve to share  information on a particular holding company with SEC staff on an ongoing  basis. Examination information from the functional supervisors was being  provided to the consolidated supervisor, and to some extent, the  consolidated supervisor was relying on that information in planning and  reporting.
Supervisors do communicate when developing holding company  supervisory programs. For example, staff at SEC, especially in OCIE,  noted that they communicated regularly with the supervisory management  at the Federal Reserve Bank of New York when setting up their CSE  program. In addition, the agencies gave us examples of when they  communicated with regard to specific issues, and the Federal Reserve and  SEC have taken opportunities to learn from the firms under each other’s  jurisdiction. SEC said the Federal Reserve had asked to meet with some of  CSEs regarding peer valuation, and SEC had facilitated such meetings.
Following the enactment of GLBA, OCC and the Federal Reserve agreed  on how they would coordinate in the supervision of LCBOs. While some  duplication remains, we found examples of that agreement being  implemented. For example, OCC and the Federal Reserve share  supervisory planning documents for LCBOs when OCC is the primary  bank supervisor for the lead bank in the bank holding company. As a  result, the Federal Reserve is able to factor OCC’s planned work into its  supervisory plan process.
In addition, we found that OCC and Federal Reserve examiners at some  institutions shared information informally over the course of the  examination cycle, allowing them to conduct joint or shared target  examination activities that might not have been part of the original plan.  OCC examiners told us they are now also receiving information about the  Federal Reserve’s horizontal reviews in a timelier manner and can thus  make better decisions about the extent to which they want to participate  in those reviews. Federal Reserve officials said that when OCC has  conducted examination activities related to horizontal reviews, they rely  on OCC’s information. OCC and Federal Reserve examiners also told us  that when they disagree on examination findings, they attempt to work out  those disagreements before presenting conflicting information to  management. Finally, OCC and Federal Reserve examiners jointly attend  meetings with management and the Boards of Directors of the financial  institutions where they have primary and consolidated supervisory  responsibilities. They invite other relevant bank examiners to attend some  of these meetings as well. Finally, the Federal Reserve provides OCC and  FDIC full online access to its supervisory database, which contains  examination reports and other supervisory information for bank holding  companies.
The supervision of one firm, headquartered abroad but with significant  U.S. operations, including substantial securities activities, is an example of  coordination between the Federal Reserve, the holding company  supervisor for the firm’s U.S. operations, two foreign supervisory agencies  involved in the oversight of the ultimate holding company, and operations  in their countries, and the SEC, which is the functional supervisor of firm’s  most important U.S. operations. The Federal Reserve meets with  supervisors from the other countries formally twice a year to coordinate  activities. A representative of the firm said the three agencies meet jointly  with representatives of the firm prior to developing a supervisory plan.  The lead examiner at the Federal Reserve said that including  representatives from other governments on examination teams makes it  easier to access information across international borders. While SEC is not  included in these meetings, the Federal Reserve and SEC agreed to a “pilot  program” for the Federal Reserve to regularly share holding company  information with OCIE staff that oversee the firm’s U.S. broker-dealers and  investment advisers.
Collectively, these efforts to coordinate do address several of the key  elements of collaboration identified in table 6, above. In particular, the  agreements among the supervisors provide a basis for joint strategies, for  agreements on roles and responsibilities, and for operating across agency  boundaries. Joint examination activities between the Federal Reserve and  OCC, for instance, address these elements and are a way to leverage  resources. Similarly, coordination between SEC offices and the Federal  Reserve promote efforts to learn from each other despite agency  boundaries.
Opportunities remain for the agencies to collaborate more systematically,  however, and thus enhance their ability to provide effective and consistent  oversight when they share responsibility for a holding company and its  subsidiaries. More consistent collaboration between OCC as the lead bank  examiner and the Federal Reserve as the holding company supervisor, for  instance, would allow the agencies to take advantage of opportunities to  supervise some large, complex, banking organizations as effectively and  efficiently as possible. Conducting some examinations and meetings on a  joint basis—the solution adopted by the Federal Reserve and OCC—is a  positive step but does not ensure that the agencies develop consistent  mechanisms to evaluate the results of joint examinations or to judge the  extent to which such examinations or other approaches lessen  duplication, promote consistency, or otherwise enable more efficient  supervision.
