Dodd-Frank Act: Agencies' Efforts to Analyze and Coordinate Their Rules
Published: 2012-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Dodd-Frank Act requires or authorizes various federal agencies to issue hundreds of rules to implement reforms intended to strengthen the financial services industry. GAO is required to annually study financial services regulations. This report examines (1) the regulatory analyses federal agencies performed for rules issued pursuant to the Dodd-Frank Act; (2) how the agencies consulted with each other in implementing the final rules to avoid duplication or conflicts; and (3) what is known about the impact of the Dodd-Frank Act rules. GAO identified 66 final Dodd-Frank Act rules in effect between July 21, 2011, and July 23, 2012. GAO examined the regulatory analyses for the 54 regulations that were substantive and thus required regulatory analyses; conducted case studies on the regulatory analyses for 4 of the 19 major rules; conducted case studies on interagency coordination for 3 other rules; and developed indicators to assess the impact of the acts systemic risk provisions and regulations.
section_title: What GAO Found
paragraphs: Federal agencies conducted the regulatory analyses required by various federal statutes for all 54 regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that GAO reviewed. As part of their analyses, the agencies generally considered, but typically did not quantify or monetize, the benefits and costs of these rules. Most of the federal financial regulators, as independent regulatory agencies, are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by the Office of Management and Budget (OMB). Although most financial regulators are not required to follow OMB's guidance, they told GAO that they attempt to follow it in principle or spirit. GAO's review of selected rules found that regulators did not consistently follow key elements of the OMB guidance in their regulatory analyses. For example, while some regulators identified the benefits and costs of their chosen regulatory approach in proposed rules, they did not evaluate their chosen approach compared to the benefits and costs of alternative approaches. GAO previously recommended that regulators more fully incorporate the OMB guidance into their rulemaking policies, and the Office of Comptroller of the Currency and the Securities and Exchange Commission have done so. By not more closely following OMB's guidance, other financial regulators continue to miss an opportunity to improve their analyses.
Federal financial agencies continue to coordinate on rulemakings informally in order to reduce duplication and overlap in regulations and for other purposes, but interagency coordination does not necessarily eliminate the potential for differences in related rules. Agencies coordinated on 19 of the 54 substantive regulations that GAO reviewed. For most of the 19 regulations, the Dodd-Frank Act required the agencies to coordinate, but agencies also voluntarily coordinated with other U.S. and international regulators on some of their rulemakings. According to the regulators, most interagency coordination is informal and conducted at the staff level. GAO's review of selected rules shows that differences between related rules may remain even when coordination occurs. According to regulators, such differences may result from differences in their jurisdictions or the markets. Finally, the Financial Stability Oversight Council (FSOC) has not yet implemented GAO's previous recommendation to work with regulators to establish formal interagency coordination policies.
Most Dodd-Frank Act regulations have not been finalized or in place for sufficient time for their full impacts to materialize. Recognizing these and other limitations, GAO took a multipronged approach to assess the impact of some of the act's provisions and rules, with an initial focus on the act's systemic risk goals. First, GAO developed indicators to monitor changes in certain characteristics of U.S. bank holding companies subject to enhanced prudential regulation under the Dodd-Frank Act (U.S. bank SIFIs). Although the indicators do not identify causal links between their changes and the act--and many other factors can affect SIFIs--some indicators suggest that since 2010 U.S. bank SIFIs, on average, have decreased their leverage and enhanced their liquidity. Second, empirical results of GAO's regression analysis suggest that, to date, the act may have had little effect on U.S. bank SIFIs' funding costs but may have helped improve their safety and soundness. GAO plans to update its analyses in future reports, including adding indicators for other Dodd-Frank Act provisions and regulations.
section_title: What GAO Recommends
paragraphs: GAO is not making new recommendations in this report but reiterates its 2011 recommendations that the federal financial regulators more fully incorporate OMBs guidance into their rulemaking policies and that FSOC work with federal financial regulators to establish formal interagency coordination policies for rulemaking. The agencies provided written and technical comments on a draft of this report, and neither agreed nor disagreed with the reports findings.

section_title: Letter
paragraphs: The 2007-2009 financial crisis created major disruptions in significant  parts of the U.S. financial system and threatened the solvency of some  large financial institutions, prompting the federal government to take  extraordinary steps to moderate the adverse economic impacts. In  response to the crisis, Congress passed the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act) in 2010, which  includes numerous reforms to strengthen oversight of financial services  firms and consolidate certain consumer protection responsibilities in the  Bureau of Consumer Financial Protection, commonly known as the  Consumer Financial Protection Bureau (CFPB). The act requires or  authorizes various federal agencies to issue hundreds of regulations to  implement its reforms. As agencies have turned their attention to  implementing these requirements, some industry associations and others  have raised concerns about the potential impact of the regulations,  individually and cumulatively, on financial markets and financial and  nonfinancial institutions.
Agencies can anticipate and evaluate the consequences of their  regulations through regulatory analysis, which provides a formal way of  organizing evidence that can help in understanding potential effects of  new regulations. Benefit-cost analysis, the primary tool used for  regulatory analysis, helps to identify the regulatory alternatives with the  greatest net benefits. We, along with the Office of Management and  Budget (OMB) and others, have identified benefit-cost analysis as a  useful tool that can inform decision making. The systematic process of  determining benefits and costs helps decision makers organize and  evaluate information about, and identify trade-offs among, alternatives.  Because of the merits of benefit-cost analysis, many agencies are  directed by statute or executive order to conduct such analysis as part of  rulemaking. For example, Executive Order 12,866 (E.O. 12,866) requires  executive agencies to assess anticipated costs and benefits not only of  the proposed regulatory action but also of any alternatives. However, this order does not apply to independent regulatory agencies, including the  banking, futures, and securities regulators (federal financial regulators).
Section 1573(a) of the Department of Defense and Full-Year Continuing  Appropriations Act of 2011 amends the Dodd-Frank Act and directs GAO  to conduct an annual study of financial services regulations, including  those of CFPB. mandate.development of rules and regulations related to the Dodd-Frank Act.   Specifically, this report examines     In November 2011, we issued our first report under this    Since that report, we have continued to monitor the  the regulatory analyses, including benefit-cost analyses, that federal  financial regulators have performed to assess the potential impact of  selected final rules issued pursuant to the Dodd-Frank Act; how federal financial regulators consulted with each other in  implementing selected final rules issued pursuant to the Dodd-Frank  Act to avoid duplication or conflicts; and what is known about the impact of the Dodd-Frank Act regulations on  the financial marketplace.
Pub. L. No. 112-10, § 1573(a), 125 Stat. 38, 138-39 (2011) (codified at 12 U.S.C. §  5496b). Under the mandate, we are directed to analyze (1) the impact of regulation on the  financial marketplace, including the effects on the safety and soundness of regulated  entities, cost and availability of credit, savings realized by consumers, reductions in  consumer paperwork burden, changes in personal and small business bankruptcy filings,  and costs of compliance with rules, including whether relevant federal agencies are  applying sound cost-benefit analysis in promulgating rules; (2) efforts to avoid duplicative  or conflicting rulemakings, information requests, and examinations; and (3) other matters  deemed appropriate by the Comptroller General. As agreed with congressional staff, the  focus of our reviews will be limited to the financial regulations promulgated pursuant to the  Dodd-Frank Act. conducted. Combined with the 32 rules we identified in our first report,  we identified 98 Dodd-Frank Act rules in effect as of July 23, 2012. To  assess the regulatory analyses of the agencies, we reviewed the 66 rules  that were issued and became effective between July 21, 2011, and July  23, 2012.  Of these rules, 54 are substantive regulations while 12 are  interpretive rules; general statements of policy; and rules that deal with  agency organization, procedure, or practice.  Unlike interpretive rules,  general statements of policy, and rules that deal with agency  organization, procedure, or practice, substantive regulations are subject  to the notice-and-comment rulemaking requirements of the Administrative  Procedure Act (APA) and generally include some form of regulatory  analysis.  Thus, our review focused on the 54 substantive regulations for  our analysis. Of the 54 regulations, 19 rules were determined by the  regulators and OMB to be “major” rules that could have an annual impact  on the economy of $100 million or more. For agencies subject to E.O.  12866, such major rules would be considered significant regulatory  actions and subject to formal benefit-cost analysis. Three federal  financial regulators issued 18 of the 19 major rules: the Board of  Governors of the Federal Reserve System (Federal Reserve), Commodity  Futures Trading Commission (CFTC), and Securities and Exchange  Commission (SEC).  In addition, the Department of the Treasury  (Treasury), which is subject to E.O. 12,866, issued the other major rule  pursuant to the Dodd-Frank Act. We selected four major rules for in-depth  review and compared the analyses conducted to the principles outlined in  OMB Circular A-4, which provides guidance to federal agencies on the  development of regulatory analysis.  Within our scope period, the  Federal Reserve and Treasury each issued one major rule that we  selected.  We selected the lone SEC major rule during the period that  implemented new statutory authority.  CFTC issued several major rules,  and we selected a rule based on our discussions with current and former  CFTC staff. We interviewed agency staffs and reviewed documentation  from the agencies to assess the quality of the benefit-cost or similar  analyses. We also reviewed statutes, regulations, agency guidance, and  other documentation to identify the analyses federal financial regulators  were required to conduct and how the agency intended to conduct them.
To examine interagency coordination among or between federal financial  regulators in developing rules, we reviewed the 66 Dodd-Frank rules that  were issued and became effective between July 21, 2011, and July 23,  2012, to identify which required interagency coordination and document  whether such coordination occurred. We identified 19 rules that required  interagency coordination. Of the rules requiring interagency coordination,  we selected three for case studies to examine the extent to which and  how agencies coordinated to avoid conflict and duplication in rulemaking.   We selected the rules to include at least one that two or more regulators  jointly issued and at least one that a single regulator issued. We also  selected rules to include as many of the federal financial regulators as  possible, including the Federal Reserve, CFTC, SEC, the Office of the  Comptroller of the Currency (OCC), and the Federal Deposit Insurance  Corporation (FDIC).  We interviewed agency staff and reviewed  documentation from the agencies to assess the extent to which and how  agencies coordinated to avoid conflict and duplication in rulemaking.
To examine the impact of Dodd-Frank Act regulations on the financial  marketplace, we took a multipronged approach. We developed a set of  indicators to monitor changes in certain characteristics of systemically  important financial institutions (SIFI) that might be affected by Dodd-Frank  Act regulations.Dodd-Frank Act, the act itself, related regulations, academic studies,  GAO and agency reports, and other relevant documentation. Although  changes in the indicators may be suggestive of the impact of the act on  SIFIs, the indicators have a number of limitations, including that they do  not identify any causal linkages between the act and changes in the  indicators. Moreover, factors other than the act affect SIFIs and, thus, the  indicators. Additionally, we developed a set of indicators related to the (1)  cost of credit provided by bank SIFIs and (2) safety and soundness of  bank SIFIs. We used regression analysis to estimate the changes in the  indicators of bank SIFIs that may be associated with Dodd-Frank Act  provisions and proposed regulations related to the enhanced prudential  regulation of these bank holding companies by the Federal Reserve.  Our  analysis does not differentiate the effects of the act from simultaneous  changes in economic conditions or other factors that may affect such  companies. We obtained and addressed high-level comments and  suggestions on all our indicators from Financial Stability Oversight  Council (FSOC) staff and two other market experts. Finally, we analyzed  the initial impacts of several major rules that were issued pursuant to the  Dodd-Frank Act and have been final for around 1 year or more.  As part  of that work, we reviewed selected regulations, analyzed available data  about the potential impacts of the regulations, and interviewed agency  officials and market participants about such impacts. Appendix I contains  additional information on our scope and methodology.
To that end, we reviewed the legislative history of the  We conducted this performance audit from December 2011 to December  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Financial Services Regulation
paragraphs: The U.S. financial regulatory structure is a complex system of multiple  federal and state regulators as well as self-regulatory organizations  (SRO) that operate largely along functional lines. That is, financial  products or activities generally are regulated according to their function,  no matter who offers the product or participates in the activity. The  functional regulator approach is intended to provide consistency in  regulation, focus regulatory restrictions on the relevant functional areas,  and avoid the potential need for regulatory agencies to develop expertise  in all aspects of financial regulation.
In the banking industry, the specific regulatory configuration depends on  the type of charter the banking institution chooses. Charter types for  depository institutions include commercial banks, thrifts, and credit  unions. These charters may be obtained at the state or federal level. The  federal prudential banking regulators—all of which generally may issue  regulations and take enforcement actions against industry participants  within their jurisdiction—are identified in table 1.
In addition, the Dodd-Frank Act created CFPB as an independent bureau  within the Federal Reserve System that is responsible for regulating the  offering and provision of consumer financial products and services under  the federal consumer financial laws.  Under the Dodd-Frank Act, at the  designated transfer date, certain authority vested in the prudential  regulators transferred to CFPB.
