Dodd-Frank Regulations: Agencies' Efforts to Analyze and Coordinate Their Recent Final Rules
Published: 2016-12-29T00:00:00

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. Congress included a provision in statute for GAO to study these financial services regulations annually. This sixth annual report discusses (1) the regulatory analyses federal agencies conducted for the 30 rules issued pursuant to the Dodd-Frank Act that became effective between July 2015 and July 2016, (2) coordination among the regulators on these rules, and (3) indicators of the impact of select Dodd-Frank Act rules on financial market stability.
GAO assessed the extent to which regulators followed OMB's cost-benefit guidance for five major rules selected because they covered a variety of agencies and topics. GAO also examined coordination for three rules selected because they involved extensive interagency coordination and covered many regulators required to coordinate under the Dodd-Frank Act. GAO also reviewed documentation and interviewed regulatory staff.
section_title: What GAO Found
paragraphs: Federal financial regulators reported conducting the required regulatory analyses for rules issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as part of the rulemaking process. For example, of the 30 rules GAO reviewed, which became effective between July 2015 and July 2016, the regulators analyzed the paperwork burden imposed for 12 rules for which they determined this analysis was required. For the remaining 18 rules, they determined that this analysis was not required or applicable. For instance, in some cases they determined that no new collection of information was required. As independent regulatory agencies, the federal financial regulators are not subject to executive orders requiring federal agencies to conduct detailed cost-benefit analysis in accordance with Office of Management and Budget (OMB) guidance, but regulators told GAO that they generally follow this guidance in spirit. GAO reviewed five of the nine rules considered major—that is, rules likely to result in an annual impact on the economy of $100 million or more, among other things—and found that regulators addressed most key elements of OMB guidance in their regulatory analyses. For instance, these agencies generally quantified some costs related to these rules. However, they did not quantify benefits in each rule and noted data and other limitations to doing so. In 2011, GAO recommended that the regulators more fully incorporate OMB's regulatory guidance into their written rulemaking policies, but not all regulators have implemented this recommendation.
Regulators reported coordinating, as required or voluntarily, on 19 of the 30 rules GAO reviewed. The Dodd-Frank Act and the rulemaking process did not require regulators to coordinate on the remaining 11 rules. GAO focused in particular on coordination efforts involving three rulemakings: the Commodity Futures and Trade Commission's and the prudential regulators' rules on margin requirements for over-the-counter swaps, and the Bureau of Consumer Financial Protection's (CFPB) rule on integrated mortgage disclosures. For the swaps rules, regulators coordinated domestically and internationally and, according to regulators, they largely harmonized their respective rules. For the integrated mortgage disclosure rule, CFPB followed its internal guidance for coordinating with relevant agencies throughout the rulemaking process.
The full impact of the Dodd-Frank Act remains uncertain because some of its rules have not been finalized and insufficient time has passed to evaluate others. As of December 2016, regulators had issued final rules for about 75 percent of the 236 provisions of the act that GAO is monitoring. Using recently released data, GAO updated indicators from its prior reports, including those that monitor systemic risk characteristics of large U.S. bank holding companies. These indicators track changes in characteristics of these companies such as size, interconnectedness, leverage, and liquidity since the passage of the act to examine if the changes have been consistent with the goals of the act. While changes in the indicators are not necessarily evidence of the impacts of the act's provisions, trends in indicators suggested large bank holding companies have become larger but less vulnerable to financial distress.
section_title: What GAO Recommends
paragraphs: GAO makes no new recommendations but continues to monitor the implementation of five prior recommendations intended to improve, among other things, financial regulators' cost-benefit analysis, interagency coordination, and impact analysis associated with Dodd-Frank regulations. Not all regulators have implemented these recommendations.

section_title: Letter
paragraphs: In 2010, Congress passed the Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank Act) in response to the 2007–2009  financial crisis that disrupted the U.S. financial system. Under the Dodd- Frank Act, federal agencies are directed or have the authority to issue  hundreds of regulations to implement the act’s provisions.
Agencies normally must comply with various federal rulemaking  requirements as they draft and implement regulations. Many of the  rulemakings include some form of regulatory analysis, which provides a  formal way of organizing evidence to help in understanding the potential  effects of new regulations. Certain statutes and executive orders require  varying regulatory analyses, and the extent to which independent  regulatory agencies, such as some of the federal financial regulators  (financial regulators), are subject to the requirements varies. For  example, Executive Order (E.O.) 12,866 requires executive federal  agencies to assess costs and benefits of proposed regulatory action and  any alternatives. This order does not apply to independent regulatory  agencies such as banking, securities, or futures regulators, or the Bureau  of Consumer Financial Protection (commonly known as the Consumer  Financial Protection Bureau, or CFPB). However, CFPB has a separate  requirement under the Dodd-Frank Act to consider the potential benefits  and costs to consumers and covered persons as part of a rulemaking  under a federal consumer financial law. As agencies continue to develop  and implement the regulations, some industry associations and others  have reported on the potential impact, individually  and cumulatively, on  financial markets and nonfinancial institutions.
Section 1573(a) of the Department of Defense and Full-Year Continuing  Appropriations Act of 2011 amends the Dodd-Frank Act and includes a  provision for us to annually review financial services regulations, including  those of CFPB. We have previously issued five reports under this  mandate. This report discusses  the regulatory analyses conducted by the federal financial regulators  in their Dodd-Frank Act rulemakings, including their assessments of  which rules they considered to be major rules;  the coordination between and among federal regulators on these  rulemakings; and  indicators of the impact of selected Dodd-Frank Act provisions and  their implementing regulations on financial market stability.
To examine the regulatory analyses conducted by the federal financial  regulators, we focused our analysis on the final rules issued pursuant to  the Dodd-Frank Act that became effective from July 23, 2015, through  July 22, 2016, a total of 30 rules (see app. II). To identify the 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 staff at  the financial regulators—CFPB, Board of Governors of the Federal  Reserve System (Federal Reserve), Federal Deposit Insurance  Corporation (FDIC), Office of the Comptroller of the Currency (OCC),  National Credit Union Administration (NCUA), Securities and Exchange  Commission (SEC), and Commodity Futures Trading Commission  (CFTC). We also asked these staff to identify any other rulemaking that  should be included. We reviewed federal statutes, regulations, and GAO  studies on these rules as well as Federal Register releases that contain  information on the Paperwork Reduction Act of 1995 (PRA) and  Regulatory Flexibility Act (RFA) analyses conducted by agencies and  their coordination efforts.  For PRA and RFA analyses, we reviewed  Federal Register releases of the final rules for the regulator’s  determinations about whether they were required to conduct the analyses  and the results of the analyses. Using GAO’s Federal Rules database, we  found that 9 of the 30 rules were identified as major rules, per the Office  of Management and Budget (OMB) guidance, under the Congressional  Review Act. We developed a data collection instrument to compare and  assess the regulatory analyses conducted for a judgmental sample of five  of the major rules against the principles outlined in OMB Circular A-4,  which provides guidance to federal agencies on the development of  regulatory analysis. To narrow the list from 9 major rules to the 5 rules  subject for in-depth review, we determined to include rules that were from  a variety of agencies, including one joint rule, and that covered varied  topics.
To examine the coordination conducted by the federal financial  regulators, we reviewed the Dodd-Frank Act and Federal Register  releases to identify the interagency coordination or consultation  requirements as required by the act for the 30 rules in our scope. We also  asked the relevant financial regulators’ staff to identify any instances of  interagency coordination not specified in the Federal Register releases,  and if they did not coordinate, to discuss the reasons why. We selected  three rules for in-depth review of interagency coordination: CFTC’s and  the prudential regulators’ respective rules on margin requirements for  uncleared swaps and CFPB’s rule on integrated mortgage disclosures.  We selected these rules based on the opportunity for extensive  interagency coordination. For these rules, we interviewed agency staff  and reviewed documentation to establish the extent and the outcome of  interagency coordination.
To analyze the impact of the Dodd-Frank Act on financial market stability,  we updated several indicators developed in our prior reports using data  through the second quarter of 2016. We updated indicators monitoring  changes in size, complexity, leverage, liquidity, and interconnectedness  of bank systemically important financial institutions (bank SIFI), as well as  indicators monitoring changes in size, leverage, liquidity, and  interconnectedness of nonbank financial institutions designated by the  Financial Stability Oversight Council (FSOC) for supervision by the  Federal Reserve, or designated nonbanks. We also updated our  indicators monitoring the extent to which certain swap reforms are  consistent with the act’s goals of reducing risk. For those parts of our  methodology that involved the analysis of computer-processed data from  Bloomberg, the Federal Reserve Bank of Chicago, the Federal Reserve,  the National Information Center, and the Bureau of Economic Analysis,  we assessed the reliability  of these data by reviewing relevant  documentation and electronically testing the data for missing values,  outliers, and invalid values. We determined the data were sufficiently  reliable for our purposes of monitoring changes in bank SIFIs and  designated nonbanks and assessing the amount of margin collateral that  over-the-counter derivatives counterparties used. See appendix I for  more information on our scope and methodology.
We conducted this performance audit from June 2016 to December 2016  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
paragraphs: The financial regulatory system consists of numerous regulators with  varying missions and functions. They promulgate regulations via federal  rulemakings. In particular, the Dodd-Frank Act includes specific  rulemaking and coordination requirements.
subsections: section_title: Financial Regulators
subsections: section_title: Prudential Regulators for the Banking Industry
paragraphs: In the banking industry, the specific regulatory configuration generally  depends on the type of charter the banking institution chooses.  Depository institution charter types include commercial banks, which originally focused on the banking needs of  businesses but over time have broadened their services; savings associations (also known as thrifts), which include federal  savings banks and certain state savings banks, and savings and  loans and were originally created to serve the needs—particularly the  mortgage needs—of those not served by commercial banks; and credit unions, which are member-owned cooperatives run by member- elected boards with a historical emphasis on serving people of modest  means.