In addition, we found that coordination between these agencies did not  always run smoothly. OCC examiners at some of the institutions we  reviewed and officials at headquarters told us that they see some  coordination issues, especially with regard to the horizontal examinations  the Federal Reserve conducts across some systemically important  institutions. OCC examiners at one LCBO said that some cases could lead  to the Federal Reserve and OCC providing inconsistent feedback to the  firm. They also noted that when the Federal Reserve collects information  for these examinations, they do not always rely on OCC for that  information when OCC is the primary bank examiner of the lead bank.  Finally, while OCC and the Federal Reserve follow the procedures they  have laid out for resolving differences, the potential still exists for the two  to give conflicting information to management. We found one firm that  had initially received conflicting information from the Federal Reserve, its  consolidated supervisor, and OCC, its primary bank supervisor, about  sufficient business continuity provisions.
While the holding company supervisor for thrift holding companies (OTS)  or CSEs (SEC) is often the supervisor of the dominant regulated  subsidiary, opportunities to reduce regulatory burden and improve  accountability through better collaboration continue to exist. While an  OTS official told us that one of the main responsibilities of a holding  company supervisor is to improve efficiency by serving as a source of  information about the holding company to the functional supervisors, this  opportunity to leverage information is not fully utilized. FDIC examiners,  for instance, could collect information on the organizational structure of  the holding company from OTS, but obtained this information from bank  officials when examining an ILC that was part of a thrift holding company.
In other instances, OTS and the Federal Reserve have taken some steps to  work collaboratively with other supervisors in supervising a particular  firm, but the results are incomplete. A decision by the United Kingdom’s  Financial Services Authority to include the German and French regulators  in a meeting with OTS led OTS to call a November 2005 meeting that  included a broader range of supervisors. OTS officials said they invited  insurance, FDIC, and SEC supervisors in the United States. Officials at the  company told us, however, that FDIC did not attend the 2005 meeting  because the meeting had been arranged hastily. OTS held a similar meeting  in November 2006, and FDIC staff attended this meeting; SEC, however,  did not attend and senior staff at Market Regulation and OCIE told us they  were unaware that SEC had been invited. Similarly, as noted above, the  Federal Reserve has sometimes engaged in integrated examination  activities with foreign supervisors, but these did not consistently include  other relevant U.S. supervisors.
The agencies did not always have consistent approaches to minimizing  regulatory burden and improving accountability through collaboration.  For example, as noted above, the Federal Reserve mitigates challenges  posed by its decentralized structure by creating processes such as  reviewing the plans and findings of LCBOs and centralizing the staffing  systems. However, these processes may make collaboration more difficult.  An OCC official told us that the complex review process at the Federal  Reserve sometimes kept OCC from providing formal results to  management on a timelier basis when the two agencies conducted joint  examinations. Further, the planning cycles are not always consistent  across the agencies. While OCC and the Federal Reserve considered each  others’ schedules or examination plans when developing their plans for  bank holding companies where OCC is the lead bank supervisor, not all  agencies do so. For example, at the institutions included in our study,  there was little or no indication that FDIC had coordinated the  examinations of ILCs with relevant holding company supervisors. Finally,  bank regulators noted another barrier to full collaboration—that the board  of the bank is legally liable for the safety and soundness of the bank  regardless of the status of the holding company. FDIC officials specifically  noted that the interests of the bank’s management, including its legal  responsibilities, and those of the holding company might diverge when one  or the other is in danger of failing. Similarly, at that time the interests of  the holding company supervisor and the primary and secondary bank  supervisor might diverge as well. Federal Reserve officials noted,  however, that risks would be lessened to the extent that the objectives of  the consolidated supervisor and the primary bank supervisor are the same  (e.g., to preserve the safety and soundness of insured depository  institutions) and the consolidated supervisor takes action to prevent the  holding company from taking actions that are deleterious to its insured  depository institutions.
Collaboration between the banking agencies and SEC is hindered by  cultural differences and concerns about sharing information. Bank  supervisory officials noted that they were sometimes concerned about  sharing information with SEC because of their compliance, as opposed to  prudential supervision, culture. One official said the Federal Reserve does  not want to be perceived as a fact finder for the SEC when it comes to  consolidated financial information. If they were perceived in that way, he  said, management at financial holding companies may be less willing to  share certain types of confidential information with their holding company  supervisors. SEC and Federal Reserve officials noted that SEC may not  have the same formal legal safeguards as bank supervisors have with  regard to the confidentiality of the information. The impediments to  sharing information at SEC are evident internally as well where, as  discussed above, Market Regulation has not always shared firm risk  management information with OCIE.