The securities and futures industries are regulated under a combination of  self-regulation (subject to oversight by the appropriate federal regulator)  and direct oversight by SEC and CFTC, respectively. SEC oversees the  securities industry SROs, and the securities industry as a whole, and is  responsible for administering federal securities laws and developing  regulations for the industry. SEC’s overall mission includes protecting  investors; maintaining fair, orderly, and efficient markets; and facilitating  capital formation. CFTC oversees the futures industry and its SROs.  Under the Dodd-Frank Act, CFTC also has extensive responsibilities for  the regulation of swaps and certain entities involved in the swaps  markets.  CFTC has responsibility for administering federal legislation and  developing comprehensive regulations to protect the public from fraud  and manipulation, to insure the financial integrity of transactions, and to  reduce systemic risk in the marketplace.
In addition, the Dodd-Frank Act created FSOC. FSOC’s three primary  purposes are to identify risks to the financial stability of the United States,  promote market discipline, and respond to emerging threats to the  stability of the U.S. financial system. FSOC consists of 10 voting  members and 5 nonvoting members and is chaired by the Secretary of  the Treasury. In consultation with the other FSOC members, the  Secretary is responsible for regular consultation with the financial  regulatory entities and other appropriate organizations of foreign  governments or international organizations.
section_title: Regulations and Federal Rulemaking
paragraphs: The federal government uses regulation to implement public policy.  Section 553 of APA contains requirements for the most common type of  federal rulemaking—informal rulemaking or “notice and comment”  rulemaking. While there are inter- and intra-agency variations in the  informal rulemaking process, federal financial regulators generally share  three basic rulemaking steps or phases:   Initiation of rulemaking action. During initiation, agencies gather  information that would allow them to determine whether rulemaking is  needed and identify potential regulatory options. To gather information  on the need for rulemaking and potential regulatory options, agencies  may hold meetings with interested parties or issue an advanced  notice of proposed rulemaking. At this time, the agencies also will  identify the resources needed for the rulemaking and may draft  concept documents for agency management that summarize the  issues, present the regulatory options, and identify needed resources.
Development of proposed rule. During this phase of the rulemaking  process, an agency will draft the notice of proposed rulemaking,  including the preamble (which is the portion of the rule that informs  the public of the supporting reasons and purpose of the rule) and the  rule language. The agency will begin to address analytical and  procedural requirements in this phase. The agency provides  “interested persons” with an opportunity to comment on the proposed  rule, generally for a period of at least 30 days.
Development of final rule. In the third phase, the agency repeats, as  needed, the steps used during development of the proposed rule.  Once the comment period closes for the proposed rule, the agency  either would modify the proposed rule to incorporate comments or  address the comments in the final rule release. This phase also  includes opportunities for internal and external review. As published in  the Federal Register, the final rule includes the date on which it  becomes effective.
APA’s notice and comment procedures exclude certain categories of  rules, including interpretative rules; general statements of policy; rules  that deal with agency organization, procedure, or practice; or rules for  which the agency finds (for good cause) that notice and public comment  procedures are impracticable, unnecessary or contrary to the public  interest.
section_title: Dodd-Frank Act Regulations
paragraphs: Under the Dodd-Frank Act, federal financial regulatory agencies are  directed or have the authority to issue hundreds of regulations to  implement the act’s provisions. In some cases, the act gives the agencies  little or no discretion in deciding how to implement the provisions. For  instance, the Dodd-Frank Act made permanent a temporary increase in  the FDIC deposit insurance coverage amount ($100,000 to $250,000);  therefore, FDIC revised its implementing regulation to conform to the  change. However, other rulemaking provisions in the act appear to be  discretionary in nature, stating that (1) certain agencies may issue rules to  implement particular provisions or that the agencies may issue  regulations that they decide are “necessary and appropriate”; or (2)  agencies must issue regulations to implement particular provisions but  have some level of discretion over the substance of the regulations. As a  result, for these rulemaking provisions, the agencies may decide to  promulgate rules for some or all of the provisions, and may have broad  discretion to decide what these rules will contain and what exemptions, if  any, will apply.
In many instances, exemptions to Dodd-Frank Act provisions are  encompassed in definitions of certain terms that are broadly established  in statute and require clarification through regulation. Persons or entities  that meet the regulatory definitions are subject to the provision, and those  that do not meet the definitions are not.  For example, CFTC and SEC  promulgated a regulation that defined the terms ‘‘swap dealer,’’ ‘‘security- based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based  swap participant,’’ and ‘‘eligible contract participant.’’  Persons that do  not meet the definitions of these terms may not be subject to the Dodd- Frank Act provisions concerning swaps and security-based swaps,  including registration, margin, capital, business conduct, and other  requirements.  Similarly, FSOC promulgated a regulation and interpretive  guidance regarding the specific criteria and analytic framework FSOC  would apply in determining whether a nonbank financial company could  pose a threat to the financial stability of the United States.  Financial  firms that are not designated by FSOC, acting pursuant to the statutory  standards, would not be subject to enhanced prudential supervision by  the Federal Reserve.
section_title: Regulatory Analyses Provide Limited Information about Benefits and Costs of Chosen or Alternative Approaches
paragraphs: Federal agencies conducted the regulatory analyses required by various  federal statutes for all 54 Dodd-Frank Act regulations that we reviewed.  As part of their analyses, the agencies generally considered, but typically  did not quantify or monetize, the benefits and costs of these regulations.  As independent regulatory agencies, the federal financial regulators are  not subject to executive orders that require comprehensive benefit-cost  analysis in accordance with guidance issued by OMB.  While most  financial regulators said that they attempt to follow OMB’s guidance in  principle or spirit, we found that they did not consistently follow key  elements of the guidance in their regulatory analyses. We previously  recommended that regulators should more fully incorporate the OMB  guidance into their rulemaking policies.
subsections: section_title: Regulators Were Not Required to Assess Benefits and Costs of Regulatory Alternatives
paragraphs: As part of their rulemakings, federal agencies generally must conduct  regulatory analysis pursuant to the Paperwork Reduction Act (PRA) and  the Regulatory Flexibility Act (RFA), among other statutes.RFA require federal agencies to assess various impacts and costs of their  rules, but do not require the agencies to formally assess the benefits and  costs of alternative regulatory approaches or the reason for selecting one  alternative over another. In addition to these requirements, authorizing or  other statutes require certain federal financial regulators to consider   PRA and  specific benefits, costs, and impacts of their rulemakings, as the following  describes.
CFTC, under section 15(a) of the Commodity Exchange Act, is  required to consider the benefits and costs of its action before  promulgating a regulation under the Commodity Exchange Act or  issuing certain orders. Section 15(a) further specifies that the benefits  and costs shall be evaluated in light of the following five broad areas  of market and public concern: (1) protection of market participants and  the public; (2) efficiency, competitiveness, and financial integrity of  futures markets; (3) price discovery; (4) sound risk-management  practices; and (5) other public interest considerations.
Under the Consumer Financial Protection Act (Title X of the Dodd- Frank Act), CFPB must consider the potential benefits and costs of its  rules for consumers and entities that offer or provide consumer  financial products and services. These include potential reductions in  consumer access to products or services, the impacts on depository  institutions with $10 billion or less in assets, as directed by 12 U.S.C.  § 5516, and the impacts on consumers in rural areas. RFA analysis, CFPB also must describe any projected increase in the  cost of credit for small entities and any significant alternatives that  would minimize such increases for small entities.  In addition to the protection of investors, SEC must consider whether  a rule will promote efficiency, competition, and capital formation  whenever it is engaged in rulemaking and is required to consider or  determine whether an action is necessary or appropriate in the public  interest. SEC also must consider the impact that any rule  promulgated under the Securities Exchange Act would have on  competition. This provision states that a rule should not be adopted  if it would impose a burden on competition that is not necessary or  appropriate to the act’s purposes.
12 U.S.C. § 5481(6).
The Electronic Funds Transfer Act (EFTA), as amended by the Dodd- Frank Act, requires the Federal Reserve to prepare an analysis of the  economic impact of a specific regulation that considers the costs and  benefits to financial institutions, consumers, and other users of  electronic fund transfers. The analysis must address the extent to  which additional paperwork would be required, the effect upon  competition in the provision of electronic banking services among  large and small financial institutions, and the availability of such  services to different classes of consumers, particularly low-income  consumers.
However, like PRA and RFA, none of these authorizing statutes prescribe  formal, comprehensive benefit and cost analyses that require the  identification and assessment of alternatives.
In contrast, Executive Order 12,866 (E.O. 12,866), supplemented by  Executive Order 13,563 (E.O. 13,563), requires covered federal agencies,  to the extent permitted by law and where applicable, to (1) assess  benefits and costs of available regulatory alternatives and (2) include both  quantifiable and qualitative measures of benefits and costs in their  analysis, recognizing that some benefits and costs are difficult to  quantify. According to OMB, such analysis can enable an agency to  learn if the benefits of a rule are likely to justify the costs and discover  which of the possible alternatives would yield the greatest net benefit or  be the most cost-effective.  In 2003, OMB issued Circular A-4 to provide  guidance to federal executive agencies on the development of regulatory  analysis as required by E.O. 12,866. The guidance defines good  regulatory analysis as including a statement of the need for the proposed  regulation, an assessment of alternatives, and an evaluation of the  benefits and costs of the proposed regulation and the alternatives. It also  standardizes the way benefits and costs of federal regulatory actions  should be measured and reported. Of the federal agencies included in our  review, only FSOC and Treasury are subject to E.O. 12,866. As  independent regulatory agencies, the federal financial regulators—CFPB,  CFTC, FDIC, the Federal Reserve, OCC, the National Credit Union  Administration (NCUA), and SEC—are not subject to E.O. 12,866 and  OMB’s Circular A-4.
Of the 66 Dodd-Frank Act rules within our scope, 54 regulations were  substantive—generally subject to public notice and comment under  APA—and required the agencies to conduct regulatory analysis. These  rules were issued individually or jointly by CFTC, FDIC, the Federal  Reserve, FSOC, NCUA, OCC, SEC, or Treasury. (See app. II for a list of the regulations within the scope of our review.)  In examining the  regulatory analyses conducted for these 54 regulations, we found the  following.
Agencies conducted the required regulatory analyses.  The  agencies conducted regulatory analysis pursuant to PRA and RFA for  all 54 regulations.  Agencies also conducted the analyses required  under their authorizing statutes.  Specifically, CFTC and SEC  individually or jointly issued 39 regulations and considered their  potential impact, including their benefits and costs in light of each  agency’s respective public interest considerations.
Agencies issued 19 major rules. Of the 54 regulations that were  issued and became effective between July 21, 2011, and July 23,  2012, the agencies identified 19 as being major rules—that is,  resulting in or likely to result in a $100 million annual impact on the  economy.  Specifically, CFTC issued 10 major rules; SEC issued 5  major rules; CFTC and SEC jointly issued 2 major rules; the Federal  Reserve issued 1 major rule; and Treasury issued 1 major rule.
One of the 19 major rules was subject to E.O. 12866 and its  benefit-cost analysis requirement.  Of the agencies that issued  major rules, only Treasury is subject to E.O. 12,866, which requires a  formal assessment of the benefits and costs of an economically  significant rule.  Thus, as required, Treasury analyzed the benefits  and costs of its proposed major rule.
Agencies considered the benefits and/or costs in the majority of  their rules, but did not generally quantify them.  As part of their  regulatory analyses or in response to public comments received on  their proposed rules, the agencies frequently discussed the potential  benefits and costs of their rules. For instance, CFTC and SEC asked  for public comments and data on the benefits and costs in all of their  proposed rules, and the other regulators generally asked for public  comments on the costs and, in many cases, benefits of their proposed  rules. For the 54 substantive Dodd-Frank Act regulations that we  reviewed, 49 regulations included discussions of potential benefits or  costs. The cost discussions primarily were qualitative except for the  PRA analysis, which typically included quantitative data (such as  hours or dollars spent to comply with paperwork-related  requirements).  Other potential costs, however, were less frequently  quantified.  In comparison, the benefit discussions largely were  qualitative and framed in terms of the objectives of the rules.
section_title: Regulators Generally Developed Selected Major Rules in Ways Consistent with the Principles, but not Certain Key Elements, of the OMB Guidance
paragraphs: Although independent federal financial regulators are not required to  follow OMB’s Circular A-4 when developing regulations, they told us that  they try to follow this guidance in principle or spirit.  As discussed in more  detail below, we previously found that the policies and procedures of  these agencies did not fully reflect OMB guidance and recommended that  they incorporate the guidance more fully in their rulemaking policies and  procedures. To assess the extent to which the regulators follow Circular  A-4, we examined four major rules (see table 2).  Specifically, we  examined whether the regulators (1) identified the problem to be  addressed by the regulation and the significance of the problem; (2)  considered alternatives reflecting the range of statutory discretion; and (3)  assessed the benefits and costs of the regulation.
While the regulators identified the problem to be addressed in their rule  proposals, CFTC, the Federal Reserve, and SEC did not present benefit- cost information in ways consistent with certain key elements of OMB’s  Circular A-4. For example, CFTC and SEC did not evaluate the benefits  and costs of regulatory alternatives they considered for key provisions  compared to their chosen approach. Also, because of the lack of data and  for other reasons, the agencies generally did not quantitatively analyze  the benefits and, to a lesser degree, costs in their rules.  Agencies’  approaches for calculating a baseline against which to compare benefits  and costs of regulatory alternatives in their analysis varied, and agency  staffs told us that the lack of data complicated such efforts.