All depository institutions that have federal deposit insurance have a  federal prudential regulator, which generally may issue regulations and  take enforcement actions against institutions within its jurisdiction. The  prudential regulators are identified in table 1. Holding companies that own  or control a bank or thrift are subject to Federal Reserve supervision. The  Bank Holding Company Act of 1956 and the Home Owners’ Loan Act set  forth the regulatory frameworks for bank holding companies and savings  and loan holding companies, respectively. The Dodd-Frank Act made  the Federal Reserve the regulator of savings and loan holding companies  and amended the Home Owners’ Loan Act and the Bank Holding  Company Act to create certain similar requirements for bank and savings  and loan holding companies.
The securities and futures markets are regulated under a combination of  self-regulation (subject to oversight by the appropriate federal regulator)  and direct oversight by SEC and CFTC, respectively. SEC regulates the  securities markets, including participants such as securities exchanges,  broker-dealers, investment companies, and certain investment advisers  and municipal advisors. SEC’s mission is to protect investors; maintain  fair, orderly, and efficient markets; and facilitate capital formation. SEC  also oversees self-regulatory organizations—including securities  exchanges, clearing agencies, and the Financial Industry Regulatory  Authority—that have responsibility for overseeing securities markets and  their members; establishing standards under which their members  conduct business; monitoring business conduct; and bringing disciplinary  actions against members for violating applicable federal statutes, SEC’s  rules, and their own rules.
CFTC is the primary regulator for futures markets, including futures  exchanges and intermediaries, such as futures commission merchants.  CFTC’s mission is to protect market users and the public from fraud,  manipulation, abusive practices, and systemic risk related to derivatives  subject to the Commodity Exchange Act, and to foster open, competitive,  and financially sound futures markets. CFTC oversees the registration of  intermediaries and relies on self-regulatory organizations, including the  futures exchanges and the National Futures Association, to establish and  enforce rules governing member behavior. CFTC and SEC jointly  regulate security futures, which generally refers to futures on single  securities and narrow-based security indexes.
In addition, Title VII  of the Dodd-Frank Act expands regulatory  responsibilities for CFTC and SEC by establishing a new regulatory  framework for over-the-counter swaps. The act authorizes CFTC to  regulate swaps and SEC to regulate security-based swaps with the goals  of reducing risk, increasing transparency, and promoting market integrity  in the financial system. CFTC and SEC share authority over mixed  swaps—that is, security-based swaps that have a commodity component.
section_title: Consumer Financial Protection Bureau
paragraphs: The Dodd-Frank Act transferred consumer protection oversight and other  authorities over certain consumer financial protection laws from multiple  federal regulators to CFPB, creating a single federal entity to, among  other things, help ensure consistent enforcement of federal consumer  financial laws. The Dodd-Frank Act charged CFPB with the following  responsibilities, among others: ensuring that consumers are provided with timely and understandable  information to make responsible decisions about financial  transactions; ensuring that consumers are protected from unfair, deceptive, or  abusive acts and practices and from discrimination; monitoring compliance with federal consumer financial law and taking  appropriate enforcement action to address violations;  identifying and addressing outdated, unnecessary, or unduly  burdensome regulations; ensuring that federal consumer financial law is enforced consistently,  in order to promote fair competition; ensuring that markets for consumer financial products and services  operate transparently and efficiently to facilitate access and  innovation; and conducting financial education programs.
Furthermore, the Dodd-Frank Act gave CFPB supervisory authority over  certain nondepository institutions, including certain kinds of mortgage  market participants, private student loan lenders, and payday lenders.
section_title: Regulatory Analyses in Federal Rulemaking
paragraphs: Several regulatory analyses may apply to independent regulators,  including the financial regulators. The regulators are subject to  compliance with various requirements as part of their rulemakings, such  as those in PRA; RFA, as amended by the Small Business Regulatory  Enforcement Fairness Act of 1996; and the Congressional Review Act.
PRA requires federal agencies to (1) seek public comment on  proposed collections and (2) submit proposed collections for review  and approval by OMB. According to the Office of Information and  Regulatory Affairs’ PRA guidance, these actions must occur before  federal agencies require or request information from the public.
RFA requires that federal agencies consider the impact of certain  regulations they issue on small entities and, in some cases,  alternatives to lessen the regulatory burden on these entities. In  some cases, PRA and RFA also require agencies, including financial  regulators, to assess various effects and costs, respectively, of their  rules. However, RFA, like PRA, does not require the agencies to  conduct formal benefit and cost analyses.
The Small Business Regulatory Enforcement Fairness Act of 1996,  which amended RFA, generally includes judicial review of compliance  with certain provisions of RFA and requires agencies, including  financial regulators, to develop one or more small entity compliance  guides for each final rule or group of related final rules for which the  agency must prepare a regulatory flexibility  analysis. In addition, the  act requires CFPB to convene a small business review panel, when  preparing an initial regulatory flexibility  analysis in connection with a  proposed rule, to gather recommendations and advice from  representatives of small business entities about any projected  increase in the cost of credit for small entities and any significant  alternatives to the proposed rule.
Under the Congressional Review Act, before rules can take effect,  agencies (including financial regulators) must submit their rules to  Congress and the Comptroller General, and rules deemed major by  OMB generally may not become effective until 60 days after the rules  are submitted.
In addition to these requirements, authorizing or other statutes require  certain financial regulators to consider specific benefits, costs, and effects  of their rulemakings (see table 2).
In contrast, E.O. 12,866, supplemented by E.O. 13,563, requires  executive agencies (which do not include independent regulators such as  financial regulators), to the extent permitted by law and where applicable,  to provide more formal cost-benefit analyses that (1) assess costs and  benefits of available regulatory alternatives and (2) include both  quantifiable and qualitative measures of benefits and costs in their  analysis, recognizing that some costs and benefits are difficult to quantify.  Such analysis, according to OMB, can enable an agency to learn if the  benefits of a rule are likely to justify the costs and discover which possible  alternatives would yield the greatest net benefit or be most cost-effective.
In 2003, OMB issued Circular A-4 to provide guidance to executive  agencies on developing regulatory analysis as required by E.O. 12,866.
The circular defines good regulatory analysis as including a statement of  the need for the proposed regulation, an assessment of alternatives, and  an evaluation of the costs and benefits of the proposed regulation and the  alternatives. It also standardizes the way costs and benefits of regulatory  actions should be measured and reported. FSOC and the Department of  the Treasury (Treasury), which are not financial regulators, are subject to  E.O. 12,866 and Circular A-4. However, as we have reported, some  independent agencies consult Circular A-4.
section_title: Interagency Coordination Requirements in Dodd- Frank Act Rulemakings
paragraphs: As we have noted in prior reports, effective coordination can help  regulators minimize or eliminate staff and industry burden, administrative  costs, conflicting regulations, unintended consequences, and uncertainty  among consumers and markets. The Dodd-Frank Act imposes  interagency coordination or consultation requirements and responsibilities  on regulators or in connection with certain rules, including the following  examples:
Under Title VII,  SEC and CFTC must coordinate and consult with  each other and with prudential regulators (for the purposes of Title VII,  these regulators are the Federal Reserve, OCC, FDIC, Farm Credit  Administration, and Federal Housing Finance Agency), to the extent  possible, before starting a rulemaking or issuing an order on swaps,  security-based swaps, swap entities, or security-based swap  entities. This requirement is designed to ensure regulatory  consistency and comparability across the rules or orders, to the extent  possible. Title VII  also directs CFTC, SEC, and the prudential  regulators, as appropriate, to coordinate with foreign regulators on  establishing consistent international standards on the regulation of  swaps, security-based swaps, swap entities, and security-based swap  entities. In addition, the Dodd-Frank Act requires SEC and CFTC, in  consultation with the Federal Reserve, to jointly adopt certain rules  under Title VII,  and if Title VII  requires CFTC and SEC to issue joint  regulations to implement a provision, any guidance on or  interpretation of the provision is effective only if issued jointly and after  consultation with the Federal Reserve.
Under section 1022, before proposing a rule and during the comment  process, CFPB must consult with the appropriate prudential regulators  or other federal agencies on consistency with prudential, market, or  systemic objectives administered by such agencies.
section_title: Agencies Reported Conducting Required Regulatory Analyses and for Select Major Rules, Generally Included Key Elements of Cost- Benefit Analysis
paragraphs: We found that for rules that were issued and became effective between  July 23, 2015, and July 22, 2016, agencies reported conducting PRA and  RFA analysis where required. In addition, although not required to do so,  financial regulators told us that they generally follow OMB’s guidance for  developing regulatory analysis (Circular A-4). We found that the agencies  included most of the key elements of OMB’s guidance in their analyses  for select major rules during this review period. We recommended in our  December 2011 report that federal financial regulators more fully  incorporate OMB’s regulatory guidance into their rulemaking polices.
subsections: section_title: Agencies Reported Conducting Required Regulatory Analyses
paragraphs: Of the 30 Dodd-Frank Act rules within our scope, the agencies reported  conducting regulatory analysis for PRA on 12 rules and conducted a  regulatory analysis or provided a certification that such an analysis was  not needed under RFA for 21 rules as part of their rulemaking process.  These rules were issued individually  or jointly by CFTC, CFPB, FDIC, the  Federal Reserve, OCC, and SEC. (See app. II for a list of the  regulations within the scope of our review.) In examining the regulatory  analyses for the 12 rules, we found that the agencies reported conducting  the regulatory analysis pursuant to PRA when required—that is, the  agencies are required to minimize the paperwork burden of their  rulemakings and evaluate whether a proposed collection is necessary for  the proper performance of the functions of the agency. PRA analysis on  all of the 12 rules included a discussion of the analysis the agencies performed and provided estimates of the paperwork burden on entities.  For instance, for the joint rule on the registration and supervision of  appraisal management companies, the regulators provided estimates on  the total number of states and appraisal management companies affected  and estimated total burden hours for reporting and recordkeeping  requirements for these entities. In another rule, CFPB determined that  permitting electronic filing of reports would result in a minimal one-time  burden associated with a new method of submission but it estimated  savings over time due to the reduction of paper filings each year. The rule  allows land developers to choose whether to submit certain filings, such  as annual reports, either by paper or via electronic means. For another  rule on business conduct standards for security-based swap dealers and  participants, SEC performed a PRA analysis in its proposed rule and  updated certain estimates for security-based swap market participants  and other entities for the final rule to reflect the most recent data  available.
