Dodd-Frank Regulations: Agencies Conducted Regulatory Analyses and Coordinated but Could Benefit from Additional Guidance on Major Rules
Released: 2013-12-11T00:00:00

Letter

Background

Financial Services Regulation

The U.S. financial regulatory structure is a complex system of multiple federal and state regulators as well as self-regulatory organizations that operates largely along functional lines. That is, financial products or activities generally are regulated according to their function, no matter which entity offers the product or participates in the activity. The functional regulator approach is intended to provide consistency in regulation, focus regulatory restrictions on the relevant functional areas, and avoid the potential need for regulatory agencies to develop expertise in all aspects of financial regulation.

In the banking industry, the specific regulatory configuration 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; thrifts, which include savings banks, savings associations, 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 an historical emphasis on serving people of modest means.

Charters may be obtained at the state or federal level. State regulators charter institutions and participate in the institutions’ oversight, but all institutions that have federal deposit insurance have a federal prudential regulator. The federal prudential regulators—which generally may issue regulations and take enforcement actions against industry participants within their jurisdiction—are identified in table 1. Additionally, the Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrifts, while the National Credit Union Administration (NCUA) insures deposits in federal and most state-chartered credit unions.

Holding companies that own or control a bank or thrift are subject to supervision by the Board of Governors of the Federal Reserve System (Federal Reserve). 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 both bank holding companies 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 the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), respectively. SEC regulates the securities markets, including participants such as securities exchanges, broker-dealers, investment companies, and investment advisers. 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 the 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 of 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. Like SEC, 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. In addition, Title VII of the Dodd-Frank Act expands regulatory responsibilities for CFTC and SEC by establishing a new regulatory framework for 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.

Futures commission merchants are individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of a commodity for future delivery, among other products, on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted. 7 U.S.C. § 1a(28). Firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association, the industrywide self-regulatory organization for the U.S. futures industry. provide consumer financial products and services. Certain consumer financial protection functions from seven federal agencies were transferred to CFPB. CFPB has authority to supervise companies in the mortgage, payday lending, and private student lending markets. As such, CFPB is authorized to supervise certain nonbank consumer financial service companies and insured depository institutions and credit unions with over $10 billion in assets and their affiliates for compliance with federal consumer financial protection laws and related purposes. CFPB does not have authority over most insurance activities or most activities conducted by firms regulated by SEC or CFTC.

Financial Stability Oversight Council (FSOC)

The Dodd-Frank Act established FSOC to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system. The Dodd- Frank Act also established the Office of Financial Research within the U.S. Department of the Treasury (Treasury) to serve FSOC and its member agencies by improving the quality, transparency, and accessibility of financial data and information; conducting and sponsoring research related to financial stability; and promoting best practices in risk management. FSOC’s membership consists of the Secretary of the Treasury, who chairs the council; the heads of CFPB, CFTC, FDIC, the Federal Reserve, the Federal Housing Finance Agency, NCUA, the Office of the Comptroller of the Currency (OCC), and SEC; the directors of the Office of Financial Research and the Federal Insurance Office; representatives from state-level financial regulators; and an independent member with insurance experience.

Dodd-Frank Regulations

Under the Dodd-Frank Act, federal financial regulatory agencies are directed or have the authority to issue hundreds of regulations to implement the act’s provisions. In some cases, the act gives the agencies little or no discretion in deciding how to implement the provisions. For instance, the Dodd-Frank Act made permanent a temporary increase in the FDIC deposit insurance coverage amount ($100,000 to $250,000); therefore, FDIC revised its implementing regulation to conform to the change. However, other rulemaking provisions in the act appear to be discretionary in nature, stating that (1) certain agencies may issue rules to implement particular provisions or that the agencies may issue regulations that they decide are “necessary and appropriate;” or (2) agencies must issue regulations to implement particular provisions but have some level of discretion over the substance of the regulations. As a result, for these rulemaking provisions, the agencies may decide to promulgate rules for some or all of the provisions, and may have broad discretion to decide what these rules will contain and what exemptions, if any, will apply.