Two of the major rules we reviewed did not evaluate alternative  approaches for key provisions in their rule proposals, but the final rule  releases did evaluate alternatives considered by the agencies. In  implementing the Dodd-Frank provisions, the agencies exercised  discretion in designing the various requirements that composed their  rules, such as defining key terms and determining who will be subject to  the regulations and how. In their rule proposals, CFTC and SEC identified  alternative approaches for key provisions of their rule proposals. For  example, CFTC identified the consolidated tape approach—which is used  in the U.S. securities markets to publicly report data on securities—as an  alternative method for distributing swap transaction data in real time.   SEC considered requiring potential whistleblowers to use in-house  complaint and reporting procedures before they make a whistleblower  submission to SEC.  However, CFTC and SEC generally did not evaluate  the benefits and costs of their proposed rules’ requirements compared to  such alternative requirements.  Instead, their rule proposals only  presented the proposed set of requirements composing their rules and  discussed the potential benefits and costs of their overall regulatory  approaches. As part of their proposed rules, CFTC and SEC asked the  public for comments on a number of questions, including about possible  alternatives to proposed requirements. In their final rules, CFTC and  SEC noted that they considered alternatives provided by commenters on  the proposed rules and revised their rules, so as to reduce regulatory  burden or improve the effectiveness of the rules. This approach generally  is consistent with each agency’s guidance on regulatory analysis.  However, OMB guidance notes that good regulatory analysis is designed  to inform the public and other parts of the government of the effects of  alternative actions. Without information about the agency’s evaluation of  the benefits and costs of alternatives for key provisions, interested parties  may not have a clear understanding of the assumptions underlying the  rule’s requirements, which could hinder their ability to comment on  proposed rules.
One of the rules we reviewed identified the alternative approaches but did  not describe the reasons for choosing one alternative over another in its  rule proposal.  The Federal Reserve identified several alternative  approaches for key provisions in the rule proposal for implementing the  interchange fee rule and some of their potential benefits and costs.  However, it did not determine which of the alternatives would produce  greater net benefits or be more cost-effective. Instead, the Federal  Reserve asked the public to comment on which alternatives might be  preferable to the others based on several factors, including benefits and  costs.  Federal Reserve staff told us that they took this approach because  it was difficult to predict how market participants would respond to the  rule. They said that they had discussions with senior management about  alternative approaches and analyzed the costs and benefits of the  alternatives, including how alternatives could have different impacts on  different market participants, but this information was not contained in the  proposed rule.  In the final rule, responding to public comments, the  Federal Reserve selected one alternative over the other alternatives and  provided reasons for the selection. Without information about the  rationale for selecting one alternative over another in the proposed rule,  interested parties may not know how to effectively gauge the magnitude  of the potential effects, which could hinder their ability to comment on the  proposed rule.
Only one rule that we reviewed identified and evaluated alternative  regulatory approaches.  In its rule proposal, Treasury determined that the  fee assessment rule was a significant regulatory action under E.O. 12,866  and, thus, conducted a regulatory impact assessment. In its proposal,  Treasury identified, evaluated, and discussed several alternative  regulatory approaches. Treasury evaluated the impact of alternative  approaches on interested parties and selected the approach it viewed as  equitable and cost-effective, consistent with the OMB guidance.
The regulators generally did not quantitatively analyze the benefits and, to  a lesser degree, costs of the rules we reviewed. CFTC, the Federal  Reserve, and SEC did not quantitatively analyze the benefits of these  rules.  CFTC and SEC monetized and quantified paperwork-related costs  under PRA, but did not quantify any other costs.  Federal Reserve staff  told us that they monetized some of the direct costs of the debit card  interchange fee rule. Specifically, they conducted a survey to determine  an average debit card interchange fee in 2009 and used that data to help  establish the debit card interchange fee cap under the rule. However,  while the debit card interchange fee cap information was included in the  proposed rule, measures of revenue loss that could result from the rule  were not included. In contrast to the other rules we reviewed, Treasury  monetized and quantified some costs of the rule beyond paperwork- related costs.  Specifically, Treasury provided a range of estimated  assessment amounts that described the approximate size of the transfer  from assessed companies to the government.
As we have reported, the difficulty of reliably estimating the costs of  regulations to the financial services industry and the nation has long been  recognized, and the benefits of regulation generally are regarded as even  more difficult to measure. Similarly, Circular A-4 recognizes that some  important benefits and costs may be inherently too difficult to quantify or  monetize given current data and methods and recommends a careful  evaluation of qualitative benefits and costs. All of the rules we reviewed  included qualitative descriptions of the potential benefits and costs  associated with the rules. The agencies also generally included  qualitative information on the nature, timing, likelihood, location, and  distribution of the benefits and costs. For instance, in discussing the  benefits of the reporting and public dissemination requirements, CFTC  stated that it anticipates that the real-time reporting rule “will generate  several overarching, if presently unquantifiable, benefits to swaps market  participants and the public generally.  These include: mprovements in  market quality; price discovery; improved risk management; economies of  scale and greater efficiencies; and improved regulatory oversight.”  CFTC then went on to describe the ways in which these benefits might  accrue to market participants. However, some of the agencies did not  discuss the strengths and limitations of the qualitative information and did  not discuss key reasons why the benefits and costs could not be  quantified.
Also, the regulators did not consistently present analysis of any important  uncertainties connected with their regulatory decisions. For instance, the  Federal Reserve stated that the potential impacts of the debit card  interchange fee rule depended in large part on the reaction of certain  market actors to the rule. In contrast, we did not find a discussion of any  important uncertainties associated with SEC’s whistleblower rules, but  SEC staff told us that the inherent uncertainties in making predictions  about human behavior was a key reason why it was not possible to  engage in a quantitative analysis of the rule. However, we found that the  agencies generally based their analyses on the best reasonably available,  peer-reviewed economic information. Treasury described certain direct  costs associated with complying with the fee assessment rule. Treasury  used economic reasoning to identify some benefits or types of benefits  associated with the rule, particularly in considering the choice of  assessment methodology, which was the area of discretion left by  Congress to the agency.
We also found the regulators’ approaches for calculating a baseline  against which to compare benefits and costs of regulatory approaches  varied.  OMB’s Circular A-4 states that the baseline should be the best  assessment of the way the world would look absent the proposed action.  In cases where substantial portions of the rule may simply restate  statutory requirements that would be self-implementing, Circular A-4  provides for use of a prestatute baseline—that is, the baseline should  reflect the status quo before the statute was enacted.  However, the  guidance further states that if the agency is able to determine where it  has discretion in implementing a statute, it can use a post-statute  baseline to evaluate the discretionary elements of the action. CFTC and  SEC both did not establish post-statute baselines and instead evaluated  the benefits and costs of the discretionary elements of their rules in terms  of statutory objectives.  Specifically, CFTC evaluated each discretionary  element of the real-time reporting rule based on whether it met the  statutory objectives to reduce risk, increase transparency, and promote  market integrity.  Similarly, SEC evaluated each discretionary element  of the whistleblower protection rule according to four broad objectives  based on statutory goals and the nature of public comments.  We found  that the Federal Reserve generally took this approach in developing the  debit card interchange fee rule. In contrast, Treasury, which is subject to  E.O. 12,866, used a post-statute baseline to evaluate the discretionary  elements of the fee assessment rule. SEC staff said they would have  described the analysis somewhat differently under their new economic  analysis guidance (discussed below), which directs staff to consider the  overall economic impacts, including both those attributable to  congressional mandates and those that result from an exercise of  discretion.  SEC’s guidance states that this approach often will allow for a  more complete picture of a rule’s economic effects, particularly because  there are many situations in which it is difficult to distinguish between the  mandatory and discretionary components of a rule.
Agency staffs told us developing a baseline from which to assess the  benefits and costs of what would have happened in the absence of a  regulation was complicated by the lack of reliable data to quantify the  benefits and costs. For example, CFTC staff told us that they were  challenged because little public data were available about the opaque  swaps market. Moreover, because the rule created a new regulatory  regime, CFTC did not have the data needed for the analysis.  Instead,  CFTC had to rely on market participants to voluntarily provide it with  proprietary data. CFTC staff said that they did receive some proprietary  data but that they were incomplete. Similarly, for the whistleblower  protection rule, SEC staff said that they asked the public for data in their  draft rule but did not receive any.  In the absence of data, SEC cited  related research in its rule release, but staff noted that they were reluctant  to weigh this research too heavily because the programs covered in the  research differed in important respects from SEC’s program.  In addition,  Federal Reserve staff said that quantifying the effects of the debit card  interchange fee rule was a major challenge because of the lack of data.
section_title: Some Agencies’ Guidance on Regulatory Analysis Continues to Omit Key Elements of OMB’s Regulatory Guidance
paragraphs: Although not subject to E.O. 12,866 and, in turn, OMB Circular A-4, most  of the federal regulators told us that they try to follow Circular A-4 in  principle or spirit.  In our previous review, we found that the policies and  procedures of these regulators did not fully reflect OMB guidance and  recommended that they incorporate the guidance more fully in their  rulemaking policies and procedures.  For example, each federal regulator  has issued guidance generally explaining how its staff should analyze the  benefits and costs of the regulatory approach selected, but unlike the  OMB guidance, such guidance generally does not encourage staff to  identify and analyze the benefits and costs of available alternative  approaches. Since we issued our report, OCC and SEC have revised  their guidance, but the other agencies have not yet done so. CFTC last  revised its guidance in May 2011, and in May 2012 it signed a  Memorandum of Understanding with OMB that allows OMB staff to  provide technical assistance to CFTC staff as they consider the benefits  and costs of proposed and final rules.
Issued in March 2012, SEC guidance on economic analysis for  rulemakings closely follows E.O. 12,866 and Circular A-4. Specifically, SEC’s guidance defines the basic elements of good regulatory economic  analysis in a manner that closely parallels the elements listed in Circular  A-4: (1) a statement of the need for the proposed action; (2) the definition  of a baseline against which to measure the likely economic  consequences of the proposed regulation; (3) the identification of  alternative regulatory approaches; and (4) an evaluation of the benefits  and costs—both quantitative and qualitative—of the proposed action and  the main alternatives.  In addition, the guidance explains these elements  and describes the ways rulemaking teams can satisfy each of the  elements borrowing directly from Circular A-4. OCC guidance on  economic analysis defines the elements included in a full cost-benefit  analysis in a similar fashion and includes citations to specific sections of  Circular A-4 to guide staff through the application of each element.
For other federal financial regulators, by continuing to omit core elements  of OMB Circular A-4, their regulatory guidance may cause staff to  overlook or omit such best practices in their regulatory analysis. In turn,  the analyses produced may lack information that interested parties  (including consumers, investors, and other market participants) could use  to make more informed comments on proposed rules.  For example, in  our review of four major rules, we found that most of the agencies did not  consistently discuss how they selected one regulatory alternative over  another or assess the potential benefits and costs of available  alternatives. Without information about the benefits and costs of  alternatives that agencies considered, interested parties may not know  which alternatives were considered and the effects of such alternatives,  which could hinder their ability to comment on proposed rules. More fully  incorporating OMB’s guidance into their rulemaking guidance, as we  previously recommended, could help agencies produce more robust and  transparent rulemakings.
section_title: Regulators Continue to Coordinate Informally on Rulemakings, but Differences among Related Rules Still Exist
paragraphs: Federal financial regulators have continued to coordinate on rulemakings  informally, but coordination may not eliminate the potential for differences  in related rules. Regulators have coordinated on 19 of the 54 substantive  regulations that we reviewed, in some cases voluntarily coordinating their  activities and also extending coordination internationally. According to  agency staff, most interagency coordination during rulemaking largely  was informal and conducted at the staff level. Differences in rules could  remain after interagency coordination, because the rules reflected  differences in factors such as regulatory jurisdiction or market or product  type. While a few regulators have made progress on developing guidance  for interagency coordination during rulemaking, most have not.
subsections: section_title: Dodd-Frank Act and Regulators Recognize the Importance of Interagency Coordination
paragraphs: Both the Dodd-Frank Act and the federal financial regulators whom we  interviewed recognize the importance of interagency coordination during  the rulemaking process.  In general, coordination during the rulemaking  process occurs when two or more regulators jointly engage in activities to  reduce duplication and overlap in regulations. Effective coordination could  help regulators minimize or eliminate staff and industry burden,  administrative costs, conflicting regulations, unintended consequences,  and uncertainty among consumers and markets.
Recognizing the importance of coordination, the act imposes specific  interagency coordination and consultation requirements and  responsibilities on regulators or certain rules. For instance, section 171  (referred to as the Collins Amendment) requires that the appropriate  federal banking agencies establish a risk-based capital floor on a  consolidated basis.  In addition, while section 619 (referred to as the  Volcker Rule) does not require the federal banking agencies (FDIC, the  Federal Reserve, and OCC) to issue a joint rule together with CFTC and  SEC, it requires that they consult and coordinate with each other, in part  to better ensure that their regulations are comparable. Further, the act  broadly requires some regulators to coordinate when promulgating rules  for a particular regulatory area. For example, under Title VII, SEC and  CFTC must coordinate and consult with each other and prudential  regulators before starting rulemaking or issuing an order on swaps or  swap-related subjects—for the express purpose of assuring regulatory  consistency and comparability across the rules or orders. The act also  includes specific requirements for CFPB. Title X requires CFPB to consult  with the appropriate prudential regulators or other federal agencies, both  before proposing a rule and during the comment process, regarding  consistency with prudential, market, or systemic objectives administered  by such agencies.