For the remaining 18 rules, the agencies determined that they were not  required to conduct the regulatory analyses pursuant to PRA or that PRA  was not applicable. In some cases, they determined that they were not  required to conduct regulatory analyses pursuant to PRA because they  determined no new collection of information would be required. For  instance, CFTC’s rule on trade options stated that for PRA, CFTC  determined that the final rule would not impose any new information  collection requirements that require OMB’s approval under PRA. In other  cases, the agencies determined that the PRA was not applicable. For  example, the Federal Reserve’s rule on unfair or deceptive acts or  practices stated that the final rule contains no requirements subject to the  PRA.
Under the RFA, when an agency proposes a rule that would have a  significant economic impact on a substantial number of small entities, the  rule must be accompanied by an impact analysis, known as an initial  regulatory flexibility  analysis (IRFA) when it is published for public  comment. The agency must publish a final regulatory flexibility analysis  (FRFA) with the final rule. Alternatively,  in the appropriate  circumstances, an agency may certify that its rule will not have a  significant economic impact on a substantial number of small entities.
The certification must be published in the Federal Register “along with a  statement providing the factual basis for such certification.”
In one instance, a regulator—CFPB—determined that the final rule on  integrated mortgage disclosures would have a significant impact on a  substantial number of small entities. It conducted the regulatory flexibility  analysis and estimated the number of affected entities in certain  mortgage transactions and the benefits and costs to small entities. For 6  rules, the regulators conducted a FRFA and concluded that the rule would  not have a significant economic impact on a substantial number of small  entities. For example, the Federal Reserve, in a rule that established  minimum margin and capital requirements for certain swap entities,  considered the potential impact on small entities in accordance with a  FRFA, and based on its analysis, believed that the rule would not have a  significant economic impact on a substantial number of small entities.
For 10 rules, the regulators stated that RFA was not applicable. For  example, CFPB stated in its rule amending certain filing requirements  under the Interstate Land Sales Full Disclosure Act that because no  notice of proposed rulemaking is required, RFA does not require an initial  or final regulatory flexibility  analysis. In another example, FDIC  determined that its rule on assessments relates directly to the rates  imposed on insured depository institutions for deposit insurance. For this  reason, it determined that the requirements of RFA do not apply. FDIC  explained that certain types of rules, such as rules of particular  applicability relating to rates or corporate or financial structures, or  practices relating to such rates or structures, are expressly excluded from  the definition of the term ‘‘rule’’ for purposes of RFA.
In the remaining cases, the regulators certified that the regulations would  not have a significant economic impact on a substantial number of small  entities per section 605(b) of the RFA. In doing so, each regulator  provided a basis supporting its certification. For example, SEC’s rule on  business conduct standards for swap dealers and participants noted that  because (1) large financial institutions generally were the entities  engaged in the dealing activity involving security-based swaps, and (2)  major security-based swap participants were not small entities, its  security-based-swap entity registration rules and forms, as adopted,  would not have a significant economic impact on a substantial number of  small entities for purposes of RFA.
Finally, of the 30 regulations that were issued and became effective  between July 23, 2015, and July 22, 2016, the agencies identified 9 as  being major rules. Pursuant to the Congressional Review Act, a major  rule is one that results in or is likely to result in an annual impact on the  economy of $100 million or more, a major increase in costs or prices, or  significant adverse effects on competition, employment, investment,  productivity, innovation, or on the ability of U.S.-based enterprises to  compete with foreign-based enterprises in domestic or export markets.  Specifically, CFTC issued 1 major rule; CFPB issued 1 major rule;  Federal Deposit Insurance Corporation issued 1 major rule; the Federal  Reserve issued 1 major rule; SEC issued 4 major rules; and 1 major rule  was issued jointly (Farm Credit Administration, FDIC, Federal Housing  Finance Agency, Federal Reserve, and OCC).
section_title: Regulators Are Not Required to Follow OMB Guidance but Included Most Key Elements of Cost-Benefit Analysis
paragraphs: Independent  federal financial regulators are not required to follow OMB’s  Circular A-4 when developing regulations, but they told us that they try to  follow this guidance in principle or spirit. Regulators generally included  the key elements of OMB’s guidance in their regulatory analyses for these  major rules.
To assess the extent to which the regulators follow Circular A-4, we  examined 5 major rules (see table 3 for a description of these rules).  Specifically, we examined whether the regulators (1) identified the  problem to be addressed by the regulation; (2) established the baseline  for analysis; (3) considered alternatives reflecting the range of statutory  discretion; and (4) assessed the costs and benefits of the regulation.
We found that all five rules we reviewed were consistent with OMB  Circular A-4, which states that a rule should clearly identify the specific  problem that the proposed regulatory action is intended to address. For  example, SEC stated in its rule on pay ratio disclosure that current  disclosure rules required registrants to disclose compensation information  for only certain employees in their SEC filings; as a result, shareholders  cannot calculate a company-specific metric that they can use to evaluate  the chief executive officer’s compensation within the context of their own  company. As another example, FDIC noted in its rule on assessments the  need to reach the minimum reserve ratio to strengthen the fund, reduce  the risk of the banking industry facing unexpected, large increases in  assessment rates in a period of stress, and maintain stable and  predictable bank assessments. Also, CFTC stated in its rule on margin  requirements for uncleared swaps that the rule was intended to  implement a specific provision of the Commodity Exchange Act, as  amended by Title VII  of the Dodd-Frank Act. As CFTC noted in the rule,  Title VII  intended to establish a comprehensive regulatory framework to  reduce risk, increase transparency, and promote market integrity in the  derivatives market.
In addition, all five rules identified the baseline for analysis. OMB Circular  A-4 states that the baseline should be the best assessment of the way the  world would look absent the proposed action. For example, CFTC stated  in its rule on margin requirements for uncleared swaps that the baseline  against which the costs and benefits associated with this rule will be  compared is the uncleared swaps markets as it existed at the time the  rule was finalized. SEC stated in its rule on pay ratio disclosure that the  baseline is the current state of the market without a requirement for  registrants to disclose pay ratio information. Similarly, CFPB stated in its  rule on integrated mortgage disclosures that the baseline considers  economic attributes of the mortgage market and the existing regulatory  structure.
subsections: section_title: Evaluation of Alternative Approaches
paragraphs: The regulators also provided alternative approaches to the proposed  rules implementing the relevant provision of the Dodd-Frank Act and  solicited comments. OMB Circular A-4 states that good regulatory  analysis is designed to inform the public and other parts of the  government of the effects of alternative actions. We found that all five  rules that we assessed provided alternative approaches to the proposed  rules. The agencies also asked for and received public comments,  including possible alternatives to proposed requirements. For instance, in  the joint rule on margin and capital requirements for covered swap  entities, the prudential regulators identified and considered a number of  alternatives raised by commenters and provided the rationale in their  decision to a suggested approach. SEC stated in its rule on pay ratio  disclosure that after considering all of the comments received on the  proposed rule—and in particular, after considering specific suggestions  from commenters on alternatives that could help to mitigate compliance  costs and practical difficulties associated with the proposed rule—it was  adopting a number of revisions to the final rule.
section_title: Analysis of Costs and Benefits of Major Rules
paragraphs: OMB Circular A-4 states that quantifying costs and benefits allows  regulators to evaluate different regulatory options using a common  measure. Additionally,  OMB Circular A-4 recognizes that some important  costs and benefits may be inherently too difficult to quantify given current  data and methods and recommends a careful evaluation of qualitative  costs and benefits. In prior work, we have noted some of the challenges  to quantifying costs and benefits. For example, in our 2014 report, we  found that federal financial regulators were constrained by several factors  such as limited data or data unavailability  and difficulties modeling and  quantifying costs and benefits.
However, we also found that by drawing on several sources, such as  public comments on proposed rulemakings or data from other regulators,  regulators are able to more effectively consider the costs and benefits of  the rulemakings. As shown in the following examples, the regulators  generally quantified some costs in all five of their respective rules and in  four instances they discussed some costs qualitatively.
The preamble to CFTC’s final rule on margin requirements for  uncleared swaps stated it used industry data to construct its own  estimates of costs, but noted that there were a number of challenges  in conducting quantitative analysis of the costs associated with the  rule. As a result, CFTC stated that the discussion of the costs and  benefits is largely qualitative  in nature since administrative costs are  difficult to quantify. For example, the preamble stated that the higher  degree of harmonization between various regulators and jurisdictions  in the final rule should result in lower administrative costs.  Additionally,  CFTC stated that longer lead times for industry to build  compliance systems provided in the final rule will result in less  operational error and costs.