Regulatory Analyses in Federal Rulemaking

As mentioned earlier, federal agencies generally must conduct regulatory analysis pursuant to PRA and RFA, among other statutes, as part of their rulemakings. PRA and RFA require federal agencies, including financial regulators, to assess various impacts and costs of their rules. However, the statutes do not require the agencies to conduct formal benefit and cost analyses that require identification and assessment of alternatives.

Pub. L. No. 111-203, Tit. X, § 1022(b)(2) (codified at 12 U.S.C. § 5512(b)(2)). a rule should not be adopted if it would impose a burden on competition that is not necessary or appropriate to the act’s purposes.

The Electronic Funds Transfer Act, as amended by the Dodd-Frank Act, requires the Federal Reserve to prepare an analysis of the economic impact of regulations issued by the Federal Reserve that considers the costs and benefits to financial institutions, consumers, and other users of electronic fund transfers. The analysis must address the extent to which additional paperwork would be required, the effects upon competition in the provision of electronic banking services among large and small financial institutions, and the availability of such services to different classes of consumers, particularly low-income consumers.

Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993). For significant rules, the order further requires agencies to prepare a detailed regulatory (or economic) analysis of both the benefits and costs. More recently, E.O. 13,563 supplemented E.O. 12,866, in part by incorporating its principles, structures, and definitions. Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 18, 2011). E.O. 12,866 contains 12 principles of regulation that direct agencies to perform specific analyses to identify the problem to be addressed, assess its significance, assess both the benefits and costs of the intended regulation, design the regulation in the most cost-effective manner to achieve the regulatory objective, and base decisions on the best reasonably obtained information available. regulatory actions should be measured and reported. Of the federal agencies included in our review, only FSOC and Treasury are subject to E.O. 12,866. As independent regulatory agencies, the federal financial regulators—CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and SEC—are not subject to E.O. 12,866 and OMB’s Circular A-4. Although not subject to E.O. 12,866 and OMB Circular A-4, most of the federal financial regulators told us that they try to follow Circular A-4 in spirit. In our 2011 report, we found that the policies and procedures of these regulators did not fully reflect OMB guidance and recommended that they incorporate the guidance more fully in their rulemaking guidance. Since then, FDIC, OCC, and SEC revised their guidance as we recommended, but the other agencies have not.

Agencies Conducted Required Regulatory Analyses but May Not Be Identifying All Major Rules

In the Federal Register releases of the 59 Dodd-Frank rules that we identified and reviewed, the issuing federal agencies stated that they conducted the regulatory analyses required by various federal statutes.As independent regulatory agencies, the federal financial regulators— CFPB, CFTC, FDIC, the Federal Reserve, OCC, NCUA, and SEC—are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by OMB. Under CRA, OMB is responsible for determining which rules are major but relies on agency analyses to help make the determination. However, our analysis showed that OMB and the agencies may not have applied the CRA criteria consistently in determining which rules are major rules.

Regulators Conducted Required Regulatory Analyses for Their Dodd- Frank Rulemakings

Of the 70 Dodd-Frank rules within our scope, 59 regulations were substantive—generally subject to public notice and comment under the Administrative Procedure Act—and required some form of regulatory analysis. These rules were issued individually or jointly by CFPB, CFTC, FDIC, the Federal Reserve, NCUA, OCC, SEC, or Treasury. (See app. II for a list of the regulations in our review.) In examining the regulatory analyses the regulators reported that they conducted for these 59 regulations, we found the following.

Agencies conducted the required regulatory analyses. The agencies conducted regulatory analyses pursuant to PRA and RFA for all 59 rules. In addition, agencies conducted required regulatory analyses pursuant to other statutes, such as the Unfunded Mandates Reform Act of 1995, Small Business Regulatory Enforcement Fairness Act of 1996, and Riegle Community Development and Regulatory Improvement Act of 1994. Agencies also stated that they considered the benefits and costs of their rules as required under their authorizing or other statute. Specifically, CFPB issued 15 rules for which it considered the potential benefits and costs for consumers and entities that offer or provide consumer financial products and services. CFTC and SEC individually or jointly issued 27 rules and considered their potential impact, including their benefits and costs, in light of each agency’s required public interest considerations. The Federal Reserve issued one rule and it analyzed the rule’s economic impact in consideration of the costs and benefits to financial institutions, consumers, and other users of electronic fund transfers.