Oversight of complex organizations that are primarily insurance  companies pose special collaborative challenges. As noted above, GLBA  directed consolidated supervisors to take certain actions to promote the  exchange of information between consolidated supervisors and relevant  state insurance supervisors, and we found that MOUs had been negotiated  and some communication was taking place. The states have also taken  some actions to oversee insurance companies on a group basis. According  to NAIC, most states have adopted a version of the NAIC model laws  concerning holding company supervision, and NAIC has developed a  framework for holding company supervision. Within that framework,  which promotes the assessment of risks and controls at the holding  company level, lead state supervisors conduct the examination. These  examiners are advised to identify and communicate with the relevant  functional supervisors for the holding company. The framework also  recommends that insurance examiners notify the Federal Reserve if the  institution is a financial holding company. However, only one major  insurer is a financial holding company, while a significant minority of the  large, complex thrift holding companies have significant insurance  operations, but the guidance does not recommend that examiners contact  OTS as a holding company supervisor. NAIC officials said that while they  participated in the EU evaluation process of the U.S. consolidated  supervisory framework, they do not believe that insurance supervisors  have been involved in the equivalency determinations for the specific  companies.
As a result of consolidated supervisors and those of the regulated entities  in these complex holding companies not consistently adopting practices  associated with systematic collaboration, U.S. supervisory agencies may  be missing opportunities to better ensure effective, efficient supervision of  individual financial services firms. The agencies also have not developed  methods to evaluate the joint efforts that they do have under way, thus  hindering their efforts to avoid duplication. Further, since they have not  consistently established compatible policies and supervisory approaches,  the agencies have missed opportunities to make sure they are treating  firms consistently.
section_title: Greater Collaboration among the Three Consolidated Supervisors Could Improve Supervisory Efforts
paragraphs: While the three consolidated supervisors have some mechanisms in place  to share information and supervisory approaches, opportunities remain for  them to collaborate more systematically to promote greater consistency,  particularly in oversight of large, complex firms. While these firms’  product offerings generally are similar, ensuring regulatory consistency  remains an ongoing challenge.
In particular, the OTS and SEC have overlapping responsibilities at some  CSEs that own or control thrifts. Further, the agencies do not consistently  work in a collaborative manner to identify the potential for defining and  articulating a common goal, such as identifying regulatory best practices  for consolidated supervision or identifying emerging risks that would  confront all financial services firms.
subsections: section_title: Duplicative Effect of Overlapping Jurisdiction between OTS and SEC Remains Unresolved
paragraphs: Three of the five securities firms that have obtained CSE status are also  thrift holding companies. As a result, these firms have two consolidated  supervisors and no mechanism has been developed to limit the potential  for duplicative activities and conflicting findings or to assess  accountability for various supervisory activities. In the preamble to the  final CSE rule, SEC acknowledged the potential for duplication and  conflict for some firms. The rule reduces this potential by, among other  things, providing that SEC will rely on the Federal Reserve’s consolidated  supervision of financial holding companies and on consolidated  supervision by other holding company supervisors under circumstances  the SEC determines to be appropriate.
Currently, SEC has not determined that consolidated supervision of thrift  holding companies by OTS satisfies SEC’s supervisory concerns with  respect to CSEs that are thrift holding companies. SEC says that where  both it and OTS are the consolidated supervisors, the firms are primarily  securities firms with small thrift subsidiaries. In addition, SEC examiners  told us that the major risks for these firms are outside the thrift and other  banking subsidiaries and that OTS had not been examining these activities.  When thrifts are included in bank holding companies, the law dictates that  at the holding company level, the Federal Reserve is solely responsible for  holding company supervision. However, no such mechanism exists for  firms that are thrift holding companies who have opted to become CSEs,  and OTS, which notes the growing importance of the thrift in two of the  three institutions, has not chosen to defer to SEC’s consolidated  supervision. SEC and OTS officials recognize this issue but have not yet  met to resolve it.
section_title: Agencies Face Broader Risks That Could Be Better Managed through Effective Collaboration
paragraphs: Supervisors in all three agencies have recognized the importance of  allocating scarce resources to the areas of greatest risk and have adopted  some risk-based supervisory policies and procedures. However, the  agencies have not consistently adopted mechanisms to look at risk  collaboratively, recognizing that financial risks are not neatly aligned with  agency jurisdiction. The extent to which these risks cut across regulatory  boundaries was highlighted in our work on Long-Term Capital  Management (LTCM), a large hedge fund. Federal financial regulators did  not identify the extent of weaknesses in banks’ and securities and futures  firms’ risk management practices until after LTCM’s near collapse. Until  LTCM’s near collapse, they said they believed that creditors and  counterparties were appropriately constraining hedge funds’ leverage and  risk taking. However, examinations done after LTCM’s near collapse  revealed weaknesses in credit risk management by banking and securities  firms that allowed LTCM to become too large and leveraged. The existing  regulatory approach, which focuses on the condition of individual  institutions, did not sufficiently consider systemic threats that can arise  from nonregulated entities, such as LTCM. Similarly, information  periodically received from LTCM and its creditors and counterparties did  not reveal the potential threat posed by LTCM. However, the agencies did  not have a strategy to collaboratively identify and resolve problems such  as this, delaying identification of shared issues and work toward their  resolution.