The joint rule on margin and capital requirements for uncleared swaps  estimated the annual cost associated with initial margin requirements  that will be required of U.S. swap entities and their counterparties  once the requirements are fully implemented to range from $672  million to roughly $46 billion, depending on the specific initial margin  estimate and incremental funding costs that is used to compute the  estimate. The agencies noted the difficulty of estimating the costs  associated with providing initial margin with any precision due to  differences in marginal funding costs across different types of entities  and over time, among other things.
SEC’s rule on pay ratio disclosure provided both quantitative and  qualitative costs. SEC discussed direct compliance costs paid by  registrants that are subject to the pay ratio disclosure. For example,  SEC estimated that the average initial cost of compliance for a  registrant with foreign operations is expected to be approximately  $700,000 and for a registrant with U.S.-based operation only is  expected to be approximately $150,000. In its pay ratio disclosure  rule, SEC allows a company, in identifying the median employee, to  use a cost-of-living adjustment for employees living in a jurisdiction  other than the jurisdiction in which the chief executive officer resides.  Thus, where a company has employees in countries whose cost-of- living differs from the cost-of-living in the chief executive officer’s  country of residence, the cost-of-living adjustment may have an effect  on the determination of the median employee and on the calculation  of the pay ratio. SEC noted that it was limited in its ability to quantify  the impact of the adjustment on the pay ratio calculation by lack of  data on the countries where employees are located, the actual  distribution of employee pay and the specific cost-of-living measure  used. SEC stated that it qualitatively  analyzed the main factors that  may contribute to more significant effects of the cost-of-living  adjustment on the determination of the median employee  compensation and on the calculation of the pay ratio. It found that the  effect of the cost-of-living adjustment could be potentially larger for  registrants with a larger percentage of employees outside the chief  executive officer’s country of residence and for registrants with  employees in countries with a cost-of-living that differs significantly  from the chief executive officer’s country of residence.
In addition, two of the five rules quantified some benefits and all of the  rules included some qualitative information on benefits, such as their  nature, timing, likelihood, location, and distribution. In one example,  CFPB quantified some benefits in connection with its integrated  disclosure rule. For example, CFPB estimated that the rule could result in  savings of $130 million per year for employee time saved for mortgage  transactions and stated that most of these savings are likely to be passed  on to consumers. FDIC’s assessment rule also quantified some benefits.  FDIC stated that it will collect approximately $10 billion in surcharges and  award approximately $1 billion in credits to small banks, although actual  amounts will vary from these estimates. The three remaining rules did not  quantify benefits and noted data and other limitations to not doing so.
The five rules provided a discussion of some qualitative benefits. FDIC’s  rule on assessments stated that imposing surcharges on assessments so  that the deposit insurance fund reaches its target reserve ratio promptly  strengthens the fund more quickly so that it can better withstand an  unanticipated spike in losses from bank failures or the failure of one or  more large banks. FDIC stated that reaching the target ratio early also  reduces the risk of the banking industry facing unexpected, large  increases in assessment rates in a period of stress. In another example,  SEC stated in its rule on pay ratio disclosures that providing additional  executive compensation information to shareholders provides new data  points that shareholders may find relevant and useful when exercising  their certain voting rights. However, SEC also stated that it could not  quantify in monetary terms the benefit to shareholders. SEC stated that  pay ratio disclosure is not tied to an immediate economic transaction,  such as a sale of a security, and that the pay ratio disclosure is but one  data point among many considerations that shareholders might find  relevant when exercising their say-on-pay votes.
section_title: Regulators Coordinated on Rulemakings as Required
paragraphs: The agencies reported coordinating as required or voluntarily on 19 of the  30 regulations that became effective between July 23, 2015, and July 22,  2016. The Dodd-Frank Act stipulated coordination for 17 regulations, and  agencies reported coordinating on these rules. For example, in its rule on  business conduct standards for security-based swap dealers and major  security-based swap participants, SEC reported consulting and  coordinating with CFTC and the prudential regulators in accordance with  the consultation mandate in the Dodd-Frank Act. For 2 additional rules,  the Dodd-Frank Act did not stipulate coordination, but the rules were  jointly issued by two or more regulators, and thus, inherently required  coordination.
For most of the other 11 rules, agency officials told us that they did not  voluntarily coordinate because the rules were technical amendments or  focused on areas solely within the agency’s purview. For example, CFPB  explained that it did not coordinate on several of its rules because they  were threshold adjustments that were mechanical in nature and often tied  to the Consumer Price Index. Similarly, FDIC did not coordinate on its  rule on assessments because FDIC is solely responsible for deposit  insurance assessments, so this is not an area promulgated in  coordination with other entities. Appendix  III  provides a complete list of  rulemakings, along with an explanation of whether coordination was  required and the nature of any coordination.
Of the 19 rules that we identified as having interagency coordination, we  reviewed 3 rules in depth (see table 4). Specifically, we examined when,  how, and to what extent federal financial regulators coordinated on the  CFTC’s and the prudential regulators’ respective rules on margin  requirements for uncleared swaps, as well as CFPB’s rule on integrated  mortgage disclosures. For the margin requirements for uncleared swaps  rules, we also examined the efforts taken by the prudential regulators and  CFTC to harmonize their respective versions of the rule.
According to regulators, most coordination for the rulemakings occurred  throughout the rulemaking process. Agencies described coordinating  through regularly scheduled meetings and conference calls, as well as  through e-mail, telephone conversations, and sharing copies of drafts for  comment.
subsections: section_title: Prudential Regulators, CFTC, and International Regulators Engaged in Recurring Coordination on the Swaps Rules
paragraphs: In developing their respective rules on margin requirements for uncleared  swaps, staff from the prudential regulators and CFTC engaged in  coordination domestically, staff from the banking regulators and CFTC  engaged in coordination internationally.
subsections: section_title: Domestic Coordination
paragraphs: Staff from the banking regulators and CFTC said that throughout the  rulemaking process, regulators scheduled recurring interagency meetings to coordinate their rules and engaged in additional coordination as  needed. Staff from the banking regulators and CFTC also said that  before proposing their respective rules, they began holding regular  meetings to discuss their ideas. According to staff from the regulators,  these meetings, which were typically held at least biweekly, continued  throughout the rulemaking process, although regulatory staff from one  agency said that the regulators would meet more frequently if there were  issues that required more discussion. Federal Reserve staff created  agendas for these recurring meetings. These agendas included  discussion items such as revisions for specific sections and particular  comments for the agencies to consider. Staff from CFTC and one banking  regulator said that they continue to have biweekly conference calls to  discuss the implementation of the rules and issues that may arise  regarding them.
According to staff from CFTC and the banking regulators, their efforts to  coordinate throughout the rulemaking process led to rules that are largely  harmonized, particularly in key areas such as the initial and variation  margin requirements, the timing for posting margin, and the parties that  are required to post the margin. CFTC staff said that one of the goals of  coordinating with the other regulators was to harmonize the rules to the  extent possible and avoid the potential for regulatory arbitrage. Staff  from CFTC and the banking regulators noted that the coordination  process allowed them to resolve several areas where they had  differences. For example, CFTC staff said that initially the prudential  regulators and CFTC were considering setting different thresholds for the  size of an entity that would be subject to the rules. However, they said  that CFTC conducted an analysis that helped the regulators achieve a  consensus on the appropriate threshold.
According to regulators, another area where the prudential regulators and  CFTC initially differed was in their proposed margin requirements for the  treatment of uncleared cross-border swap transactions—transactions  involving swap entities operating in a foreign jurisdiction or organized as  U.S. branches or agencies of foreign banks. In their respective final rules,  CFTC and the prudential regulators came to a similar position regarding  whether to allow entities to comply with comparable margin requirements  in a foreign jurisdiction. The prudential regulators’ rule permits certain  swap entities to comply with a foreign regulatory framework for non- cleared swaps if the regulators jointly determine that the foreign  regulatory framework is comparable to the regulators’ rule. Similarly,  CFTC allows entities, under certain circumstances, to rely on compliance  with a foreign jurisdiction’s margin requirements if CFTC determines they  are comparable to CFTC’s. OCC staff noted that through the  coordination process CFTC came to this determination, in part because  much of the international swap dealer community is subject to the  prudential regulators’ rule rather than CFTC’s rule.
While regulators noted that coordination helped them achieve  comparability between the final rules in many key areas, they identified  one area where differences remain—that of margin requirements for  uncleared swaps with affiliated entities (interaffiliate swaps). Both final  rules require swap entities covered by the rules to collect and post  variation margin for uncleared swaps with affiliates on the same basis as  for nonaffiliated counterparties. However, the final rules are different with  respect to the collection of initial margin for interaffiliate transactions.  While the prudential regulators’ rule does require a swap entity to collect  initial margin from an affiliate, subject to a threshold amount, CFTC  generally does not impose a similar requirement to collect initial margin  from an affiliate (although it stipulates such swaps must be subject to a  centralized risk-management program that is designed to monitor and to  manage the risks associated with such transactions). CFTC’s Chairman  said in his statement of record that interaffiliate transactions are  transactions within the consolidated entity, and not with a third party. As  such, they do not increase the overall risk exposure of the consolidated  entity. In its final rule, CFTC noted that, among other contributing factors,  it considered the difference in mission and overall regulatory framework  between the prudential regulators and CFTC in determining its initial  margin requirement for interaffiliate transactions. CFTC and two banking  regulators’ staff noted that it was unclear at this time as to whether this  difference in the final rules was going to affect interaffiliate transactions.  Two regulators said the regulators will need to monitor potential effects as  the margin rules are implemented. However, in finalizing CFTC’s rule,  one dissenting Commissioner said in her statement of record that CFTC’s  treatment of interaffiliate initial margin places the swap dealers CFTC  regulates and their customers at unnecessary risk in times of financial  stress.