Federal financial regulators also have highlighted the importance of  coordination during the rulemaking process.  For example, in testifying  about the need to coordinate agency rulemakings, FSOC’s chairperson  commented on the importance of coordinating both domestically and  internationally to prevent risks from migrating to regulatory gaps—as they  did before the 2007-2009 financial crisis—and to reduce U.S. vulnerability  to another financial crisis.  At the same time, we noted in a recent report  that the FSOC chairperson has recognized the challenges of coordinating  on the Dodd-Frank Act rulemakings assigned to specific FSOC  members. He noted that the coordination in the rulemaking process  represented a challenge because the Dodd-Frank Act left in place a  financial system with multiple, independent agencies with overlapping  jurisdictions and different responsibilities. However, the chairperson also  noted that certain agencies were working much more closely together  than they did before the creation of FSOC. This observation has been  repeated by other regulators, whose staffs have told us that interagency  coordination in rulemaking has increased since the passage of the Dodd- Frank Act.
section_title: Regulators Coordinated as Required, and Such Coordination Involved Around One-Third of Their Dodd-Frank Regulations
paragraphs: We found documentation of coordination among the rulemaking agency  and other domestic or international regulators for 19 of the 54 substantive  regulations that were issued and became effective between July 21,  2011, and July 23, 2012. The act required coordination in 16 of the 19  rulemakings.  Specifically, 6 of the 19 regulations were jointly issued by  two or more regulators and, thus, inherently required interagency  coordination (see table 3). The act stipulated coordination for 10 other  regulations.  In the Federal Register rule releases, we found evidence  documenting the coordination required by the act as well as voluntary  coordination with additional regulators. For example, FDIC’s regulation on  “Certain Orderly Liquidation Authority Provisions” described voluntary  coordination with the Federal Reserve. Similarly, CFTC was required to  coordinate with SEC on six swaps regulations it issued, but the agency  also coordinated with other regulators on two of those regulations.  Further, CFTC coordinated with foreign regulators on all six swaps  regulations. The act did not require coordination for the other three  regulations for which we found documentation of coordination, indicating  that the agencies voluntarily coordinated. For the remaining 35  regulations that we reviewed, which did not require interagency  coordination, we did not find any documentation of coordination among  the agencies.
Of the 19 regulations that we identified as having interagency  coordination, we selected three regulations to review in depth and sought  to cover as many regulators as possible that were required to coordinate  under the Dodd-Frank Act (see table 4). We examined when, how, and  the extent to which federal financial regulators coordinated.  We also  examined efforts undertaken by the regulators to avoid conflicts in the  rulemakings.
The regulators held some formal interagency meetings early on in the  rulemaking process; however, coordination was mostly informal and  conducted through e-mail, telephone conversations, and one-on-one  conversations between staff.  For example, at the initiation stage of the  risk-based capital rulemaking, FDIC, OCC, and the Federal Reserve held  a principal-level meeting to discuss the major issues relating to the  interpretation of the statutory requirement.  After this meeting, staffs  formed an interagency working group, comprised of staff from each  agency who, according to Federal Reserve staff, continually have worked  together on numerous capital rules and therefore have a very close  working relationship. Likewise, agency staffs said that after the initial  formal meetings on the other rulemakings that we reviewed, coordination  revolved around informal staff-level discussions. Coordination during the  proposed rule drafting stage typically was characterized by staff-level  conversations primarily through telephone calls or e-mails and some face- to-face meetings. Staffs would contact each other as issues arose to work  out conflicts or differences in agency viewpoints.  When issues could not  be resolved at the staff level, they were escalated to senior management,  but most issues were resolved and most coordination occurred at the staff  level throughout the drafting of the proposed rules, according to agency  staffs. For all three rulemakings reviewed, agency staffs coordinated at  least weekly through the proposal stage with the frequency of  coordination escalating as the proposed rule neared issuance.
After receiving public comments and while preparing the final rule, agency  staffs told us that they continued to coordinate with each other, but the  need for and level of interagency coordination varied by rule. For  instance, OCC, Federal Reserve, and FDIC staffs said that by the time  they reached the stage of drafting the final risk-based capital rule,  meetings were less frequent because the group already had worked out  most of the details. Coordination between CFTC and SEC also decreased  during this stage of the real-time reporting rulemaking. Conversely, CFTC  and SEC staffs said that interagency coordination continued to be  frequent while drafting the final swaps entities rule because after the  proposed rule was issued some differences in underlying definitions  remained, such as the definition for “highly leveraged.” The commissions  used public comments to the proposed rule to help them interpret and  come to consensus on the definitions. CFTC and SEC staffs met regularly  in this period to refine drafts, resolve issues, and convene an industry  roundtable.
The extent to which agencies coordinated with international regulators  varied in the three rulemakings that we reviewed.  For example, CFTC  and SEC coordinated with international regulators on swap rulemakings.  For the real-time reporting rule, CFTC coordinated with foreign regulators,  such as the Financial Services Authority and the European Commission,  which provided ideas on data reporting. On the swap entities rule, CFTC  and SEC staffs said that they participated in numerous conference calls  and meetings with various international regulators.
In contrast, the banking regulators did not meet with any international  regulators on the risk-based capital rule. The agency staffs said that they  were implementing a straightforward statutory provision that required little  interpretation and little amendment to the existing rules; therefore, staffs  said they did not need to seek input from international regulators as to  how to implement U.S. law. Staffs said that for less narrowly scoped  rules, where regulators have more discretion, they are more proactive in  reaching out to international regulators. FDIC staff cited, as an example,  the risk retention rule, for which they reached out to the European Union  to understand their approach.
Regulators who were responsible for the three rulemakings that we  reviewed said that they tried to identify potential areas of duplication or  conflict involving the rules. For the risk-based capital rule, the banking  regulators held discussions on regulatory conflict and duplication and  concluded that none would be created by this rule. For the swap entity  rule and the real-time reporting rule, CFTC and SEC identified potential  areas of conflict, which they were able to address through coordination.  For example, when developing the real-time reporting rule, CFTC and  SEC initially had different approaches about what type of entity would be  in charge of disseminating swap transaction data. SEC proposed that  only swap data repositories would be required to disseminate real-time  data, and CFTC initially proposed to require several different entities to do  so. SEC’s proposal, deciding that only swap data repositories would be  required to disseminate real-time swap data. Agency staffs said that this  harmonization should help to minimize the compliance cost burden  placed on market participants and allow for more efficient operation of  systems for the public dissemination of swap and security-based swap  market data.
Swap data repositories are new entities created by the Dodd-Frank Act in order to  provide a central facility for swap data reporting and recordkeeping. Under the act, all  swaps, whether cleared or uncleared, are required to be reported to registered swap data  repositories.  Pub. L. No. 111-203, § 727, 124 Stat. 1696 (2010) (codified at 7 U.S.C.  2(a)(13)(G)).
In some areas, differences in rules remained after interagency  coordination, due to differences in regulatory jurisdiction. In particular,  while CFTC and SEC reached consensus on the text for the jointly issued  swap entities rule, the regulators outlined different approaches in certain  parts of the rule as a result of their regulatory jurisdiction over different  product sets. For example, some of the language of the definitions for  “major swap participant” and “major security-based swap participant”  differs because the agencies each have jurisdiction over different  products and some of these products have different histories, markets,  and market sizes, according to CFTC and SEC staff. Also, in the real-time  reporting rule, CFTC, in its final rule, defined specific data fields to be  reported, while SEC, in its proposed rule, outlined broad data categories  and required swap data repositories to develop specific reporting  protocols. Agency staffs stated that while the approaches were different,  they were not inconsistent. The key factors the regulators considered  were whether the rules achieved the policy objectives and whether the  regulated entities could comply with both agencies’ rules given their  differences. It was determined that swap data repositories could develop  data reporting protocols that would comply with both agencies’ rules.
To document and communicate preliminary staff views on certain issues  to senior management, regulators use term sheets throughout the  rulemaking process. Although term sheets are primarily internal  documents, they were shared with staff at other regulators to  communicate views and elicit comments. These term sheets serve as a  formal mechanism to help initiate discussions of differences in the  regulators’ positions. Term sheets generally are drafted internally by staff  at each agency, shared between or among agency staff, and shared with  agency principals or senior management. CFTC and SEC created term  sheets for both the swap entities rule and the real-time reporting rule.  Conversely, for the risk-based capital rule, the banking regulators did not  create a term sheet because, according to OCC staff, the statutory  requirements for this rule were explicit and therefore a term sheet was not  required. However, staff noted that this was different from a standard  rulemaking where they typically would draft and share a term sheet.
section_title: Most Agencies Continue to Lack Formal Policies and Procedures to Guide Interagency Coordination
paragraphs: While a few agencies have made progress on developing policies for  interagency coordination for their rulemaking, most have not. In  November 2011, we reported that most of the federal financial agencies  lacked formal policies or procedures to guide their interagency  coordination in the rulemaking process. Federal financial regulators  informally coordinated on some of the final rules that we reviewed, but  most of the agencies lacked written policies and procedures to guide their  interagency coordination. Specifically, seven of nine agencies did not  have written policies and procedures to facilitate coordination on  rulemaking. The written policies and procedures that existed were  limited in their scope or applicability. The remaining two regulators, FDIC  and OCC, had rulemaking policies that include guidance on developing  interagency rules. As we previously reported, documented policies can  help ensure that adequate coordination takes place, help to improve  interagency relationships, and prevent the duplication of efforts at a time  when resources are extremely limited.
Since our November 2011 report, we found that OCC and CFPB have  further developed guidance on interagency coordination, but the other  agencies have not. CFPB has developed guidance that outlines the  agency’s approach to interagency consultation in rulemaking. The  document generally describes two rounds of consultation when drafting  the proposed rule and two rounds when addressing comments and  drafting the final rule. The guidance highlights the points in a rulemaking  at which staff should reach out to other regulators, the purpose of  consultation, and the length of time to allow for responses from  regulators. Similarly, OCC updated its rulemaking policy to include more  detail on what steps should be taken in coordination and who should be  involved.
In our November 2011 report, we recommended that FSOC work with the  federal financial regulators to establish formal coordination policies for  rulemaking that clarify issues, such as when coordination should occur,  the process that will be used to solicit and address comments, and what  role FSOC should play in facilitating coordination. While FSOC has not  implemented this recommendation, staff told us that they have developed  coordination processes around specific areas of the Dodd-Frank Act. For  example, FSOC staff said that they have coordinated closely with FDIC  on all rulemakings under Title II. In addition, FSOC developed written  guidance for coordination on rulemakings for enhanced prudential  standards for bank holding companies with $50 billion or more in total  consolidated assets and nonbank financial companies designated by  FSOC for Federal Reserve supervision under sections 165 and 166 of the  act. However, in a September 2012 report, we noted that a number of  industry representatives questioned why FSOC could not play a greater   In that report,  role in coordinating member agencies’ rulemaking efforts.we further noted that the FSOC chairperson, in consultation with the other  FSOC members, is responsible for regular consultation with the financial  regulatory entities and other appropriate organizations of foreign  governments or international organizations. We also reiterated our  previous recommendation by stating that FSOC should establish formal  collaboration and coordination policies for rulemaking.
section_title: Impacts of the Dodd- Frank Act Have Not Yet Fully Materialized and Remain Uncertain
paragraphs: The full impact of the Dodd-Frank Act remains uncertain. Although federal  agencies continue to implement the act through rulemakings, much work  remains. For example, according to one estimate, regulators have  finalized less than half of the total rules that may be needed to implement  the act. Furthermore, sufficient time has not elapsed to measure the  impact of those rules that are final and effective. As we previously noted,  even when the act’s reforms are fully implemented, it will take time for the  financial services industry to comply with the array of new regulations.
The evolving nature of implementation makes isolating the effects of the  Dodd-Frank Act on the U.S. financial marketplace difficult. This task is  made more difficult by the many factors that can affect the financial  marketplace, including factors that could have an even greater impact  than the act.
Recognizing these limitations and difficulties, we developed a  multipronged approach to analyze current data and trends that might be  indicative of some of the Dodd-Frank Act’s initial impacts, as institutions  react to issued and expected rules. First, the act contains provisions that  serve to enhance the resilience of certain bank and nonbank financial  companies and reduce the potential for financial distress in any one of  these companies to affect the financial system and economy. Specifically,  the Dodd-Frank Act requires the Federal Reserve to impose enhanced  prudential standards and oversight on bank holding companies with $50  billion or more in total consolidated assets and nonbank financial   We developed indicators to monitor  companies designated by FSOC.changes in certain SIFI characteristics. Although the indicators may be  suggestive of the act’s impact, our indicators do not identify causal links  between their changes and the act. Further, many other factors can affect  SIFIs and, thus, the indicators. As new data become available, we expect  to update and, as warranted, revise our indicators and create additional  ones to cover other provisions. Second, we used difference-in-difference  analysis to infer the act’s impact on the provision of credit by and the  safety and soundness of bank SIFIs. The analysis is subject to limitations,  in part because factors other than the act could be affecting these  entities. Third, we analyzed the impact of several major rules that were  issued pursuant to the Dodd-Frank Act and have been final for around a  year or more.
subsections: section_title: Indicators Suggest Increased SIFI Resiliency and Provide Baselines for Future Analysis
paragraphs: The 2007-2009 financial crisis demonstrated that some financial  institutions, including some nonbank financial companies (e.g., AIG), had  grown so large, interconnected, complex, and leveraged, that their failure  could threaten the stability of the U.S. financial system and the global  economy. Financial institutions, markets, and infrastructure that make up  the U.S. financial system provide services to the U.S. and global  economies, such as helping to allocate funds, allowing households and  businesses to manage their risks, and facilitating financial transactions  that support economic activity. The sudden collapses and near-collapses  of major financial institutions, including major nonbank financial  institutions, were among the most destabilizing events of the 2007-2009  financial crisis. In addition, large, complex financial institutions that are  perceived to be “too big to fail” can increase uncertainty in periods of  market turmoil and reinforce destabilizing reactions within the financial  system.