Agencies identified 10 major rules. Of the 59 rules that were issued and became effective from July 24, 2012, through July 22, 2013, OMB identified 10 as major rules under CRA. Specifically, CFPB issued two major rules; CFTC issued three major rules; SEC issued two major rules; CFTC and SEC jointly issued one major rule; the Federal Reserve issued one major rule; and the Federal Reserve, FDIC, and OCC jointly issued one major rule. In the 10 major rulemakings, agencies generally addressed the key elements in OMB’s guidance. In our analysis of the 10 Dodd- Frank rules identified as major we found that the agencies addressed many of the OMB guidance’s key elements. All of the rules identified the problem to be addressed. In all but two of the rule proposals, the agencies identified regulatory alternative approaches that they considered, and the agencies asked for and received public comments on alternatives in all of the rules. Based on public comments and other information, the agencies analyzed the benefits and costs of the rules, including regulatory alternatives. In 5 of the 10 rules, the agencies explicitly identified the baseline against which they assessed benefits and costs. In the other rules, the agencies implicitly identified the baseline, typically as pre-Dodd-Frank Act. However, as we found in our last review, the agencies quantified certain compliance costs associated with their rules, such as paperwork- related costs, but generally did not quantify other costs. Furthermore, none of the agencies quantified any of the benefits, in part because of stated data limitations. However, all of the agencies discussed the benefits and costs of their rules, including alternatives, in qualitative terms.

OMB Classified a Number of the Dodd-Frank Rules as Major but, along with Federal Financial Regulators, Used Inconsistent Processes in Applying CRA’s Criteria

Since the enactment of the Dodd-Frank Act through July 22, 2013, federal financial regulators and Treasury issued 36 Dodd-Frank rules that were classified as major under CRA. CRA, enacted in 1996, provides Congress with the opportunity to review and disapprove new rules issued by federal agencies. To that end, the act establishes procedures by which Congress may disapprove an agency’s rule by introducing a joint resolution of disapproval within 60 days of receiving the rule that, if adopted by both houses of Congress and signed by the President, can nullify the agency’s rule.

Specifically, CRA requires agencies, including independent agencies, to submit final rules to Congress and the Comptroller General before the rules can become effective. Rules not classified as major go into effect as otherwise provided by law after submission to Congress and the Comptroller General, while rules classified as major take effect on the later of 60 days after Congress receives the rule report, or 60 days after the rule is published in the Federal Register, as long as Congress does not pass a joint resolution of disapproval. During the 60 day period, Congress may introduce, if desired, a resolution of disapproval prior to any major rule taking effect. CRA defines a major rule as any rule that the OMB finds has resulted in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers; individual industries; federal, state, or local government agencies; or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign based enterprises in domestic and export markets. Although OMB determines whether a rule should be classified as major under CRA, OMB officials told us that they rely on agency submissions of rules and analyses to help make the determination.

Federal financial regulators and Treasury jointly or separately issued the 36 rules pursuant to the Dodd-Frank Act that were found to be major rules. CFPB, CFTC, and SEC collectively accounted for 32 (close to 90 percent) of the rules. (See app. III for a list of Dodd-Frank rules classified as major.) Based on our review of the analyses provided by the agencies to OMB, we found that the agencies expect that all 36 rules will or could meet CRA’s first major rule criterion—that is, result in an annual effect on the economy of $100 million or more. In addition, and although a rule needs to meet only one of the multiple criteria in the CRA major rule definition to be considered major, agencies expect that 6 of the 36 major rules could cause a major increase in costs or prices and 3 of the rules could have a significant adverse effect on competition or other activities.