In addition, there are limited mechanisms to allow agencies to share and  leverage resources when one agency has unique capabilities or lacks  specialized resources. To some extent, agencies share expertise and  resources when they jointly conduct examinations or when they meet  periodically to share information. However, no mechanism exists for  sharing expertise in other situations. This is important for OTS, which is  characterized by a disparity between the size of the agency and the diverse  firms it oversees. While OTS recognizes its need for staff with specialized  skills to oversee some of these firms, the small number of firms in some  categories, combined with the small overall size of the agency, limits its  ability to have any depth in those skill areas. For example, while OTS  oversees a number of holding companies that are primarily in the  insurance business, it has only one specialist in this area. At the same time,  the Federal Reserve has a number of insurance specialists but oversees  only one firm that is primarily in the insurance business. However, there is  no systematic process for sharing insurance expertise between the two  agencies.
section_title: Conclusions
paragraphs: As financial institutions have grown, become more complex and  internationally active, and adopted enterprisewide risk management  practices, consolidated supervision has become more important. For  certain large complex firms, U.S. supervisors have or are adopting some of  the “best practices” associated with consolidated supervision, as  evidenced in part by the determination of equivalence by EU supervisors.  However, U.S. supervisors could perform consolidated supervision more  efficiently and effectively by adopting management practices in the areas  of performance management and collaboration. These practices are  particularly important in helping to ensure consistent treatment of  financial services holding companies and in clearly defining accountability  for providing consolidated supervision. Consistent rules, consistently  applied, and clear accountability are important because of the  decentralized internal structures the agencies use to develop and  implement policies related to consolidated supervision and the generally  fragmented structure of the U.S. regulatory system.
The first step in any effectively managed organization is to have well- articulated objectives, strategies, and performance measures. While these  agencies have developed and largely implemented policies or strategies for  consolidated supervision, these strategies could be improved through the  development of more well-articulated, specific objectives and measurable  outcomes. Defining specific, measurable objectives for the consolidated  supervision programs is an inherently difficult task for financial services  supervisors but is a key component of assessing how consolidated  supervision adds to the functional supervision of banks, thrifts, broker- dealers, and insurers. Better-articulated objectives will also help to ensure  that supervisors treat firms equitably and that firms receive consistent  feedback. SEC has developed a draft statement of objectives and  performance measures for the CSE program intended to facilitate that  assessment. If approved, this would be particularly important because  differences in orientation and policies and communication weaknesses  among different organizational components of SEC exacerbate the  difficulty of taking on the new responsibilities inherent in the CSE  program. Without formal guidance that delineates the responsibilities and  identifies strategies and performance measures for the divisions and  offices, resources will not be used as effectively as they might be.
Another key facet of effectively managed organizations or systems is the  degree to which the various components collaborate and integrate their  processes. While the agencies do exchange information, they have  opportunities to improve collaboration. We have noted in the past that it is  difficult to collaborate within the fragmented U.S. regulatory system and  have recommended that Congress modernize or consolidate the regulatory  system. However, under the current system, the agencies have  opportunities to collaborate systematically and thus ensure that  institutions operating under the oversight of multiple financial supervisors  receive consistent guidance and face minimal supervisory burden. The  agencies have taken some steps, particularly in the case of some specific  holding companies, to work more collaboratively and thus ensure  consistent supervisory treatment. These steps include joint supervisory  meetings, including foreign supervisors, to develop common examination  approaches.
section_title: Recommendations for Executive Action
paragraphs: We are recommending that the Federal Reserve, Office of Thrift  Supervision, and Securities and Exchange Commission take the following  seven actions, as appropriate:  To better assess their agencies’ achievements as consolidated supervisors,  the Chairman of the Federal Reserve System’s Board of Governors, the  Director of the Office of Thrift Supervision, and the Chairman of the  Securities and Exchange Commission should direct their staffs to develop  program objectives and performance measures that are specific to their  consolidated supervision programs.