According to its legislative history, the Dodd-Frank Act contains  provisions intended to reduce the risk of failure of a large, complex  financial institution and the damage that such a failure could do to the  economy. Such provisions include (1) establishing FSOC to identify and  respond to emerging threats to the stability of the U.S. financial system;  (2) authorizing FSOC to designate a nonbank financial company for  Federal Reserve supervision if FSOC determines it could pose a threat to  the financial stability of the United States  based on the company’s size,  leverage, interconnectedness, or other factors; and (3) directing the  Federal Reserve to impose enhanced prudential standards and oversight  on bank holding companies with $50 billion or more in total consolidated  assets (referred to as bank SIFIs in this report) and nonbank financial  companies designated by FSOC (referred to as nonbank SIFIs in this  report). The Dodd-Frank Act also is intended to reduce market  expectations of future federal rescues of large, interconnected, and  complex firms using taxpayer dollars. Under the act, bank holding  companies with $50 billion or more in total consolidated assets and  nonbank financial companies designated by FSOC for Federal Reserve  supervision are required to develop plans for their rapid and orderly  resolution. Additionally, FDIC is given new orderly liquidation authority to  act as a receiver of a troubled financial firm whose failure could threaten  financial stability so as to protect the U.S. financial system and the wider  economy.
Some Dodd-Frank Act provisions may result in adjustments to SIFIs’ size,  interconnectedness, complexity, leverage, or liquidity over time. We developed indicators to monitor changes in some of these SIFI  characteristics. The size and complexity indicators reflect the potential  for a single company’s financial distress to affect the financial system and  economy. The leverage and liquidity indicators reflect a SIFI’s resilience  to shocks or its vulnerability to financial distress. FSOC has not yet  designated any nonbank financial firms for Federal Reserve  supervision. As a result, we focus our analysis on U.S. bank SIFIs.  Our indicators have limitations. For example, the indicators do not identify  causal links between changes in SIFI characteristics and the act. Rather,  the indicators track or begin to track changes in the size, complexity,  leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act  was passed to examine whether the changes are consistent with the act.  However, other factors—including the economic downturn, international  banking standards agreed upon by the Basel Committee on Banking  Supervision (Basel Committee), European debt crisis, and monetary  policy actions—also affect bank holding companies and, thus, the  indicators. These factors may have a greater effect than the Dodd-Frank  Act on SIFIs. In addition, some rules implementing SIFI-related provisions  have not yet been proposed or finalized. Thus, trends in our indicators  include the effects of these rules only insofar as SIFIs have changed their  behavior in response to issued rules and in anticipation of expected rules.  In this sense, our indicators provide a baseline against which to compare  future trends.
Table 5 summarizes the changes in our bank SIFI indicators. The size  indicators do not provide a clear trend between the third quarter of 2010  and the second quarter of 2012. Additionally, we have only one data point  in the complexity indicator, but our data suggest that the largest bank  SIFIs generally were more complex organizationally than other bank  SIFIs. Lastly, the indicators suggest that bank SIFIs, on average, have  become less leveraged since the third quarter of 2010, and their liquidity  also appears to have improved. Trends in our leverage and liquidity  indicators appear to be consistent with an improvement in SIFIs’  resilience to shocks.
Ben S. Bernanke, “Financial Reform to Address Systemic Risk,” (Speech to the Council  on Foreign Relations, Washington, D.C., Mar. 10, 2009). size of a financial institution may prevent the institution from growing so  large that it is perceived by the market as too big to fail, such limits also  may prevent the institution from achieving economies of scale and  benefiting from diversification.
We developed three indicators of size. The first indicator tracks the  number of bank SIFIs. The second indicator measures a SIFI’s size  based on the total assets on its balance sheet.  The third indicator  measures the extent to which industry assets are concentrated among  the individual SIFIs, reflecting a SIFI’s size relative to the size of the  industry. A limitation of these indicators is that they do not include an  institution’s off-balance sheet activities and thus may understate the  amount of financial services or intermediation an institution provides.   Furthermore, asset size alone is not an accurate determinant of systemic  risk, as an institution’s systemic risk significance also depends on other  factors, such as its complexity and interconnectedness.
As shown in figure 1, seven U.S. bank SIFIs had more than $500 billion in  total consolidated assets (referred to as large bank SIFIs in this report) in  the third quarter of 2010 and in the second quarter of 2012.bank SIFIs were considerably larger than the other bank SIFIs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFPB, CFTC, FDIC, the Federal  Reserve Board, FSOC, NCUA, OCC, OFR, SEC, and Treasury for review  and comment. SEC and Treasury provided written comments that we  have reprinted in appendixes VII and VIII, respectively.  All of the  agencies also provided technical comments, which we have incorporated,  as appropriate.
In their comments, the agencies neither agreed nor disagreed with the  report’s findings.  In its letter, Treasury noted that FSOC agrees that  successful implementation of the Dodd-Frank Act rulemakings will require  member agencies to work together, even if such coordination is not  specifically required under the Dodd-Frank Act. Treasury also noted that  FSOC has served as a forum for discussion among members and  member agencies, through various FSOC meetings, committee meetings,  and subcommittee meetings.  Finally, the letter describes FSOC’s effort to  continue monitor potential risks to the financial stability and implement  other statutory requirements.
In its letter, SEC noted that it revised its guidance on economic analysis  in March 2012, in part in response to a recommendation in our 2011  report that federal financial regulators more fully incorporate OMB’s  regulatory analysis guidance into their rulemaking policies.  SEC’s letter  stated that the revised guidance already has improved the quality of  economic analysis in its rulemakings and internal rule-writing processes.   SEC also noted that FSOC has fostered a healthy and positive sense of  collaboration among the financial regulators. SEC remains amenable to  working with FSOC on formal coordination policies, as GAO previously  recommended, but noted that FSOC's efforts should fully respect the  independence of the respective member agencies regarding the  substance of the rules for which they are responsible and the mission of  FSOC itself.
We are sending copies of this report to CFPB, CFTC, FDIC, the Federal  Reserve Board, FSOC, NCUA, OCC, OFR, SEC, Treasury, interested  congressional committees, members, and others.  This report will also be  available at no charge on our website at http://www.gao.gov.
Should you or your staff have questions concerning this report, please  contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report.  Key contributors to this report are listed in  appendix IX.
section_title: Appendix I: Scope and Methodology
paragraphs: Our objectives in this report were to examine (1) the regulatory analyses,  including benefit-cost analyses, federal financial regulators have  performed to assess the potential impact of selected final rules issued  pursuant to the Dodd-Frank Act; (2) how federal financial regulators  consulted with each other in implementing selected final rules issued  pursuant to the Dodd-Frank Act to avoid duplication or conflicts; and (3)  what is known about the impact of the final Dodd-Frank Act regulations on  the financial markets.
To address the first two objectives, we limited our analysis to the final  rules issued pursuant to the Dodd-Frank Act that were effective between  July 21, 2011, and July 23, 2012, a total of 66 rules (see app. II).  To  identify these rules, we used a website maintained by the Federal  Reserve Bank of St. Louis that tracks Dodd-Frank Act regulations. We  corroborated the data with information on Dodd-Frank Act rulemaking  compiled by the law firm Davis Polk & Wardwell LLP.
To address our first objective, we reviewed statutes, regulations, GAO  studies, and other documentation to identify the benefit-cost or similar  analyses federal financial regulators are required to conduct in  conjunction with rulemaking.  For each of the 66 rules within our scope,  we prepared individual summaries using a data collection instrument  (DCI). The criteria used in the DCI were generally developed based on  the regulatory analyses required of federal financial regulators and Office  of Management and Budget (OMB) Circular A-4, which is considered best  practice for regulatory analysis.  We used the completed summaries to  develop a table showing the extent to which the federal financial  regulators addressed the criteria for each of the Dodd-Frank Act  regulations. We selected 4 of the 66 rules for in-depth review, comparing  the benefit-cost or similar analyses to specific principles in OMB Circular  A-4. We selected the rules for in-depth review based on whether the rule  was deemed a major rule (i.e., whether it is anticipated to have an annual  effect on the economy of $100 million or more) by the responsible agency  and OMB. We generally found that the financial regulators do not state in  the Federal Register notice whether the rule is major. However, we  learned that regulators are required to submit major rules to GAO under  the Congressional Review Act (CRA) for the purpose of ensuring that the  regulators followed certain requirements in conducting the rulemaking,  and GAO maintains a database of major rules.  Our search of the CRA  database showed that federal financial regulators issued 19 major Dodd- Frank Act rules within our scope.  To further narrow the list of rules for in- depth review, we determined to include at least one rule from each of the  federal financial regulators.  We identified major rules issued by only  three financial regulators: the Commodity Futures Trading Commission  (CFTC), the Board of Governors of the Federal Reserve (Federal  Reserve), and the Securities and Exchange Commission (SEC).  In  addition, the Department of the Treasury (Treasury) issued a major rule  during the scope period.  The Federal Reserve and Treasury each issued  only one major rule during our scope period—the Debit Card Interchange  Fee rule and the Assessment of Fees on Large Bank Holding Companies  to Cover the Expenses of the Financial Research Fund, respectively.  SEC and CFTC issued multiple major rules during the period. To further  narrow the list of rules for in-depth review, we determined to include only  rules implementing a new regulatory authority rather than amending a  preexisting regulatory authority.  For SEC, only one rule met this  criterion—the Securities Whistleblower Incentives and Protections rule.   CFTC issued several major rules that met this criterion so to further  narrow the list of rules for in-depth review, we consulted with a former  CFTC economist and solicited his opinion whether it would be appropriate  for GAO to assess the Real-Time Public Reporting of Swap Transaction  Data rule, and he agreed.  To compare these rules to the principles in  Circular A-4, we developed a DCI with the principles and applied the DCI  to all four rules.  In conducting each individual analysis, we reviewed the  Federal Register notices prepared by the agencies during the course of  the rulemaking.  We also interviewed officials from CFTC, the Federal  Reserve, SEC, and Treasury to determine the extent to which benefit-cost  or similar analyses were conducted.
To address our second objective, we reviewed the Dodd-Frank Act,  regulations, and studies, including GAO reports, to identify the  coordination and consultation requirements federal financial regulators  are required to conduct in conjunction with rulemaking. For each of the 66  rules in our scope, we reviewed the rule releases to determine the rules  on which agencies coordinated with other federal financial regulators and  international financial regulators. From our review of the rule releases, we  developed a table that shows the rules that involved coordination,  agencies involved, nature of coordination, whether coordination was  required or voluntary, and whether the agencies coordinated with  international regulators. Rules that may have involved interagency  coordination in the rulemaking but did not expressly mention such  coordination in the rule release are not included in this table. Of the 19  rules that we determined involved interagency coordination, we selected  3 rules to review in depth to assess how and the extent to which federal  financial regulators coordinated, focusing on actions they took to avoid  conflict and duplication in rulemakings. In selecting rules to review in  depth, we sought to include at least one rule that was jointly issued and  therefore implicitly required coordination and at least one rule that was  issued by a single agency and involved coordination with another agency.   We also sought broad coverage of agencies issuing substantive Dodd- Frank Act rules. We ultimately selected two joint rules and one rule issued  by a single agency, including rules issued by FDIC, OCC, Federal  Reserve, CFTC, and SEC. In reviewing each rule, we reviewed the  Federal Register notices for each rule, and we interviewed officials from  each agency to determine how and the extent to which coordination took  place to avoid duplication and conflict. We also interviewed officials at  FSOC and CFPB to get an understanding of their role in interagency  coordination for Dodd-Frank Act rulemakings.