section_title: International Coordination
paragraphs: The Dodd-Frank Act directs CFTC, SEC, and the prudential regulators to  consult and coordinate, as appropriate, with foreign regulatory authorities  on the establishment of consistent international standards for regulating  swaps. Staff from CFTC, SEC, and several of the prudential regulators  participated on the international working group that helped develop the  international framework to regulate uncleared swaps, which was issued in  September 2013 by the Basel Committee on Banking Supervision and the  Board of the International  Organization of Securities Commissions.  According to CFTC staff, the working group coordinated on issues such  as the logistics for the collection of margin and how to treat transactions  in emerging markets. Staff from two banking regulators and CFTC said  that after the international standards were established, the regulators  coordinated through their standing, biweekly meetings to reconcile their  initial proposed rules with the international framework.
section_title: Coordination on the Integrated Mortgage Disclosure Rule Followed CFPB’s Internal Guidance for Agency Consultation
paragraphs: With respect to the integrated mortgage disclosure rule, CFPB followed  its formal consultation process for working with agencies to develop  Dodd-Frank Act rules. As previously discussed, section 1022 of the Dodd- Frank Act requires CFPB to consult with the appropriate prudential  regulators or other federal agencies as part of the rulemaking process. In  March 2012, CFPB developed internal guidelines that outline the  minimum steps that it expects staff to follow during the consultation  process. The guidelines state that while the process may vary depending  on factors such as the nature, complexity, and deadlines of rulemakings,  the process typically includes an opportunity for relevant agencies to coordinate with CFPB before it proposes its rule, after CFPB receives  comments on its proposal, and before the final rule is issued. This  coordination includes in-person briefings and solicitations for input on  CFPB’s approach to the particular rule.
In developing the integrated mortgage disclosure rule, CFPB staff said  that they provided notification of a desire to consult on the rule to the  prudential regulators, offered four briefings during the rulemaking  process, and held other consultations as needed in accordance with its  consultation process guidelines. While developing the proposed and final  rules, CFPB staff provided outlines to the prudential regulators for their  consultation and feedback. According to CFPB staff, when agencies  provided comments in the proposal stage, CFPB staff sometimes updated  the proposed rule to include a request for comment on their suggestions.  For example, staff said that when FDIC suggested that CFPB improve the  disclosures on annual percentage rates, CFPB included a request for  comment in the proposed rule on ways to improve the disclosure.
Staff from CFPB and the prudential regulators said that the prudential  regulators participated in CFPB’s consultation process. For example,  Federal Reserve staff said they participated in several interagency  consultation meetings and calls that occurred throughout the proposed  and final rulemakings. They said that CFPB staff consulted with them  prior to proposing the rule and during the comment process on the rule’s  consistency with prudential, market, and systemic objectives administered  by the Federal Reserve. In addition, Federal Reserve staff provided  informal feedback to enhance the clarity of the rule and facilitate  compliance. FDIC staff described CFPB’s rulemaking process as flexible,  allowing FDIC staff the opportunity to participate and understand CFPB’s  rulemaking process, putting FDIC staff in a better position to explain the  rule to FDIC-supervised banks.
section_title: Indicators of the Impacts of the Dodd- Frank Act on SIFIs and Swaps
paragraphs: Financial regulators continue to implement reforms pursuant to the Dodd- Frank Act, but a number of factors make the full impact of the act  uncertain. In particular, while many rules have been finalized, several  rules have not been finalized or have not yet been started. As of  December 2016, regulators had issued final rules for over 75 percent of  the 236 provisions of the act that we are monitoring. When the act’s  reforms are fully implemented, it can take time for the financial services  industry to comply with the new regulations, which means additional time  is needed to measure the impact of the rules. Moreover, isolating the  Dodd-Frank Act’s effect on the financial marketplace is difficult. Many  other factors that can affect the financial marketplace, such as monetary  policy, could have an even greater impact than the act.
Recognizing these limitations and difficulties, we developed an approach  to analyze current data and trends that might indicate some of the Dodd- Frank Act’s initial impacts. First, using data through the second quarter of  2016, we updated the indicators developed in our December 2012 and  2015 reports to monitor changes in certain characteristics of bank SIFIs,  which are subject to enhanced prudential standards and oversight under  the act. Second, using data through the second quarter of 2016, we  updated indicators of designated nonbanks that we developed in our  December 2015 report that parallel our bank SIFI indicators. Third, using  data through the second quarter of 2016, we updated indicators  developed in our December 2013 report to monitor the extent to which  certain of the act’s swap reforms are consistent with the act’s goals of  reducing risk. These analyses have limitations, which we discuss in the  following sections.
subsections: section_title: Indicators Suggest Large Bank SIFIs Have Become Larger but Less Vulnerable to Financial Distress
paragraphs: According to the legislative history, the Dodd-Frank Act contains  provisions intended to reduce the risk of failure of a large, complex  financial institution and the damage that such a failure could do to the  economy. Such provisions include (1) authorizing FSOC to designate a  nonbank financial company for Federal Reserve supervision if FSOC  determines its material distress or financial activities could pose a threat  to U.S. financial stability and (2) directing the Federal Reserve to impose  enhanced prudential standards on bank holding companies with $50  billion or more in total consolidated assets (bank SIFI) and nonbank  financial companies designated by FSOC (designated nonbanks). The  Federal Reserve has finalized rules imposing enhanced prudential  standards on bank SIFIs, including capital, leverage, and liquidity  requirements, and rules that require these firms to conduct resolution  planning and stress testing, as well as proposed other rules. (See app. IV  for a summary of provisions related to SIFIs and their rulemaking status.)
As we first reported in December 2012, the Dodd-Frank Act and its  implementing rules may result in adjustments to the size,  interconnectedness, complexity, leverage, or liquidity of bank SIFIs over  time. We updated the indicators we developed in our December 2012  and December 2015 reports to monitor changes in some of the  characteristics of bank SIFIs. The size, interconnectedness, and  complexity indicators reflect the potential for financial distress or activities  of a single bank SIFI to affect the financial system and economy (spillover  effects). The leverage and liquidity indicators reflect a SIFI’s resilience to  shocks or its vulnerability to financial distress.
It is important to note however, that these indicators have limitations. For  example, the indicators do not identify causal links between changes in  SIFI characteristics and the act. Rather, the indicators track changes in  the size, interconnectedness, complexity, leverage, and liquidity of SIFIs  since the passage of the act to examine if the changes have been  consistent with the goals of the act. However, other factors—including  international banking standards agreed upon by the Basel Committee on  Banking Supervision (Basel Committee) 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.  Furthermore, because several rules implementing provisions related to  SIFIs have not been finalized or have not yet been started, our indicators  include the effects of these rules only insofar as SIFIs have modified their  behavior in response to issued rules or in anticipation of expected rules  (see app. IV). In this regard, our indicators provide baselines against  which to compare future trends. See appendix V for additional limitations  of our indicators.
Table 5 summarizes the changes in our bank SIFI indicators from the  second or third quarter of 2010 through the second quarter of 2016 (see  app. V for more information). For example:
Changes in some size and complexity indicators are consistent with  increased potential spillover effects for large bank SIFIs (which we  define as bank holding companies with $500 billion or more in assets),  while changes in interconnectedness and other size and complexity  indicators are consistent with decreased or no change in potential  spillover effects for large bank SIFIs.
Changes in size, interconnectedness, and complexity indicators are  consistent with decreased or no change in potential spillover effects  for other bank SIFIs (which we define as bank holding companies with  at least $50 billion but less than $500 billion in assets).
Changes in all of our leverage and liquidity indicators are consistent  with increased resilience for both large bank SIFIs and for other bank  SIFIs.
section_title: Indicators Suggest Designated Nonbanks Have Become More Resilient and Less Interconnected
paragraphs: We updated indicators associated with size, interconnectedness,  leverage, and liquidity for institutions whose material financial distress or  activities FSOC determines could pose a threat to U.S. financial stability  and therefore should be subject to Federal Reserve supervision and  enhanced prudential standards. During 2013 and 2014, FSOC designated  four nonbank financial companies for Federal Reserve supervision  pursuant to a determination that their material financial distress could  pose a threat to U.S. financial stability. These included the American  International  Group, Inc. (AIG) in July 2013, General Electric Capital  Corporation, Inc. (GECC) in July 2013, Prudential Financial, Inc.  (Prudential) in September 2013, and MetLife, Inc. (MetLife) in December  2014. FSOC determined that each of these institutions was predominately  engaged in financial activities (that is, at least 85 percent of their  revenues were derived from, or more than 85 percent of their assets were  related to, activities that were financial in nature). According to FSOC, at  the time of the designations, AIG was the third-largest insurance  company in the United States and one of the largest insurers in the world;  GECC was one of the largest holding companies in the United States and  a significant source of credit to commercial and consumer customers;  Prudential was one of the largest financial services companies in the  United States providing a wide array of financial services, including group  and individual life insurance, annuities, retirement-related products and  services, and asset management; and MetLife was the largest publicly  traded U.S. insurance organization and one of the largest financial  services companies in the United States. However, in March 2016, the  U.S. District Court for the District of Columbia invalidated  FSOC’s  designation of MetLife. Then, in June 2016, after the reorganization of  GECC, FSOC rescinded the nonbank’s designation noting that divestures  and organizational changes significantly reduced the potential for any  material financial distress to threaten financial stability.
As we first reported in December 2012, the Dodd-Frank Act and its  implementing rules may result in adjustments to size, interconnectedness,  leverage, and liquidity characteristics of designated nonbanks over time.  Size and interconnectedness reflect the potential for the financial distress  of a single designated nonbank to affect the financial system and  economy, while leverage and liquidity reflect a designated nonbank’s  resilience to shocks or its vulnerability  to financial distress. In our  December 2015 report, we developed the following indicators based on  the characteristics of companies that FSOC reviews as part of its process  for designating nonbanks:
Size. Our indicator of size is total consolidated assets.