To ensure they are promoting consistency with primary bank and  functional supervisors and are avoiding duplicating the efforts of these  supervisors, the Chairman of the Federal Reserve System’s Board of  Governors, the Director of the Office of Thrift Supervision, and the  Chairman of the Securities and Exchange Commission should also direct  their staffs to identify additional ways to more effectively collaborate with  primary bank and functional supervisors. Some of the ways they might  consider accomplishing this include    ensuring common understanding of how the respective roles and  responsibilities of primary bank and functional supervisors and of  consolidated supervisors are being applied and defined in decisions  regarding the examination and supervision of institutions; and   developing appropriate mechanisms to monitor, evaluate, and report  jointly on results.
To take advantage of the opportunities to promote better accountability  and limit the potential for duplication and regulatory gaps, the Chairman  of the Federal Reserve System’s Board of Governors, the Director of the  Office of Thrift Supervision, and the Chairman of the Securities and  Exchange Commission should foster more systematic collaboration  among their agencies to promote supervisory consistency, particularly for  firms that provide similar services. In particular, the Chairman of the  Securities and Exchange Commission and the Director of the Office of  Thrift Supervision should jointly clarify accountability for the supervision  of the consolidated supervised entities that are also thrift holding  companies and work to reduce the potential for duplication.
To address certain practices that are specific to an agency, we recommend  the following:  the Chairman of the Securities and Exchange Commission direct SEC staff  to develop and publicly release explicit written guidance for supervision of  Consolidated Supervised Entities. This guidance should clarify the  responsibilities and activities of the Office of Compliance Inspections and  Examinations and the Division of Market Regulation’s responsibilities for  administering the Consolidated Supervised Entity program. the Director of the Office of Thrift Supervision direct OTS staff to revise  the CORE supervisory framework to focus more explicitly and  transparently on risk management and controls so that it more effectively  captures evolving standards for consolidated supervision and is more  consistent with activities of other supervisory agencies and facilitates  consistent treatment of OTS’s diverse population of holding companies.
The Chairman of the Federal Reserve direct Federal Reserve Board and  District Bank staff to look for ways to further reduce operational  differences in bank supervision among the District Banks, such as  developing additional guidance related to developing and communicating  examination findings.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Federal  Reserve, OTS, and SEC. We received written comments from the  Chairman of the Board of Governors of the Federal Reserve System, the  Director of the Office of Thrift Supervision, and the Chairman of the  Securities and Exchange Commission. Their letters are summarized below  and reprinted in appendixes III, IV, and V, respectively.
The Chairman of the Board of Governors of the Federal Reserve System  noted that the Federal Reserve’s program for consolidated supervision  continues to evolve in light of changes in the structure, activities, risks,  and risk management techniques of the banking industry. He concurred  with the importance of clear and consistent objectives for each  supervisory program and accurate performance measures, as well as noted  that the Federal Reserve has already charged its management committees,  comprised of Board and Reserve Bank officials, to further define and  implement more specific objectives and performance measures for each of  its supervision business lines. He also agreed that it was appropriate for  the Federal Reserve to consider whether additional opportunities exist to  promote effective collaboration among the Federal financial supervisory  agencies and that the Federal Reserve would continue to work to ensure  that the agencies share information and avoid duplication of supervisory  effort.
The Director of the Office of Thrift Supervision agreed with our  characterization of how OTS’s consolidated supervision program,  especially for large, complex firms operating on a global basis, has evolved  in recent years. OTS wrote that initiatives for these firms (that are  described in the report) will ensure that it implements the principles of  accountability and supervisory collaboration recommended in the report.  With regard to consolidated supervision of other firms OTS wrote that it  implements its holding company authority in a broader and deeper manner  than indicated in our draft report. In response to our recommendation that  OTS’s CORE framework more explicitly focus on risk management, the  Director reiterated that the CORE approach is explicitly designed to  understand, analyze and evaluate the firm’s risk appetite and its approach  to risk management, however, he said that OTS is considering substantive  revisions to the framework to further sharpen this focus on risk. We agree  that revisions to sharpen the focus on the CORE framework are  appropriate. We also agree that OTS’s holding company authority is broad  and deep and that OTS has sought to understand the risk management  approaches of the holding companies it supervises, but we continue to  believe that OTS should focus more explicitly and transparently on risk  management and controls to ensure it provides consistent treatment of its  holding companies.
The Director also wrote that the report correctly points out that OTS and  SEC conduct consolidated supervision activities in some of the same  firms. Further, he wrote that the report cites views of SEC staff that are  incorrect, specifically that the firms in question have small thrifts and that  the major risks for these firms are outside the thrift and other banking  subsidiaries. The Director wrote that the regulated thrift institutions are  sizeable and significant in at least two of these firms with assets of more  than $14 billion and $19 billion in 2006 and that reviews thoroughly  evaluate holding companies and their risks on a consolidated basis.