To address our third objective, we took a multipronged approach to  analyze what is known about the impact of the Dodd-Frank Act on the  financial marketplace. First, the act contains provisions that serve to  enhance the resilience of certain bank and nonbank financial companies  and reduce the potential for any one of these companies to affect the  financial system and economy. Specifically, the Dodd-Frank Act requires  the Federal Reserve to impose enhanced prudential standards and  oversight on bank holding companies with $50 billion or more in total  consolidated assets and nonbank financial companies designated by  FSOC. For purposes of this report, we refer to these bank and nonbank  financial companies as bank systemically important financial institutions  (bank SIFI) and nonbank systemically important financial institutions  (nonbank SIFI), respectively, or collectively as SIFIs. We developed  indicators to monitor changes in certain characteristics of SIFIs that may  be suggestive of the impact of these reforms. FSOC has not yet  designated any nonbank financial firms for Federal Reserve enhanced   To  supervision. As a result, we focus our analysis on U.S. bank SIFIs.understand the rationale behind the act’s focus on enhanced SIFI  regulation and oversight, we reviewed the legislative history of the act, the  act itself, related regulations, academic studies, GAO and agency reports,  and other relevant documentation. To inform our choice of indicators, we  analyzed the provisions and related rulemakings most relevant to bank  SIFIs. Our analysis and indicators for this report focus on bank SIFIs’  asset size, interconnectedness, complexity, leverage, and liquidity. We  developed our indicators of bank SIFIs’ size, leverage, and liquidity using  quarterly data for bank holding companies from SNL Financial and  quarterly data on the gross domestic product (GDP) deflator from the  Bureau of Economic Analysis, both for the period from 2006 quarter 1 to  2012 quarter 2. We developed our indicators of bank SIFIs’ complexity  using data from the Federal Reserve Board’s National Information Center  as of October 2012. As new data become available, we expect to update  and, as warranted, revise our indicators and create additional indicators  to cover other provisions.
Second, we use difference-in-difference regression analysis to infer the  act’s impact on the provision of credit by and the safety and soundness of  U.S. bank SIFIs. The key element of our analysis is that the Dodd-Frank  Act subjects some bank holding companies to enhanced oversight and  regulation but not other bank holding companies. Specifically, the act  requires the Federal Reserve to impose a number of enhanced prudential  standards on bank holding companies with total consolidated assets of  $50 billion or more (bank SIFI) , while bank holding companies with  assets less than $50 billion (non-SIFI banks) are not subject to such  enhanced oversight and regulation. As a result, we were able to compare  funding costs, capital adequacy, asset quality, earnings, and liquidity for  bank SIFIs and non-SIFI banks before and after the Dodd-Frank Act. All  else being equal, the difference in the differences is the inferred effect of  the Dodd-Frank Act on bank SIFIs. For our analysis, we used quarterly  data on bank holding companies from SNL Financial and quarterly data  on commercial banks and savings banks from FDIC and the Federal  Financial Institutions Examinations Council, all for the period from 2006  quarter 1 to 2012 quarter 2 (see app. IV for details). Lastly, for all of our  indicators, we obtained and addressed high-level comments and  suggestions from FSOC staff and two other market experts.
Third, we analyze the impact of several major rules that were issued  pursuant to the Dodd-Frank Act and have been final for around a year or  more. There were 44 final rules as of July 21, 2011, 7 of which were  major rules. We judgmentally selected 4 out of those 7 rules for impact  analyses, based largely on data availability. Our selected rules implement  provisions that serve specific investor or consumer protection purposes.  We first analyzed the Federal Reserve’s Debit Interchange Fees and  Routing Rule (Regulation II). As part of that work, we reviewed selected  statutes and regulations, analyzed available data and documents from the  Federal Reserve, GAO, and market participants and experts, and  interviewed agency officials and market experts. Additionally, we  analyzed two SEC rules on asset-backed securities (ABS): Issuer Review  of Assets in Offerings of ABS and Disclosure for ABS Required by  Section 945 and 943 of the Act, respectively. To do this, we reviewed  selected statutes and regulations and analyzed data on ABS issuances  obtained from the Securities Industry and Financial Markets Association  (SIFMA). Lastly, we analyzed SEC’s rule on Shareholder Approval of  Executive Compensation and Golden Parachute Compensation. As part  of that analysis, we reviewed selected regulations and analyzed available  data on shareholder votes on executive compensation that we obtained  from Institutional Shareholder Services, Inc., a proxy advisory firm that  advises institutional investors on how to vote proxies and provides  consulting services to corporations seeking to improve their corporate  governance. For all of the data described above, we assessed the  reliability of the data and found it to be reliable for our purposes.
We conducted this performance audit from December 2011 to December  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Tables Listing Dodd-Frank Act Rules Effective as of July 23, 2012
paragraphs: The following table lists the Dodd-Frank Act rules that we identified as  final and effective during the scope period for this review—July 21, 2011,  and July 23, 2012  The following table lists the Dodd-Frank Act rules that we identified as  final and effective during the scope period for our first review—July 21,  2010, and July 21, 2011.
section_title: Appendix III: Summary of Rulemakings Related to the Dodd-Frank Act Provisions Applicable to Systemically Important Financial Institutions
paragraphs: The Dodd-Frank Act contains several provisions that apply to nonbank  financial companies designated by the Financial Stability Oversight  Council for Federal Reserve supervision and enhanced prudential  standards (nonbank SIFI) and bank holding companies with $50 billion or  more in total consolidated assets (bank SIFI). Table 12 summarizes those  provisions and the rulemakings, including their status, to implement those  provisions.
section_title: Appendix IV: Econometric Analyses of the Impact of Enhanced Regulation and Oversight on SIFIs
subsections: section_title: Methodology
paragraphs: We conducted an econometric analysis to assess the impact of the Dodd- Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they  provide and (2) their safety and soundness. Our multivariate econometric  model used a difference-in-difference design that exploits the fact that the  Dodd-Frank Act subjects bank holding companies with total consolidated  assets of $50 billion or more to enhanced regulation by the Federal  Reserve but not others, so we can view bank holding companies with  total consolidated assets of $50 billion or more (bank SIFIs) as the  treatment group and other bank holding companies as the control group.  We compared the changes in the characteristics of U.S. bank SIFIs over  time to changes in the characteristics of other U.S. bank holding  companies over time. All else being equal, the difference in the  differences is the impact of new requirements for bank SIFIs primarily tied  to enhanced regulation and oversight under the Federal Reserve.
Our general regression specification is the following:  ybq = α + β + γSIFIbq + X’bqΘ + εbq  where b denotes the bank holding company, q denotes the quarter, ybq is  the dependent variable, α is a bank holding company-specific intercept,  β is a quarter-specific intercept, SIFIbq is an indicator variable that equals  1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is  a list of other independent variables, and εbq is an error term.  We  estimated the parameters of the model using quarterly data on top-tier  bank holding companies  for the period from the first quarter of 2006 to  the second quarter of 2012.
The parameters of interest are the γ, the coefficients on the SIFI  indicators in the quarters starting with the treatment start date of the third  quarter of 2010 through the second quarter of 2012. The Dodd-Frank Act  was enacted in July 2010 (the third quarter of 2010), so the SIFI indicator  is equal to zero for all bank holding companies for all quarters from the  first quarter of 2006 to the second quarter of 2010. The SIFI indicator is  equal to 1 for all bank holding companies with assets of $50 billion or  more for the third quarter of 2010 through the second quarter of 2012 and  the SIFI indicator is equal to zero for all other bank holding companies for  those quarters. Thus, for quarters from the third of 2010 to the second of  2012, the parameter γ measures the average difference in the dependent  variable between bank SIFIs and other bank holding companies in those  quarters relative to the base quarter.
We use different dependent variables (ybq) to estimate the impacts of the  new requirements for SIFIs on the cost of credit provided by bank SIFIs  and on various aspects of bank SIFIs’ safety and soundness, including  capital adequacy, asset quality, earnings, and liquidity.
Funding cost.  A bank holding company’s funding cost is the cost of  deposits or liabilities that it then uses to make loans or otherwise  acquire assets.  More specifically, a bank holding company’s funding  cost is the interest rate it pays when it borrows funds.  All else being  equal, the greater a bank holding company’s funding cost, the greater  the interest rate it charges when it makes loans.  We measure funding  cost as an institution’s interest expense as a percent of interest- bearing liabilities.
Capital adequacy.  Capital absorbs losses, promotes public  confidence, helps restrict excessive asset growth, and provides  protection to creditors.  We use two alternative measures of capital  adequacy: tangible common equity as a percent of total assets and  tangible common equity as a percent of risk-weighted assets.
Asset quality.  Asset quality reflects the quantity of existing and  potential credit risk associated with the institution’s loan and  investment portfolios and other assets, as well as off-balance sheet  transactions.  Asset quality also reflects the ability of management to  identify and manage credit risk.  We measure asset quality as  performing assets as a percent of total assets, where performing  assets are equal to total assets less assets 90 days or more past due  and still accruing interest, assets in non-accrual status, and other real  estate owned.
Earnings. Earnings are the initial safeguard against the risks of  engaging in the banking business and represent the first line of  defense against capital depletion that can result from declining asset  values. We measure earnings as net income as a percent of total  assets.
Liquidity. Liquidity represents the ability to fund assets and meet  obligations as they become due, and liquidity risk is the risk of not  being able to obtain funds at a reasonable price within a reasonable  time period to meet obligations as they become due. We use two  different variables to measure liquidity. The first variable is liquid  assets as a percent of volatile liabilities. This variable is similar in spirit  to the liquidity coverage ratio introduced by the Basel Committee on  Banking Supervision and measures a bank holding company’s  capacity to meet its liquidity needs under a significantly severe  liquidity stress scenario. We measure liquid assets as the sum of cash  and balances due from depository institutions, securities (less pledged  securities), federal funds sold and reverse repurchases, and trading  assets. We measure volatile liabilities as the sum of federal funds  purchased and repurchase agreements, trading liabilities (less  derivatives with negative fair value), other borrowed funds, deposits  held in foreign offices, and large time deposits held in domestic  offices. Large time deposits are defined as time deposits greater than  $100,000 prior to March 2010 and as time deposits greater than  $250,000 in and after March 2010.
The second liquidity variable is stable liabilities as a percent of total  liabilities. This variable measures the extent to which a bank holding  company relies on stable funding sources to finance its assets and  activities. This variable is related in spirit to the net stable funding ratio  introduced by the Basel Committee on Banking Supervision, which  measures the amount of stable funding based on the liquidity  characteristics of an institution’s assets and activities over a 1 year  horizon.  We measure stable funding as total liabilities minus volatile  liabilities as described earlier.
Finally, we include a limited number of independent variables (Xbq) to  control for things that may differentially affect SIFIs and non-SIFIs in the  quarters since the Dodd-Frank Act was enacted.  We include these  variables to reduce the likelihood that our estimates of the impact of new  requirements for SIFIs are reflecting something other than the impact of  the Dodd-Frank Act’s new requirements for SIFIs.
Nontraditional income. Nontraditional income generally captures  income from capital market activities. Bank holding companies with  more nontraditional income are likely to have different business  models than those with more income from traditional banking  activities. Changes in capital markets in the period since the Dodd- Frank Act was enacted may have had a greater effect on bank holding  companies with more nontraditional income. If bank SIFIs typically  have more nontraditional income than other bank holding companies,  then changes in capital markets in the time since the Dodd-Frank Act  was enacted may have differentially affected the two groups. We  measure nontraditional income as the sum of trading revenue;  investment banking, advisory, brokerage, and underwriting fees and  commissions; venture capital revenue; insurance commissions and  fees; and interest income from trading assets less associated interest  expense, and we express nontraditional income as a percent of  operating revenue.
Securitization income. Bank holding companies with more income  from securitization are likely to have different business models than  those with more income from traditional banking associated with an  originate-to-hold strategy for loans. Changes in the market for  securitized products in the period since the Dodd-Frank Act was  enacted may thus have had a greater effect on bank holding  companies with more securitization income. If bank SIFIs typically  have more securitization income than other bank holding companies,  then changes in the market for securitized products in the time since  the Dodd-Frank Act was enacted may have differentially affected the  two groups. We measure securitization income as the sum of net  servicing fees, net securitization income, and interest and dividend  income on mortgage-backed securities minus associated interest  expense, and we express securitization as a percent of operating  revenue. Operating revenue is the sum of interest income and  noninterest income less interest expense and loan loss provisions.
Foreign exposure. Changes in other countries, such as the  sovereign debt crisis in Europe, may have a larger effect on bank  holding companies with more foreign exposure. If bank SIFIs typically  have more foreign exposure than other bank holding companies, then  changes in foreign markets may have differentially affected the two  groups. We measure foreign exposure as the sum of foreign debt  securities (held-to-maturity and available-for-sale), foreign bank loans,  commercial and industrial loans to non-U.S. addresses, and foreign  government loans. We express foreign exposure as a percent of total  assets.
Size. We include size because bank SIFIs tend to be larger than other  bank holding companies, and market pressures or other forces not  otherwise accounted for may have differentially affected large and  small bank holding companies in the time since the Dodd-Frank Act  was enacted. We measure the size of a bank holding company as the  natural logarithm of its total assets.
TARP participation. We control for whether or not a bank holding  company participated in the Troubled Asset Relief Program (TARP) to  differentiate any impact that this program may have had from the  impact of the Dodd-Frank Act.
We also conducted several sets of robustness checks:
We restricted our sample to the set of institutions with assets that are  “close” to the $50 billion cutoff for enhanced prudential regulation for  bank SIFIs. Specifically, we analyzed two restricted samples of bank  holding companies: (1) bank holding companies with assets between  $1 billion and $100 billion and (2) bank holding companies with assets  between $25 billion and $75 billion.
We examined different treatment start dates.  Specifically, we allowed  the Dodd-Frank Act’s new requirements for SIFIs to have an impact in  2009q3, 1 year prior to the passage of the act. We did so to allow for  the possibility that institutions began to react to the act’s requirements  in anticipation of the act being passed.