Interconnectedness. Our indicators of interconnectedness are gross  notional amounts of credit default swaps outstanding for which the  designated nonbank is the reference entity and total debt outstanding  (excluding deposit liabilities).
Leverage. Our indicator of leverage is total equity as a percentage of  total assets, except separate accounts.
Liquidity. Our indicator of liquidity is short-term debt (excluding  deposit liabilities) as a percentage of total assets, except separate  accounts.
We calculated each indicator, for each quarter, for each of the currently  designated nonbanks from the second quarter of 2012 to the second  quarter of 2016. We also calculated the medians of each indicator for  publicly traded banks and insurance companies with total consolidated  assets of $50 billion or more to provide a frame of reference.
Like our indicators for bank SIFIs, our indicators for designated nonbanks  have some limitations. For example, the indicators do not identify causal  links between changes in designated nonbanks’ characteristics and the  Dodd-Frank Act. Rather, the indicators track changes in the size,  interconnectedness, leverage, and liquidity of designated nonbanks since  the passage of the act to examine if the changes have been consistent  with the goals of the act. However, other factors, such as capital  standards for large, internationally active insurance companies, may also  affect designated nonbanks and, thus, the indicators. Furthermore, to the  extent that a number of rules implementing provisions related to  designated nonbanks have not yet been finalized, our indicators include  the effects of these rules only insofar as designated nonbanks have  changed their behavior in anticipation of expected rules. In this regard,  our indicators provide baselines against which to compare future trends.
Figure 1 shows the indicators from the second quarter of 2012 through  the second quarter 2016. In November 2011 and October 2012, the  Federal Reserve issued specific rules requiring designated nonbank  financial companies to conduct resolution planning and stress testing,  respectively, and in June 2016 proposed rules that would establish  corporate governance, risk-management, and liquidity risk-management  standards for these firms. Thus, the current values of our indicators are  baselines against which to compare future trends as more rules for  designated nonbanks are implemented.
Our indicators allow for the following observations:
Based on their total assets, both designated nonbanks are relatively  large. They are all larger than the median publicly traded bank or  insurance company with assets of $50 billion or more.
Gross notional amounts of credit default swaps outstanding (for which  designated nonbanks are the reference entities) have decreased  since the second quarter of 2012, suggesting that the designated  nonbanks are relatively less interconnected and thus have smaller  potential spillover effects than in prior years by this measure, all else  being equal.
Total debt outstanding (excluding deposits) for the two designated  nonbanks has decreased since the second quarter of 2012. These  trends suggest that the designated nonbanks have become less  interconnected and thus have smaller potential spillover effects than  in prior years based on this indicator, all else being equal.
Total equity as a percentage of assets, except separate accounts,  ranged from about 21 percent for AIG to about 11 percent for  Prudential in the second quarter of 2016. This range in leverage  suggests that the designated nonbanks have varying resilience to  shocks and financial distress by this measure, all else being equal.
Short-term debt as a percentage of assets, except separate accounts,  decreased from the second quarter of 2012 to the second quarter of  2016. Decreases in short-term debt as a percentage of assets, except  separate account ranged from about 71 percent for AIG  to about 42  percent for Prudential. These trends suggest that the two designated  nonbanks’ resilience to shocks and financial distress has improved by  this measure, all else being equal.
section_title: Higher Percentages of Collateral for Swaps by Banks May Reduce Credit Loss
paragraphs: As we reported in December 2013, once fully implemented, some  provisions in Title VII  of the Dodd-Frank Act may help reduce systemic  risks to financial markets in part by increasing margins posted for over- the-counter swaps. In November 2015 and January 2016, respectively,  the prudential regulators and CFTC published final rules on margin  requirements for uncleared swaps, for swap dealers and major swap  participants, pursuant to the Dodd-Frank Act. As discussed previously,  the final rules establish minimum initial and variation margin  requirements. Using data through the second quarter of 2016, we  updated the set of indicators that we developed in our December 2013  report and updated in our December 2014 and December 2015 reports to  measure changes in the use of margin collateral for over-the-counter  derivatives. This set of indicators may shed light on changes in the use  of margin collateral associated with Dodd-Frank Act swap reforms as they  are implemented, but the indicators have several key limitations, as  described later in this section.
Our margin indicators measure the fair value of collateral pledged by  counterparties to secure over-the-counter derivatives contracts as a  percentage of net current credit exposure for those counterparties for  bank holding companies. To protect itself from the loss it would incur if a  counterparty defaulted on a derivatives contract, a swap entity could  require counterparties to post margin collateral in an amount equal to or  greater than its exposure to the contracts. An increase in collateral as a  percentage of credit exposure suggests that holding companies have  required their counterparties to post a greater amount of collateral against  their credit exposure due to derivatives contracts overall, which would be  consistent with the purposes of the act’s swap reforms.
Figure 2 shows trends in our margin indicators from the second quarter of  2009 through the second quarter of 2016. The rate of collateralization of  net current credit exposure for all counterparties has increased from  about 71 percent in the third quarter of 2010 to about 91 percent in the  second quarter of 2016, suggesting that holding companies generally  required their counterparties to post a greater amount of collateral against  their derivatives contracts. However, as discussed later, aggregate  measures of collateralization rates can mask differences in  collateralization rates for different counterparty types.
Collateral posted by type of counterparty—banks and securities firms,  monoline financial guarantors, hedge funds, sovereign governments, and  corporate and all other counterparties—increased (as a percentage of net  credit exposure) between the second quarter of 2009 and the second  quarter of 2016. However, the rate of collateralization consistently  differed by the type of counterparty, with hedge funds consistently posting  more collateral as a percentage of credit exposure than other types of  counterparties. As we reported in December 2013, according to OCC, the  rates differ partly because swaps dealers may require certain  counterparties to post both initial and variation margin and other  counterparties to post only variation margin. Under the prudential  regulators’ 2015 final rule and CFTC’s 2016 final rule for uncleared  swaps, minimum floors are set for both initial and variation margins and  as a result, the final rules may further contribute to higher rates of  collateralization.
Our margin indicators, while suggestive, are subject to important  limitations. First, they do not identify causal links between changes in  collateralization and the Dodd-Frank Act, including its regulations. Rather,  the set of indicators tracks changes in collateralization since the act’s  passage to examine if the changes were consistent with the act’s goals  for increasing collateralization. Second, both net current credit exposure  and the fair value of collateral are as of a point in time because the fair  values of derivatives contracts and collateral can fluctuate over time.  Third, an average collateralization of 100 percent does not ensure that all  current counterparty exposures have been eliminated because one  counterparty’s credit exposure may be overcollateralized and another’s  undercollateralized. Fourth, our indicators measure the fair value of the  collateral held against net current credit exposures but do not necessarily  measure the risk of uncollateralized losses. The fair value of net current  credit exposure does not fully account for the riskiness of any single swap  contract. If a party has entered into riskier swaps, it is possible for the rate  of collateralization to increase while the risk of uncollateralized losses  also increases. Fifth, our indicators are market aggregates that may not  reflect the collateralization rate for any single company. Finally, these  indicators do not reflect collateralization rates for companies, such as  stand-alone broker-dealers, which have credit exposure to counterparties  in over-the-counter derivatives contracts but are not affiliated with a bank  holding company.
section_title: Agency Comments
paragraphs: We provided a draft of this report to CFPB, Federal Reserve, FDIC, OCC,  NCUA, SEC, and CFTC for review and comment. The regulators provided  technical comments, which we have incorporated, as appropriate.
We are sending copies of this report to the appropriate congressional  committees and members and federal financial regulators. 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 evansl@gao.gov. Contact points for our   Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act  (Dodd-Frank Act), various federal agencies are directed or have the  authority to issue hundreds of regulations to implement the act’s  provisions. This report discusses the  regulatory analyses conducted by federal financial regulators  (financial regulators) in their Dodd-Frank Act rulemakings, including  their assessments of which rules they considered to be major rules; coordination between and among federal regulators on these  indicators of the impact of selected Dodd-Frank Act provisions and  their implementing regulations on financial market stability.
The financial regulators are the Bureau of Consumer Financial Protection,  also known as the Consumer Financial Protection Bureau (CFPB), the  Board of Governors of the Federal Reserve System (Federal Reserve),  Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller  of the Currency (OCC), National Credit Union Administration (NCUA),  Commodity Futures Trading Commission (CFTC), and the Securities and  Exchange Commission (SEC).
To examine the regulatory analyses conducted by the regulators, we  focused our analysis on final rules issued pursuant to the Dodd-Frank Act  that were effective between July 22, 2015, and July 23, 2016, a total of 30  rules (see app. II). We compiled these rules from a website maintained by  the Federal Reserve Bank of St. Louis that tracks Dodd-Frank Act  regulations, which we corroborated with officials from the agencies under  review. In examining the regulatory analyses of the agencies in our  review, we reviewed federal statutes, regulations, GAO studies, and other  material to identify the regulatory analyses the agencies had to conduct  as part of their Dodd-Frank rulemakings, focusing on those analyses  required under the Paperwork Reduction Act (PRA) and the Regulatory  Flexibility Act (RFA). We reviewed Federal Register notices of final rules  for the agencies’ determinations of the applicability of PRA and RFA. In  some instances, the regulators determined that the analysis was not  required or not applicable and indicated this in their final rulemaking. Two  analysts recorded the agencies’ determination of whether PRA and RFA  were required in a spreadsheet. Using GAO’s Federal Rules database,  we found that 9 of the 30 rules were identified as major rules, per the  Office of Management and Budget (OMB) guidance, under the  Congressional Review Act because they resulted in or are likely to result  in an annual impact on the economy of $100 million or more; a major  increase in costs or prices; or significant adverse effects on competition,  employment, investment, productivity, innovation, or on the ability of U.S.- based enterprises to compete with foreign-based enterprises in domestic  and export markets. For agencies subject to Executive Order (E.O.)  12,866, such major rules would be considered significant regulatory  actions and subject to formal cost-benefit analysis.