Our report discussed the overlapping responsibilities of OTS and SEC with  regard to several CSEs that, because of their ownership of thrifts, are also  thrift holding companies. We did not offer a judgment as to which agency  should appropriately have the primary responsibility, but we did  recommend that the Director and the Chairman of the Securities and  Exchange Commission clarify accountability for such supervisory  responsibility. The Director of OTS said that he intends to meet with the  Chairman of SEC to discuss this issue.
In response to our recommendation that the agencies identify additional  ways to collaborate, the Director wrote that the differences between the  holding companies overseen by the Federal Reserve and OTS would make  it difficult to achieve perfect consistency but that OTS would continue to  seek ways to align its process with best regulatory practice. In response to  our recommendation that the agencies foster more systematic  collaboration, he wrote that OTS remains committed to an open and  inclusive approach and is willing to work with relevant supervisors to  ensure there are not gaps in the review of firms subject to consolidated  supervision. Finally, responding to our recommendation for program  objectives and performance measures that are specific to consolidated  supervision, the Director agreed that clear objectives and performance  measures greatly assist in evaluating the success of any supervisory  program, and that the agency will continue to assess ways to ensure the  program is focused, disciplined, and equal to the task of holding company  supervision.
The Chairman of the Securities and Exchange Commission wrote that SEC  recognized that the establishment of a prudential consolidated supervision  program for investment bank holding companies represents a significant  expansion of the Commission’s activities and responsibilities. The  Chairman further wrote that SEC had built a prudential regime that is  generally consistent with the oversight that is provided to bank holding  companies but that SEC also takes into account the different risk profiles  and business mixes that distinguish investment bank holding companies  from bank holding companies. In response to our recommendation  regarding coordination within SEC, the Chairman, with the unanimous  support of his fellow Commissioners, subsequently wrote that he is  transferring the responsibilities for on-site testing of CSE holding company  controls to the Division of Market Regulation so that the expertise related  to the prudential supervision of securities firms will be concentrated there.  In addition, the Chairman wrote that he will allocate additional positions  to the Division of Market Regulation to carry out its increased  responsibilities, and he has directed staff there to provide greater  transparency with regard to the aims and methods of the program by  posting additional information about its components on SEC’s Web site.
We also received separate technical comments on the draft report from  the staffs of the Federal Reserve and SEC, as well as from FDIC and OCC;  we have incorporated their comments into the report, as appropriate.
We are sending copies of this report to other interested congressional  committees and to the Chairman of the Board of Governors of the Federal  Reserve System, the Director of the Office of Thrift Supervision, and the  Chairman of the Securities and Exchange Commission. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors are acknowledged in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) describe the policies and approaches U.S.  consolidated supervisors use to oversee large and small holding  companies in the financial services industry; (2) review the supervisory  agencies’ management of its consolidated supervision program, including  program objectives and performance measures; and (3) evaluate how well  consolidated supervisors are collaborating with other supervisors and  each other. We conducted our work between November 2005 and  February 2007 in accordance with generally accepted government auditing  standards in Washington, D.C.; Boston; and other locations where  financial institutions are headquartered.
To meet our objectives and to better understand how the three  consolidated supervisors—the Federal Reserve System (Federal Reserve),  Office of Thrift Supervision (OTS), and Securities and Exchange  Commission (SEC)—operate their consolidated supervision programs for  large, complex, firms, we selected a number of large firms that were  supervised by each of the three agencies on a consolidated basis. These  firms had at least one of the following characteristics: (1) major  international operations so that they were subject to the European Union’s  Financial Conglomerates Directive or were headquartered abroad, (2) a  variety of businesses (i.e., insurance, banking, and securities) that were  subject to significant supervision by primary bank and functional  supervisors or unregulated subsidiaries, and (3) one or more consolidated  supervisors. Before finalizing our selection of firms, we held discussions  with the three agencies to obtain their views on the firms we had selected.  From this selection process, we chose a total of 14 firms, 6 U.S. bank  holding companies, 1 foreign bank with substantial U.S. operations, 4 thrift  holding companies that did not have another consolidated supervisor, and  3 consolidated supervised entities (CSE) that were also thrift holding  companies. We interviewed officials from some of the selected firms to  obtain their views on the benefits and the costs of consolidated  supervision.