We analyzed alternative measures of capital adequacy, including  equity capital as a percent of total assets and Tier 1 capital as a  percent of risk-weighted assets.
We analyzed commercial banks and savings banks (banks). In this  case, we identified a bank as a SIFI if it is a subsidiary of a SIFI bank  holding company.
subsections: section_title: Data
paragraphs: We conducted our analysis using quarterly data on bank holding  companies from the Federal Reserve Board and SNL Financial for the  period from the first quarter of 2006 to the second quarter of 2012. We  also used quarterly data on commercial banks and savings banks from  the Federal Deposit Insurance Corporation (FDIC), Federal Financial  Institutions Exanimation Council (FFIEC), and SNL Financial for the same  time period for one of our robustness checks.
section_title: Results
paragraphs: The Dodd-Frank Act appears to be associated with an increase in bank  SIFIs’ funding costs in the second quarter of 2012, but not in other  quarters (see table 13). Over the period from the third quarter of 2010 to  the second quarter of 2012, bank SIFIs’ funding costs ranged from about  0.02 percentage points lower to about 0.05 percentage points higher than  they otherwise would have been since the Dodd-Frank Act. As a group,  the estimates are jointly significant.  However, the individual estimates are  not significantly different from zero for quarters other than the second  quarter of 2012.  These estimates suggest that the Dodd-Frank Act’s new  requirements for SIFIs have had little effect on bank SIFIs’ funding costs.   To the extent that borrowing costs are a function of funding costs, the  new requirements for SIFIs likely have had little effect on the cost of credit  thus far.
Our results suggest that the Dodd-Frank Act is associated with  improvements in most aspects of bank SIFIs’ safety and soundness.  Bank SIFIs appear to be holding more capital than they otherwise would  have held since the Dodd-Frank Act was enacted. The quality of assets  on the balance sheets of bank SIFIs also seems to have improved since  enactment. The act is associated with higher earnings for bank SIFIs in  the first four quarters after enactment. It is also associated with improved  liquidity as measured by the extent to which a bank holding company is  using stable sources of funding. Only liquidity measured by the capacity  of a bank holding company’s liquid assets to cover its volatile liabilities  has not clearly improved since the enactment of the act. Thus, the Dodd- Frank Act appears to be broadly associated with improvements in most  indicators of safety and soundness for bank SIFIs.
Our approach allows us to partially differentiate changes in funding costs,  capital adequacy, asset quality, earnings, and liquidity associated with the  Dodd-Frank Act from changes due to other factors. However, several  factors make isolating and measuring the impact of the Dodd-Frank Act’s  new requirements for SIFIs challenging. The effects of the Dodd-Frank  Act cannot be differentiated from simultaneous changes in economic  conditions, such as the pace of the recovery from the recent recession, or  regulations, such as those stemming from Basel III, that may differentially  affect bank SIFIs and other bank holding companies. In addition, many of  the new requirements for SIFIs have yet to be implemented. For example,  the Federal Reserve has indicated that it will impose a capital surcharge  and liquidity ratios on at least some SIFIs, but the exact form and scope  of these requirements is not yet known. Nevertheless, our estimates are  suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and  provide a baseline against which to compare future trends.
The results of our robustness checks are as follows:
Our results are generally robust to restricting the set of bank holding  companies we analyze to those with assets of $1 billion-$100 billion.
Our results are not generally robust to restricting the set of bank  holding companies we analyze to those with assets of $25 billion-$75  billion, but this is likely to be a result of the small number of bank  holding companies (29) that fit this criteria.
Our results are generally robust to starting the “treatment” in 2009 Q3,  1 year prior to the passage of the Dodd-Frank Act.  In addition, our  estimates suggest that the impact of new requirements for SIFIs of the  Dodd-Frank Act may have preceded the enactment of the act itself.   This finding is consistent with the theory that bank holding companies  began to change their behavior in anticipation of the act’s  requirements, perhaps as information about the content of the act  became available and the likelihood of its passage increased.  However, there may be other explanations, including anticipation of  Basel III requirements, reactions to stress tests, and market pressures  to improve capital adequacy and liquidity.
Our results for the impact on capital adequacy are generally similar for  alternative measures of capital adequacy.
Our results for banks’ funding costs, asset quality, earnings, and  liquidity as measured by liquid assets as a percent of volatile liabilities  were generally similar to our baseline results for bank holding  companies, but our results for capital adequacy and liquidity as  measured by stable liabilities as a percent of total liabilities were not.  The differences may reflect the impact of nonbank subsidiaries on  bank holding companies or a number of other factors.
section_title: Appendix V: Impact Analysis of the Debit Card Interchange Fees and Routing Rule
paragraphs: The Federal Reserve’s adoption of Regulation II (Debit Card Interchange  Fees and Routing), which implements section 1075 of the Dodd-Frank  Act, generally has reduced debit card interchange fees. However, debit  card issuers, payment card networks, and merchants are continuing to  adjust strategically to the rule; thus, the rule’s impact has not yet been  fully realized. Typically, consumers use debit cards as a cashless form of  payment that electronically accesses funds from a cardholder’s bank  account. A consumer using a debit card authenticates and completes a  transaction by entering a personal identification number (PIN) or a  signature. The parties involved in a debit card transaction are (1) the  customer or debit cardholder; (2) the bank that issued the debit card to  the customer (issuer bank); (3) the merchant; (4) the merchant’s bank  (called the acquirer bank); and (4) the payment card network that  processes the transaction between the merchant acquirer bank and the  issuer bank. In a debit transaction, the merchant receives the amount of  the purchase minus a fee that it must pay to its acquirer bank. This fee  includes the debit interchange fee that the acquirer bank pays to the  issuer bank. Interchange fees generally combine an ad-valorem  component, which depends on the amount of the transaction, and a fixed- fee component. Additionally, before Regulation II was implemented, fees  varied more widely based on, among other things, the type of merchant.
Although payment card networks do not receive the debit interchange  fees, they set the fees. Debit cards represent a two-sided market that  involves cardholders and merchants. Cardholders benefit if their cards  are accepted by a wide range of merchants, and merchants benefit if their  ability to accept cards results in higher sales. In theory, a card network  sets its interchange fees to balance the demand on the two sides of the  market. It sets interchange fees high enough to attract issuers to issue  debit cards processed by the network but low enough for merchants to be  willing to accept the debit cards. Before the enactment of section 1075 of  the Dodd-Frank Act, debit interchange fees had been increasing, creating  controversy in the industry about the appropriate level of debit  interchange fees in the United States, which some have stated were  among the highest in the world. For example, some merchants stated  that network competition led to higher, not lower, interchange fees as  networks strived to attract issuer banks (who ultimately receive  interchange fee revenue).
Section 1075 amends the Electronic Fund Transfer Act (EFTA) by adding  a new section 920 regarding interchange transaction fees and rules for  payment card transactions. As required by EFTA section 920, Regulation  II establishes standards for assessing whether debit card interchange  fees received by issuers are reasonable and proportional to the costs  incurred by issuers for electronic debit transactions. The rule sets a cap  on the maximum permissible interchange fee that an issuer may receive  for an electronic debit transaction at $0.21 per transaction, plus 5 basis  points multiplied by the transaction’s value. An issuer bank that complies with Regulation II’s fraud-prevention standards may receive no more than  an additional 1 cent per transaction. The fee cap became effective on  October 1, 2011. However, as required by EFTA section 920, the rule  exempts from the fee cap issuers that have, together with their affiliates,  less than $10 billion in assets, and transactions made using debit cards  issued pursuant to government-administered payment programs or  certain reloadable prepaid cards. In addition, Regulation II prohibits  issuers and card networks from restricting the number of networks over  which electronic debit transactions may be processed to less than two  unaffiliated networks. This prohibition became effective on April 1, 2012.  The rule further prohibits issuers and networks from inhibiting a merchant  from directing the routing of an electronic debit transaction over any  network allowed by the issuer.October 1, 2011.
subsections: section_title: Initial Impact on Large and Small Banks
paragraphs: Thus far, large banks that issue debit cards have experienced a decline in  their debit interchange fees as a result of Regulation II, but small banks  generally have not. As noted above, issuers that, together with their  affiliates, have $10 billion or more in assets are subject to the debit card  interchange fee cap. According to the Federal Reserve, 568 banks were   Issuers below the $10  subject to the fee cap in 2012 (covered issuers).billion asset threshold are exempt from the fee cap (exempt issuers).  According to the Federal Reserve, over 14,300 banks, credit unions,  savings and loans, and savings banks were exempt from the fee cap in  2012.
Initial data collected by the Federal Reserve indicate that covered issuers  have experienced a significant decline in their debit interchange fees and  fee income as a result of Regulation II. Data published by the Federal  Reserve show that 15 of 16 card networks provided a lower interchange  fee, on average, to covered issuers after the rule took effect.Specifically, the data show that the average interchange fee received by  covered issuers declined 52 percent, from $0.50 in the first three quarters  of 2011 to $0.24 in the fourth quarter. During the same period, the  interchange fee as a percentage of the average transaction value for  covered issuers declined from 1.29 percent to 0.60 percent.
Our own analysis also suggests that the fee cap is associated with  reduced interchange fee income for covered banks. To further assess  the impact of the fee cap on covered banks, we conducted an  econometric analysis of debit and credit card interchange fee income  earned by banks from the first quarter of 2008 through the second quarter  of 2012. As discussed, Regulation II subjects covered issuers but not  exempt issuers to the fee cap. This allows us to compare the incomes  earned by covered and exempt banks before and after the fee cap’s  effective date in the fourth quarter of 2011. All else being equal, the post- cap changes in income among the two groups can be inferred as the  effect of the fee cap on interchange fee income earned by covered banks.  Our estimates suggest that interchange fees collected by covered banks,  as a percent of their assets, were about 0.007 to 0.008 percentage points  lower than they otherwise would have been in the absence of the fee cap.  For a bank with assets of $50 billion, this amounts to $3.5 million to $4  million in reduced interchange fee income.
In comparison, Regulation II’s fee cap appears initially to have had a  limited impact on exempt issuers. As we recently reported, initial data  collected by the Federal Reserve indicate that card networks largely have  adopted a two-tiered interchange fee structure after the implementation of  Regulation II, to the benefit of exempt issuers. Data published by the  Federal Reserve from 16 card networks show 15 of 16 card networks  provided a higher interchange fee, on average, to exempt issuers than  covered issuers after the rule took effect. The data further showed that  the average interchange fee received by exempt issuers declined by  $0.02, or around 5 percent, after the rule took effect—declining from  $0.45 over the first three quarters of 2011 to $0.43 in the fourth quarter of  2011. Over the same period, the interchange fee as a percentage of the  average transaction value for exempt issuers declined from 1.16 to 1.10  percent.
Although the fee cap appeared to have a limited impact on exempt  issuers, such issuers remain concerned about the potential for their  interchange fee income to decline over the long term. For example, some  have noted that (1) the prohibition on network exclusivity and routing  restrictions may lead networks to lower their interchange fees, in part to  encourage merchants to route debit card transactions through their  networks; or (2) economic forces may cause networks not to maintain a  two-tiered fee structure that provides a meaningful differential between  fees for exempt and covered issuers. However, some merchants and  others have noted that major card networks have adopted a two-tiered  fee structure and have an incentive to maintain that structure to attract  exempt issuers.
section_title: Impact on Merchants and Consumers
paragraphs: Regulation II’s fee cap generally has reduced debit card interchange fees,  which likely has resulted or will result in savings for merchants. According  to the Federal Reserve and industry experts, the merchant acquirer  market is competitive. Thus, the decrease in interchange fees likely has  translated or will translate into lower merchant acquirer fees. Some noted  that large merchants likely reaped immediate benefits from the fee cap,  because their acquirer fees probably were reduced when interchange  fees declined. In contrast, they noted that smaller merchants often opt for  blended fee structures under which, for example, the merchants may be  charged a flat fee per electronic payment transaction and, thus, not  immediately receive the benefit of decreases in interchange fees because  merchants may still be locked into contracts that have these fee  structures.is expected to cause acquirer banks to adjust the fees they charge to  merchants and pass on any savings to avoid losing merchant business.
In either case, competition in the supply of acquirer services  In its final rule, the Federal Reserve noted that merchants could be  negatively affected if large issuers were able to persuade their customers  to pay with credit cards rather than debit cards, since credit cards  generally have higher interchange fees. While issuers can take this strategy, merchants also can provide incentives to consumers to  encourage them to use debit cards instead of credit cards. The Dodd- Frank Act requires networks to allow merchants to offer discounts to  consumers based on whether they pay by cash, check, debit card, or  credit card. In addition, a recent report stated that an antitrust settlement  between the Department of Justice and VISA and MasterCard requires  the networks to loosen past restrictions on merchants’ ability to offer  discounts to consumers based on the payment method, brand, and  product. This allows merchants accepting cards by those networks to  provide incentives to encourage customers to complete their debit  transactions using their PIN rather than signature.data on whether issuers or merchants are engaging in such strategies.