We also developed a data collection instrument to compare and assess  the regulatory analysis conducted for the major rules against the  principles outlined in OMB Circular A-4, which provides guidance to  federal agencies on the development of regulatory analysis. To conduct  our analyses, we reviewed Federal Register releases of the final rules  and the cost-benefit analyses they included in the final rules, and we  interviewed agency staff from CFPB, CFTC, SEC, Federal Reserve,  FDIC, NCUA, and OCC. We selected five rules for in-depth review,  comparing the cost-benefit or similar analyses to specific principles in  OMB Circular A-4. To narrow the list from 9 major rules to the 5 rules  subject to in-depth review, we selected rules that were from a variety of  agencies, including one joint rule, and that covered varied topics. In  conducting each individual analysis, we reviewed Federal Register  notices prepared by agencies during the course of the rulemaking.
To examine interagency coordination among the regulators, we reviewed  the Dodd-Frank Act, Federal Register releases, and GAO reports to  identify the interagency coordination and consultation requirements for  the 30 rules in our scope. As part of this review, analysts looked for key  words relating to consultation and coordination in the Federal Register  releases and recorded this information in a spreadsheet. An attorney then  independently evaluated each determination documented in the  spreadsheet to reach concurrence on the assessment. (See app. III  for a  list of rules and determination of whether coordination was required). We  also interviewed officials or staff from CFPB, CFTC, SEC, FDIC, NCUA,  the Federal Reserve, and OCC to identify changes in the nature of  interagency coordination and consultation. We also asked the financial  regulators’ staff to identify any instances of interagency coordination not  specified in the Federal Register releases, and if they did not coordinate,  to discuss the reasons why. We did not examine the effects of  noncoordination on rulemakings, which was beyond the scope of our  review.
We also selected three rules for in-depth review of interagency  coordination: CFTC’s and the prudential regulators’ respective rules on  margin requirements for uncleared swaps and CFPB’s rule on integrated  mortgage disclosures. We selected these rules based on the opportunity  for extensive interagency coordination. We selected the rules on margin  requirements for uncleared swaps because the prudential regulators and  CFTC issued rules that required coordination among the prudential  regulators as well as between the prudential regulators and CFTC. We  selected the integrated mortgage disclosure rule because of CFPB’s  requirement to consult with the appropriate prudential regulators and  other federal agencies on consistency with prudential, market, or  systemic objectives administered by such agencies before proposing a  rule. We interviewed the responsible agencies to discuss the outcomes of  coordination and specific areas where coordination or harmonization of  rules was a priority and obtained documentation of specific examples of  interagency coordination and consultation.
To analyze the impact of the Dodd-Frank Act on financial market stability,  we updated several indicators developed in our prior reports with data  through the second quarter of 2016. The indicators display trends in both  banks that are systemically important financial institutions (bank SIFI) and  nonbank financial institutions designated by the Financial Stability  Oversight Council (FSOC) for supervision by the Federal Reserve. We  updated indicators monitoring changes in size, interconnectedness,  complexity, leverage, and liquidity of bank SIFIs. Since we began  developing and tracking indicators for bank SIFIs, FSOC has designated  three nonbank institutions for enhanced supervision by the Federal  Reserve. As such, we updated indicators developed in our December  2015 report that are associated with the size, interconnectedness,  leverage, and liquidity of these institutions. Finally, we updated our  indicators that monitor the extent to which certain swap reforms are  consistent with the act’s goals of reducing risk. For those parts of our  methodology that involved the analysis of computer- processed data from  Bloomberg, the Federal Reserve Bank of Chicago, the Federal Reserve,  the National Information Center, and the Bureau of Economic Analysis,  we assessed the reliability  of these data by reviewing relevant  documentation and electronically testing the data for missing values,  outliers, and invalid values. We determined the data were sufficiently  reliable for our purposes of monitoring changes in bank SIFIs and  designated nonbanks and assessing the amount of margin collateral that  over-the-counter derivatives counterparties used.
We conducted this performance audit from June 2016 to December 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Dodd-Frank Act Rules Effective as of July 22, 2016
paragraphs: The following table lists the 30 Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank-Act) rules that we identified as  having effective dates during the scope of our review,—from July 23,  2015 through July 22, 2016. Nine rules were major.
section_title: Appendix III: Coordination for Dodd-Frank Act Rules Effective as of July 22, 2016
paragraphs: The following table lists the 30 Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank Act) rules that we identified as  having effective dates during the scope of our review (from July 23, 2015,  through July 22, 2016), whether we found evidence of coordination during  the rulemaking process, whether the Dodd-Frank Act required  interagency or international coordination, and the nature of coordination, if  any.
section_title: Appendix IV: Summary of Rulemakings Related to Selected Dodd-Frank Act Provisions Applicable to Designated Nonbanks and Systemically Important Banks
paragraphs: The Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) contains several provisions—including designation by the  Financial Stability Oversight Council (FSOC) for supervision by the Board  of Governors of the Federal Reserve System (Federal Reserve) and  enhanced prudential standards—that apply to nonbank financial  companies if FSOC determines that material financial distress at the  company or the nature, scope, size, scale, concentration,  interconnectedness, or mix of activities at the company could pose a  threat to U.S. financial stability. Enhanced prudential standards also apply  to bank holding companies with $50 billion or more in total consolidated  assets. For this report, we refer to those nonbank financial companies as  designated nonbanks and bank holding companies as systemically  important banks (bank SIFIs), respectively. Table 8 summarizes some of  the Dodd-Frank Act provisions and the rulemakings, including their status,  to implement those provisions as of July 22, 2016.
section_title: Appendix V: Trends in GAO Indicators for Bank Systemically Important Financial Institutions
paragraphs: We updated indicators to monitor changes in the size,  interconnectedness, complexity, leverage, and liquidity of bank holding  companies with $50 billion or more in total consolidated assets—bank  systemically important financial institutions or bank SIFIs). As we first  reported in December 2012, some provisions of the Dodd-Frank Wall  Street Reform and Consumer Protection Act (Dodd-Frank Act) and  related rules may result in adjustments to the these characteristics of  bank SIFIs over time. The size, interconnectedness, and complexity  indicators are intended to capture the potential for a bank SIFI’s financial  distress to affect the financial system and economy (spillover effects).  The leverage and liquidity indicators are intended to capture a bank SIFI’s  resilience to shocks or its vulnerability  to financial distress.
subsections: section_title: Data
paragraphs: We used the following data to construct our indicators: quarterly data on the price index for gross domestic product, which we  obtained from the Bureau of Economic Analysis for the period from  the second quarter of 2006 to the second quarter of 2016; annual data on numbers and locations of legal entities for holding  companies obtained from the Board of Governors of the Federal  Reserve System (Federal Reserve) for the period from the second  quarter of 2010 to the second quarter of 2016; quarterly data on second-tier bank holding companies, which we  obtained from the Federal Reserve via the National Information  Center for the period from the second quarter of 2009 to the second  quarter of 2016; quarterly balance sheet and income statement data that bank holding  companies report on Form FR Y-9C, which we obtained from the  Federal Reserve Bank of Chicago for the period from the second  quarter of 2009 to the second quarter of 2016; and quarterly data on gross notional amounts of credit default swaps  outstanding by reference entity, which we obtained from Bloomberg  for the period from the third quarter of 2010 to the second quarter of  2016.
section_title: Sample
paragraphs: Our analysis   for our size, leverage, liquidity, and one of our  interconnectedness indicators generally includes all top-tier U.S. bank  holding companies, including any U.S.-based bank holding company  subsidiaries of foreign banking organizations, with total consolidated  assets of $1 billion or more that filed Form FR Y-9C for one or more  quarters during the period from the first quarter of 2006 to the second  quarter of 2016. We chose the threshold of $1 billion in assets to match  the threshold for reporting Form FR Y-9C starting in the first quarter of  2015. For our complexity indicators and one interconnectedness  indicator, we used data on top-tier U.S. bank holding companies with total  consolidated assets of $50 billion or more. We defined bank SIFIs as  bank holding companies with total assets of $50 billion or more. We  defined large bank SIFIs as bank holding companies with total assets of  $500 billion or more, and we defined other bank SIFIs as bank holding  companies with total assets of at least $50 billion but less than $500  billion. We defined non-SIFI bank holding companies as bank holding  companies with less than $50 billion in total assets.
section_title: Methodology
paragraphs: We calculate each of our indicators for each bank holding company in our  sample for each quarter from the first quarter of 2006 to the second  quarter of 2016, with the exceptions of our complexity indicators, which  we calculate only for bank SIFIs as of the second quarter of each year  from 2006 to 2016, and one of our interconnectedness indicators, which  we calculate only for bank SIFIs for the period from the third quarter of  2010 to the second quarter of 2016. We then calculate the median value  of each indicator for each group of bank holding companies—large bank  SIFIs, other bank SIFIs, all bank SIFIs, non-SIFI  bank holding companies,  and all bank holding companies, to the extent possible—and track the  median values over time. Finally, we assess the changes in the median  values of the indicators for large bank SIFIs and other banks SIFIs  between the second or third quarter of 2010 and the second quarter of  2016, depending on the indicator. We say that an indicator has increased  or decreased if it has changed by 5 percent or more, depending on the  direction of the change, and we say that an indicator has remained about  the same if it has changed by less than 5 percent. When stating the  implications of the indicator on potential spillover effects, we assume all  other things are held equal.