Specifically, to describe the policies and approaches used by U.S.  consolidated supervisors—Federal Reserve, OTS, and SEC—we reviewed  the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Act, the  Home Owners Loan Act of 1933, and SEC’s Alternative Net Capital Rule  for CSEs. We also reviewed the Federal Reserve Board’s Bank Holding  Company Supervision Manual and some of the Board’s Division of  Banking Supervision and Regulation Letters on large, complex banking  organizations; SEC’s regulations establishing the CSE program and  examination modules specific to that program; and OTS’s Holding  Companies Handbook and Examination Handbook for thrifts. In  addition, we reviewed recent Federal Reserve supervisory plans and some  reports of targeted reviews. For the three SEC-supervised firms, we  reviewed their applications to become CSEs and ongoing supervisory  materials, such as monthly risk reports and cross-firm reviews, as well as  the results of one CSE examination completed during our review. Because  these firms were also thrift holding companies, we reviewed OTS holding  company examination reports for them. For the other OTS-supervised  firms, we reviewed holding company and thrift examination reports and  supervisory planning documents when these were available. In addition to  the 14 large firms, we reviewed a few supervisory documents for smaller  holding companies supervised by the Federal Reserve and OTS.
To review the supervisory agencies’ management of its consolidated  supervision program, we reviewed recent strategic and performance plans  from the three agencies. Where relevant, we also reviewed agency  testimonies and budget documents. In addition, we reviewed agency  guidance specific to consolidated supervision to determine whether  program objectives and performance measures were included. We  interviewed officials at the three agencies and examiners who were  responsible for the supervision of the selected firms on what they  considered the goals or benefits of consolidated supervision to be. In  addition, we collected information on the operations review program that  the Federal Reserve developed for its supervision programs.
To evaluate how well consolidated supervisors are collaborating with  other supervisors and each other, we identified practices for effective  collaboration from our previous work on collaboration. We also  interviewed officials from the three agencies on their efforts to collaborate  with each other and with primary bank and functional supervisors  overseeing subsidiaries in the holding companies they oversee. In addition,  we reviewed examination reports of some of the subsidiaries owned by  the 14 holding companies we selected. These included examination  reports from the Federal Deposit Insurance Corporation, Office of the  Comptroller of the Currency, and the New York Stock Exchange. We also  interviewed officials and examiners involved in the oversight of the  primary banks or functional entities within some of the 14 firms.
To gain an international perspective on consolidated supervision and a  better understanding of the European Union’s Financial Conglomerates  directive, we spoke to supervisors in two other countries and reviewed  documents from a variety of international sources. Specifically, we spoke  with Canada’s Office of the Superintendent of Financial Institutions and  the United Kingdom’s Financial Services Authority. We also reviewed  documents from these supervisory bodies as well as other international  sources, including the Basel Committee on Banking Supervision, the Joint  Forum, and the European Union.
section_title: Appendix II: Criteria for Consolidated Supervision Included in Basel Committee on Banking Supervision’s Core Principles
paragraphs: The following is excerpted from the Basel Committee on Banking  Supervision’s “Core Principles Methodology,” available at  http://www.bis.org/publ/bcbs130.pdf.
Principle 24: Consolidated supervision  An essential element of banking supervision is that supervisors supervise  the banking group on a consolidated basis, adequately monitoring and, as  appropriate, applying prudential norms to all aspects of the business  conducted by the group worldwide.  1.  The supervisor is familiar with the overall structure of banking groups  and has an understanding of the activities of all material parts of these  groups, domestic and cross-border.  2.  The supervisor has the power to review the overall activities of a  banking group, both domestic and cross-border. The supervisor has  the power to supervise the foreign activities of banks incorporated  within its jurisdiction.  3.  The supervisor has a supervisory framework that evaluates the risks  that non-banking activities conducted by a bank or banking group may  pose to the bank or banking group.  4.  The supervisor has the power to impose prudential standards on a  consolidated basis for the banking group. The supervisor uses its  power to establish prudential standards on a consolidated basis to  cover such areas as capital adequacy, large exposures, exposures to  related parties and lending limits. The supervisor collects consolidated  financial information for each banking group.  5.  The supervisor has arrangements with other relevant supervisors,  domestic and cross-border, to receive information on the financial  condition and adequacy of risk management and controls of the  different entities of the banking group.  6.  The supervisor has the power to limit the range of activities the  consolidated group may conduct and the locations in which activities  can be conducted; the supervisor uses this power to determine that the  activities are properly supervised and that the safety and soundness of  the bank are not compromised.  7.  The supervisor determines that management is maintaining proper  oversight of the bank’s foreign operations, including branches, joint  ventures and subsidiaries. The supervisor also determines that banks’  policies and processes ensure that the local management of any cross- border operations has the necessary expertise to manage those  operations in a safe and sound manner and in compliance with  supervisory and regulatory requirements.  8.  The supervisor determines that oversight of a bank’s foreign  operations by management (of the parent bank or head office and,  where relevant, the holding company) includes: (i) information  reporting on its foreign operations that is adequate in scope and  frequency to manage their overall risk profile and is periodically  verified; (ii) assessing in an appropriate manner compliance with  internal controls; and (iii) ensuring effective local oversight of foreign  operations.