Some types of merchants may be adversely affected by Regulation II. As  mentioned earlier, the fee cap generally led payment card networks to set  their debit interchange fees at the level of the cap for covered issuers.  However, the interchange fee for small-ticket transactions, or transactions  that are generally under $15, was sometimes below the fee cap before  Regulation II became effective. For example, according to the  International Franchise Association and the National Council of Chain  Restaurants, before Regulation II a $5 transaction could incur 11.75 cents  in debit interchange fees. Under the current fee cap of 21 cents plus 0.05 percent of the transaction value, the interchange fee for a $5  covered transaction is 21.25 cents, about 80 percent higher.  As a result,  merchants that have a high volume of small value transactions, such as  quick serving restaurants, transit authorities, and self-service and vending  operators, could be worse off after the adoption of Regulation II.
It is not practical to measure the extent to which consumers in the many  markets where debit transactions are possible have been affected by  Regulation II.  First, one probable outcome is that at least a fraction of  the merchants have passed some of their cost savings onto consumers.  As noted by the Federal Reserve, whether merchants reduce their prices  as a result of lower interchange fees will depend on the competitiveness  of the various retail markets. In a competitive market with low margins,  merchants likely have to pass on at least part of their cost savings to  consumers. On the other hand, the loss in debit interchange fee income  by large banks may lead them to seek ways to recover that lost income.  As mentioned by the Federal Reserve, banks may try to recoup lost  interchange fee income by introducing new bank service and product  fees, possibly making banking services too costly for at least some  customers. Our analysis (discussed previously) suggests that covered  banks have recovered some of their lost interchange fee revenue, such  as through increased revenue from service charges on deposit  accounts.
section_title: Impact on Competition and Interchange Fees
paragraphs: Historically, issuers have determined which and how many signature and  PIN networks may process their debit card transactions. Before and after  Regulation II, issuers generally use only one signature network (e.g.,  VISA or MasterCard) to process their debit card transactions that are  completed using a signature. Additionally, as stated in the final rule,  before Regulation II issuer banks, or in some cases, networks controlled  the merchant routing of debit transactions. For example, an issuer bank  could require a PIN transaction to be routed over a particular network,  even if other PIN networks were available to route the transaction. The  rule also states that, prior to Regulation II, issuer banks were able to limit  the networks enabled on their cards through exclusive contracts with  networks. For example, some issuers had agreed to restrict their cards’  signature debit functionality to a single signature debit network and their  PIN debit functionality to the signature network’s affiliated PIN network.  According to the Federal Reserve’s 2009 survey data of large issuers,  most debit cards from large bank issuers carried only one PIN network,  and the cards’ PIN and signature networks typically were affiliated with  each other.
Regulation II contains two provisions that serve to provide merchants with  the option of selecting the network to process their debit card transactions  and a greater number of network options. First, the rule prohibits all  issuers and networks from inhibiting a merchant from directing the routing  of a transaction over any network allowed by the issuer. This provision  became effective on October 1, 2011. For example, if an issuer’s debit  card has two or more PIN networks, the merchant rather than the issuer  can chose which network processes a PIN transaction, such as the one  charging the lowest interchange fee. Second, the rule prohibits all issuers  and networks from restricting the number of networks over which debit  transactions may be processed to fewer than two unaffiliated networks.  This provision became effective on April 1, 2012. As a result, issuers no  longer may allow only VISA’s or MasterCard’s signature and affiliated PIN  networks to process their debit card transactions. Instead, such issuers  would need to add an unaffiliated signature or PIN network if they do not  already have an unaffiliated network.
Regulation II’s prohibitions may have a limited impact on increasing  competition and, in turn, lowering interchange fees, because issuers  largely control which networks may process their debit card transactions.  For example, issuers did not likely comply with Regulation II by adding a  second unaffiliated signature network because, according to the final rule,  networks and issuers stated it would be too costly to reconfigure cards  and merchant equipment to enable the processing of two signature  networks associated with one card.have only one network option for transactions completed by signature.  Additionally, issuers can comply by having an unaffiliated signature  network and PIN network, which means that merchants may have only  one network routing choice once a customer decides to use her signature  or her PIN. Therefore, even though Regulation II provides merchants with  the authority to choose the network over which to route debit card  transactions, merchants may not have a choice about which network to  route the debit card transaction.
Going forward, issuers may be able to act strategically to limit competition  over debit card interchange fees through their control over which  networks may process their debit card transactions. First, for covered  transactions subject to the fee cap, both signature and PIN networks have  an incentive to set their interchange fees at the fee cap. If a network lowered its fees below the cap, such as to attract merchant routing  business, issuers using that network could replace it with a network that  sets its fees at the cap. With networks charging similar interchange fees  for covered transactions, merchants may not be able to use their network  routing decisions to put downward pressure on such fees. Second, for  exempt PIN transactions, merchants may be able to exert downward  pressure on fees when issuers use two or more PIN networks to process  their transactions. In this case, merchants can choose the network with  the lowest fees and possibly induce the other networks to lower their fees.  However, exempt issuers may be able to counter such pressure by  dropping a network whose fees are too low or allowing only the PIN  network (along with an unaffiliated signature network) with the highest  fees to process their transactions. As discussed, merchants may be able  to provide incentives to customers using cards issued by exempt banks to  conduct a PIN rather than a signature transaction, so as to allow  themselves more routing options.
section_title: Impact on Networks
paragraphs: In response to Regulation II, VISA is undertaking strategies intended to  attract merchant routing. First, VISA recently imposed a new monthly  fixed acquirer fee that merchants must pay to accept VISA debit and  credit cards. VISA also plans to reduce merchants’ variable fees so that  merchants’ total fees associated with VISA transactions likely would be  lower after the new fee structure’s implementation. Under its new fee  structure, VISA could, for example, lower the interchange fees for VISA’s  PIN network, Interlink, to attract merchant routing and make up at least  some of its lost revenue by collecting the fixed fees. However, the  extent to which VISA will be able to lower PIN debit interchange fees and  gain transaction volume is limited. As with any network, if Interlink  reduces its interchange fees too much, issuers could replace Interlink with  another PIN network that offers higher fees.
Second, according to VISA representatives, VISA’s signature network  also is able to process PIN transactions, in essence automatically offering  an additional PIN routing choice to merchants for cards that carry VISA   For example, in the past, a debit card that carried the VISA  signature.signature and two other PIN networks usually would process a PIN  transaction through one of the PIN networks. Now, the VISA check card  signature network can continue to be the only option for routing signature  debit transactions on that card but also become a third option for routing  PIN debit transactions. For VISA to gain PIN transaction volume through  VISA check cards, however, it must set the associated interchange fees  at or below the fees set by the other available PIN networks. However,  the extent to which VISA can do this is not yet clear. If issuers  experienced declining interchange fee revenue from their use of VISA,  they could switch signature networks, for example, to MasterCard.
section_title: Appendix VI: Econometric Analysis of the Impact the Debit Interchange Fee Standard on Issuer Banks’ Income
subsections: section_title: Methodology
paragraphs: We conducted an econometric analysis to assess the impact of the Dodd- Frank Act’s debit interchange fee standard on covered banks. Our  multivariate econometric model used a difference-in-difference design  that exploits the fact that some banks are automatically covered by the  debit interchange fee requirements but others are not, so we can view  covered banks as the treatment group and exempt banks as the control  group.  We then compared changes in various types of income earned by  covered banks over time to changes in those types of income earned by  exempt banks over time.  All else being equal, the difference in the  differences is the impact of the new debit interchange fee requirements.
Our regression specification is the following:  ybq = α + β + γCOVEREDbq + X’bqΘ + εbq,  where b denotes the bank, q denotes the quarter, ybq is the dependent  variable, α is an institution-specific intercept, β is a quarter-specific  intercept, COVEREDbq is an indicator variable that equals 1 if bank b is  covered by the debit interchange standard in quarter q and 0 otherwise,  Xbq is a list of other independent variables, and εbq is an error term.  We  estimate the parameters of the model using quarterly data for banks for  the period from the first quarter of 2008 to the second quarter of 2012.
The parameters of interest are the γ, the coefficients on the covered  bank indicators in the quarters after the treatment start date of the fourth  quarter of 2011.  The debit interchange standard was effective October 1,  2011, (the fourth quarter of 2011), so the covered bank indicator is equal  to zero for all banks for all quarters from the first quarter of 2008 to the  third quarter of 2011.  For all quarters from the fourth quarter of 2011 to  the second quarter of 2012, the covered bank indicator is equal to one for  all covered banks and equal to zero for all exempt banks.  Thus, for  quarters from the fourth of 2011 to the second of 2012, all else being  equal, the parameter γ measures the average difference in the  dependent variable between covered and exempt banks in that quarter  relative to the base quarter.
We used lists of covered institutions provided by the Federal Reserve to  identify which banks in our sample are required to comply with debit card  interchange fee standards in each quarter and which are not.  We  assumed that any institution not explicitly identified as a covered  institution was exempt.
We used different dependent variables (ybq) in order to estimate the  impacts of the debit interchange standard on various sources of income  earned by covered banks, including bank card and credit card interchange fees, service charges on deposit accounts in domestic offices,  total non-interest income,  total interest income, and  total income.
Finally, we included size as an independent variable (Xbq) to control for  factors correlated with size that may differentially affect exempt and  covered banks in the quarters since debit interchange standard went into  effect.  We measured the size of a bank as the natural logarithm of its  total assets.  We included this variable to reduce the likelihood that our  estimates of the impact of the debit interchange standard are reflecting  something else.
subsections: section_title: Data
paragraphs: To assess the impact of debit interchange fee regulation on covered  institutions, we analyzed commercial banks and savings banks (banks)  for the period from the first quarter of 2008 to the second quarter of 2012  using data from the Federal Reserve, the Federal Deposit Insurance  Corporation (FDIC), and the Federal Financial Institutions Examination  Council (FFIEC).  We excluded savings associations and credit unions  from our analysis, even though they are subject to the debit card  interchange fee standards.  For much of the period we analyzed, savings  associations filed quarterly Thrift Financial Reports, but these filings did  not include the information we required for our analysis, such as income  earned from bank card and credit card interchange fees, for every  quarter.  Similarly, credit union filings also do not include the information  we required for our analysis.
section_title: Results
paragraphs: Table 14 shows the estimated differences in fees and income as a  percent of assets for covered banks relative to what they would have  earned in the absence of the debit interchange fee standard, all else  being equal.
Our estimates suggest that the debit interchange fee standard is  associated with:
Lower bank card and credit card interchange fees collected by  covered banks.  After the effective date, interchange fees collected by  covered banks, as a percent of assets, were about 0.007-0.008  percentage points lower than they otherwise would have been.  For a  bank with assets of $50 billion, this amounts to $3.5 million-4 million in  reduced bank card and credit card interchange fees.
Higher service charges on deposit accounts in domestic offices for  covered banks.  After the effective date, service charges collected by  covered banks, as a percent of assets, were about 0.004-0.007  percentage points higher than they otherwise would have been.  For a  bank with assets of $50 billion, this amounts to $2 million-3.5 million in  additional service charges.
No significant change in overall non-interest income for covered  banks.  Non-interest income—of which both interchange fees and  service charges are components—earned by covered banks was  about 0.09-0.13 percentage points lower as a percent of assets than it  would have been in the first two quarters after the effective date and  about 0.03 percentage points higher in the third quarter after the  effective date.  However, these estimates are not statistically  significant at the 5-percent level.  Increased interest income in the first two quarters after the effective  date but no significant increase since.  Interest income earned by  covered banks, as a percent of assets, was about 0.03 percentage  points higher than it would have been in the first two quarters after the  effective date. It was 0.02 percentage points higher in the third quarter  after the effective date, but this estimate is not statistically significant  at the 5-percent level.
No significant change in total income. Total income—which is  composed of interest and non-interest income—earned by covered  banks after the effective date, as a percent of assets, ranges from  0.10 percentage points lower to 0.05 percentage points higher, but  these estimates are not statistically significant at the 5-percent level.
To assess the robustness of our estimates, we examined different  treatment start dates.  Specifically, we allowed the debit fee standard to  have an impact starting in the fourth quarter of 2010—1 year prior to the  rule’s effective date—on banks that were covered in the fourth quarter of  2011.  We did so to allow for the possibility that institutions began to react  to the debit fee standard in anticipation of the rule being passed.  Our  estimates suggest that changes in covered banks’ interchange fee  income and service charge income generally did not occur until after the  effective date and also that significant changes in non-interest income,  interest income, and total income for covered banks generally did not  precede the rule’s effective date.
Our approach allows us to partially differentiate changes in various types  of income earned by covered banks associated with the debit interchange  fee cap from changes due to other factors.  However, several factors  make isolating and measuring the impact of the cap for covered banks  challenging.  In particular, the effects of the cap cannot be differentiated  from simultaneous changes in economic conditions, regulations, or other  changes that may differentially affect covered banks.  Nevertheless, our  estimates are suggestive of the initial effects of the cap on covered banks  and provide a baseline against which to compare future trends.
section_title: Appendix VII: Comments from the Securities and Exchange Commission
section_title: Appendix VIII: Comments from the Department of the Treasury
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Richard Tsuhara (Assistant  Director), Silvia Arbelaez-Ellis, Bethany Benitez, William R. Chatlos,  Philip Curtin, Rachel DeMarcus, Timothy Guinane, Courtney LaFountain,  Thomas McCool, Marc Molino, Patricia Moye, Susan Offutt, Robert  Pollard, Christopher Ross, Jessica Sandler, and Joseph Weston, made  key contributions to this report.