section_title: Limitations
paragraphs: Our indicators analysis has limitations. For example, the indicators do not  identify causal links between changes in bank SIFI characteristics and the  act. Rather, the indicators track changes in the size, interconnectedness,  complexity, leverage, and liquidity of bank SIFIs since the Dodd-Frank Act  was passed to examine whether the changes were 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), and monetary policy actions— also affect bank holding companies and, thus, the indicators. These  factors may have a greater effect on bank SIFIs than the Dodd-Frank Act.  In addition, some rules implementing provisions related to bank SIFIs  have not yet been finalized or fully implemented. Thus, changes in our  indicators include the effects of these rules only insofar as bank SIFIs  have changed their behavior in response to issued rules and in  anticipation of expected rules. In this sense, our indicators provide  baselines against which to compare future trends. Furthermore, each  indicator has its own specific limitations, which we expand on in the  following sections.
section_title: Indicators
subsections: section_title: Size
paragraphs: An institution’s size is associated with the potential for its financial  distress to affect the financial system and the broader economy (spillover  effects). We developed three indicators of size: (1)—the number of bank  holding companies with assets of $50 billion or more, (2) total assets of  the consolidated bank holding company as reported on its balance sheet  (adjusted for inflation and measured in billions of second quarter 2016  dollars), and (3) the market share of the bank holding company (equal to  its total assets as a percentage of the total assets of all of the holding  companies we analyzed).
These indicators do not include an institution’s off-balance-sheet activities  and thus may understate the amount of financial services or  intermediation an institution provides. Also, asset size alone is not an  accurate determinant of systemic significance because an institution’s  systemic significance also depends on other factors, such as its  complexity and interconnectedness. Furthermore, some bank SIFIs are  U.S.-based bank holding company subsidiaries of foreign banking  organizations, and the size of these bank SIFIs may not reflect the  potential for the parent company’s financial distress to affect the financial  system and the economy.
We observed the following changes in our size indicators over the period  from the third quarter of 2010 to the second quarter of 2016 (see table 9):
The number of bank SIFIs decreased by one between the third  quarter of 2010 and the second quarter of 2016. The number of large  bank SIFIs decreased by one, and the number of other bank SIFIs  was the same.
Median assets of bank SIFIs decreased by about 16 percent. Median  assets of large bank SIFIs increased by about 38 percent, while  median assets of other bank SIFIs decreased by about 10 percent.
Median market shares of bank SIFIs decreased by about 13 percent.
Median market shares of large bank SIFIs increased by about 42  percent while median market shares of other bank SIFIs decreased by  about 7 percent.
Interconnectedness reflects direct or indirect linkages between financial  institutions that may transmit distress from one financial institution to  another (spillover effects). We developed two indicators of  interconnectedness based on those that the Financial Stability Oversight  Council uses in the first stage of its process for designating nonbank  SIFIs (1)—gross notional amount of credit default swaps outstanding for  which the institution is the reference entity (adjusted for inflation and  measured in millions of second quarter 2016 dollars) and (2) total debt  outstanding (adjusted for inflation and measured in second quarter 2016  dollars). We measure total debt outstanding as the difference between  total liabilities and total deposits.
We observed the following changes in our interconnectedness indicators  over the period from the third quarter of 2010 to the second quarter of  2016 (see table 10):
Median credit default swaps gross notional amounts among bank  SIFIs that are reference entities decreased by about 65 percent.  Median credit default swaps gross notional amounts for large bank  SIFIs that are reference entities have decreased by about 62 percent,  while median credit default swaps gross notional amounts for other  bank SIFIs that are reference entities decreased by about 80 percent.  We note that few bank SIFIs are reference entities—only six or seven  large bank SIFIs are reference entities, and only three or four other  bank SIFIs are reference entities in any one quarter.
Median total debt outstanding for bank SIFIs decreased by about 19  percent. Median debt outstanding for large bank SIFIs decreased by  about 23 percent, while median debt outstanding for other bank SIFIs  remained about the same.
Institutions that are more complex are likely to be more difficult to resolve  and therefore cause significantly greater disruption to the wider financial  system and economic activity if they fail (spillover effects). Resolution via  a bankruptcy or under the backstop orderly liquidation authority in Title II  of the Dodd-Frank Act may be more difficult if a large number of legal  entities or legal systems are involved. For example, a SIFI with a large  number of legal entities—particularly foreign ones operating in different  countries under different regulatory regimes—may be more difficult to  resolve than a SIFI with fewer legal entities in fewer countries. We  developed three indicators of this type of complexity (1)—the number of a  bank SIFI’s legal entities, (2) the number of a bank SIFI’s foreign legal  entities, and (3) the number of countries in which a bank SIFI’s foreign  legal entities are located.
A key limitation of our indicators is that they may not capture all relevant  aspects of the complexity of a SIFI, such as complexity that could result  from being a subsidiary of a foreign company.
We observed the following changes in our complexity indicators over the  period from the second quarter of 2010 to the second quarter of 2016  (see table 11):
Median numbers of legal entities for bank SIFIs decreased by 37, or  about 28 percent. Median numbers of legal entities for large bank  SIFIs decreased by 1016, or about 37 percent, and median numbers  of legal entities for other bank SIFIs decreased by 26, or about 24  percent.
Median numbers of foreign legal entities for bank SIFIs decreased by  1, or about 11 percent. Median numbers of foreign legal entities for  large bank SIFIs increased by 131, or about 20 percent, and median  numbers of foreign legal entities for other bank SIFIs decreased by 2,  or about 33 percent.
Median numbers of countries in which foreign legal entities are  located for bank SIFIs decreased by 1, or about 20 percent. Median  numbers of countries in which foreign legal entities are located for  large bank SIFIs remained about the same (increased by 1, or about 2  percent), and median numbers of countries in which foreign legal  entities are located for other bank SIFIs decreased by 1, or about 25  percent.
Leverage generally captures the relationship between an institution’s  exposure to risk and capital that can be used to absorb losses from that  exposure (resilience). Institutions with more capital to absorb losses are  less likely to fail, all else being equal. We track two indicators of  leverage—(1) a bank SIFI’s tangible common equity as a percentage of  total assets and (2) a bank SIFI’s total bank holding company equity as a  percentage of total assets. Tangible common equity is calculated by  subtracting the sum of intangible assets and perpetual preferred stock  (net of related Treasury stock) from the company’s equity capital.
A limitation of both indicators is that they may not fully reflect an  institution’s exposure to risk because total assets do not reflect an  institution’s risk exposure from off-balance-sheet activities and generally  treat all assets as equally risky.
We observed the following changes in our leverage indicators over the  period from the third quarter of 2010 to the second quarter of 2016 (see  table 12):
Median tangible common equity as a percentage of assets for bank  SIFIs increased by about 34 percent. Median tangible common equity  as a percentage of assets for large bank SIFIs increased by about 23  percent, and median tangible common equity as a percentage of  assets for other bank SIFIs increased by about 32 percent.
Median total equity as a percentage of assets for bank SIFIs  increased by about 15 percent. Median total equity as a percentage of  assets for large bank SIFIs increased by about 27 percent, and  median total equity as a percentage of assets for other bank SIFIs  increased by about 11 percent.
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. Institutions with more liquidity (and less liquidity  risk), are less likely to fail, all else being equal (resilience). We developed  two indicators of liquidity: (1)—short-term liabilities as a percentage of  total liabilities and (2) liquid assets as a percentage of short-term  liabilities. Short-term liabilities reflect an institution’s potential need for  liquidity in the immediate future. We measure short-term 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 jumbo time deposits (deposits of  $100,000 or more) held in domestic offices. Liquid assets are assets that  can be sold easily without affecting their price and, thus, can be  converted easily to cash to cover debts that come due. Accordingly, liquid  assets as a percentage of an institution’s short-term liabilities are a  measure of an institution’s capacity to meet potential upcoming  obligations. 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.
A limitation of both indicators is that they do not include off- balance-sheet  liabilities, such as callable derivatives or other potential derivatives-  related obligations. The second indicator also does not include off-  balance-sheet liquid assets, such as short-term income from derivative  contracts. Because these limitations affect both the numerator and the  denominator of our indicators, we cannot determine whether the  exclusion of off-balance-sheet items results in an under- or overstatement  of an institution’s liquidity need and access.
We observed the following changes in our liquidity indicators over the  period from the third quarter of 2010 and to the second quarter of 2016  (see table 13):
Median short-term liabilities as a percentage of total liabilities for bank  SIFIs decreased by about 12 percent. Median short-term liabilities as  a percentage of total liabilities for large bank SIFIs decreased by  about 26 percent, and median short-term liabilities as a percentage of  total liabilities for other bank SIFIs decreased by about 20 percent.
Median liquid assets as a percentage of short-term liabilities for bank  SIFIs increased by about 66 percent. Median liquid assets as a  percentage of short-term liabilities for large bank SIFIs increased by  about 54 percent, and median liquid assets as a percentage of short- term liabilities for other bank SIFIs increased by about 61 percent.
section_title: Appendix VI: Dodd-Frank Rules Implementing Central Clearing, Capital, and Margin Swap Reforms
paragraphs: The following tables list select rules that implement sections of Title VII  of  the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) related to central clearing requirements for swaps and  security-based swaps, and margin and capital requirements for swaps  entities, as of July 22, 2016.
section_title: Appendix VII: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Stefanie Jonkman (Assistant  Director), Janet Fong (Analyst-in-Charge), Farrah Graham, Donald  Hirasuna, Courtney LaFountain, John McGrail, Marc Molino,  Jennifer  Schwartz, and Shannon Smith made key contributions to this report.