For the purposes of consolidated risk management and supervision,  there should be no hindrance in host countries for the parent bank to  have access to all the material information from their foreign branches  and subsidiaries. Transmission of such information is on the  understanding that the parent bank itself undertakes to maintain the  confidentiality of the data submitted and to make them available only  to the parent supervisory authority.  9.  The home supervisor has the power to require the closing of foreign  offices, or to impose limitations on their activities, if:  it determines that oversight by the bank and/or supervision by the host  supervisor is not adequate relative to the risks the office presents;  and/or  it cannot gain access to the information required for the exercise of  supervision on a consolidated basis.  10. The supervisor confirms that oversight of a bank’s foreign operations  by management (of the parent bank or head office and, where relevant,  the holding company) is particularly close when the foreign activities  have a higher risk profile or when the operations are conducted in  jurisdictions or under supervisory regimes differing fundamentally  from those of the bank’s home country.  1.  For those countries that allow corporate ownership of banking  the supervisor has the power to review the activities of parent  companies and of companies affiliated with the parent companies, and  uses the power in practice to determine the safety and soundness of  the bank; and  the supervisor has the power to establish and enforce fit and proper  standards for owners and senior management of parent companies.  2.  The home supervisor assesses the quality of supervision conducted in  the countries in which its banks have material operations.  3.  The supervisor arranges to visit the foreign locations periodically, the  frequency being determined by the size and risk profile of the foreign  operation. The supervisor meets the host supervisors during these  visits. The supervisor has a policy for assessing whether it needs to  conduct on-site examinations of a bank’s foreign operations, or require  additional reporting, and has the power and resources to take those  steps as and when appropriate.
section_title: Appendix III: Comments from the Chairman of the Board of Governors of the Federal Reserve System
section_title: Appendix IV: Comments from the Director of the Office of Thrift Supervision
section_title: Appendix V: Comments from the Chairman of the Securities and Exchange Commission
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, James McDermott, Assistant  Director; Jason Barnosky; Nancy S. Barry; Lucia DeMaio; Nancy Eibeck;  Marc W. Molino; Paul Thompson; and Barbara Roesmann also made key  contributions to this report.
section_title: Related GAO Products
paragraphs: Risk-Based Capital: Bank Regulators Need to Improve Transparency and  Address Impediments to Finalizing the Proposed Basel II Framework.  GAO-07-253. Washington, D.C.: Feb. 15, 2007.
Industrial Loan Corporations: Recent Asset Growth and Commercial  Interest Highlight Differences in Regulatory Authority. GAO-06-961T.  Washington, D.C.: July 12, 2006.
Results-Oriented Government: Practices That Can Help Enhance and  Sustain Collaboration among Federal Agencies. GAO-06-15. Washington,  D.C.: October 21, 2005.
Industrial Loan Corporations: Recent Asset Growth and Commercial  Interest Highlight Differences in Regulatory Authority. GAO-05-621.  Washington, D.C.: September 15, 2005.  21st Century Challenges: Reexamining the Base of the Federal  Government. GAO-05-325SP. Washington, D.C.: February 1, 2005.
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.  Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004.
Internal Control Management and Evaluation Tool. GAO-01-1008G.  Washington, D.C.: August 1, 2001.
Managing for Results: Barriers to Interagency Coordination. GAO/GGD- 00-106. Washington, D.C.: March 29, 2000.
Responses to Questions Concerning Long-Term Capital Management  and Related Events. GAO/GGD-00-67R. Washington, D.C.: February 23,  2000.
Risk-Focused Bank Examinations: Regulators of Large Banking  Organizations Face Challenges. GAO/GGD-00-48. Washington, D.C.:  January 24, 2000.
Standards for Internal Control in the Federal Government. GAO/AIMD- 00-21.3.1. Washington, D.C.: November 1, 1999.
Long-Term Capital Management: Regulators Need to Focus Greater  Attention on Systemic Risk. GAO/GGD-00-3. Washington, D.C.: October  29, 1999.