The processes used by federal financial regulators and OMB to identify rules as major vary and create the potential for OMB to not identify all major rules. In 1999, OMB issued guidance on implementing CRA that For rules subject to E.O. outlined the process for identifying major rules.12,866 review, the guidance instructs agencies, when submitting rules, to indicate whether they consider the rules major. For rules not subject to E.O. 12,866 review, agencies are instructed to contact their OMB desk officer, who has responsibility for certain agencies, in accordance with their established practice. Because the federal financial regulators are not subject to E.O. 12,866, they submit rules to OMB per practices established with their OMB desk officers. Another difference is that agencies subject to E.O. 12,866 generally would be required to prepare a comprehensive benefit-cost analysis, quantifying benefits and costs where feasible, for significant regulatory actions. OMB desk officers can then use such analysis in determining whether a rule is major under CRA. In contrast, for rules not subject to the order, the agencies would not necessarily be required to conduct such an analysis. As a result, OMB desk officers may have less complete information from which to determine whether a rule is major under CRA.

We found that regulators’ established practices vary. For example, some federal financial regulators told us that they submit all of their rules to OMB for review, but three regulators told us that they submit only those rules they consider major based on their analyses. OMB officials told us that their expectation is that independent agencies should send all rules to their desk officers; otherwise, the desk officers cannot determine whether the rules are major as required under CRA. The risk of OMB not identifying a major rule is unknown, but one federal financial regulator we interviewed said that the agency tries to be conservative in its analyses— tending to overestimate rather than underestimate costs, thereby reducing the risk that a rule may not be identified as major. Additionally, OMB commonly relies on the issuing agency’s expertise and analyses to classify rules as major.

We also found examples that indicate that federal financial regulators and OMB may not be interpreting CRA’s major rule definition or related OMB guidance consistently.

Applying CRA criteria to indirect consequences. Agencies differed in the way they treated indirect costs of their rules when considering whether such rules could have an impact of $100 million dollars or more annually on the economy. In 2012, CFTC and SEC jointly issued a rule to further define certain swap terms, including swap and security-based swap. In its analysis, CFTC noted that the definitions, by themselves, would not have an annual effect on the economy of $100 million but will affect a number of other rules, including rules determined to be major rules. According to CFTC, these other rules could not be made effective without the final definitions rule; as a result, it concluded that the definitions rule would have an annual effect on the economy of more than $100 million. CFTC and SEC also jointly issued a rule to further define certain terms including swap dealer and security-based swap dealer. In its analysis, SEC noted that these definitions, by themselves, would not impose substantive requirements on dealers or major participants, but that the rule should be considered major because it would set boundaries that determine whether entities are subject to other rules, including ones determined to be major rules. In contrast, in 2012 FSOC issued a final rule on the process it intends to use for determining whether a nonbank financial company should be supervised by the Federal Reserve and subject to enhanced prudential standards. Treasury officials noted that they believed the rule should not be considered major because the rule did not impose substantive requirements on any entities, but only laid out the process by which they could become subject to other rules and regulations.OMB agreed with Treasury’s assessment and determined that the rule was not major.

Applying CRA criteria to related and jointly issued rules. CFPB combined two separate but related rules to estimate total costs in its CRA major rule assessment, but in other cases, agencies issuing separate but related rules have not combined the rules’ costs or benefits. In 2013, CFPB issued two separate mortgage servicing rules that amended Regulation X and Regulation Z. In its CRA analysis submitted to OMB, CFPB estimated that Regulations X and Z would have an annual burden of $22 million in paperwork-related costs, and Regulation X would create an additional annual burden of $90 million.

76 Fed. Reg. 42,950 (July 19, 2011). local, or tribal governments or communities.that the $100 million threshold includes benefits, costs, or transfers, and is identical to the threshold for determining whether a rule is major under CRA. The guidance highlighted the word “or” to indicate that benefits and costs should not be combined.

Although OMB issued a memorandum in 1999 to instruct agencies on how to implement CRA, the memorandum provided little guidance on how agencies should apply CRA’s major rule criteria—particularly its $100 million threshold. However, as illustrated by our examples, the criteria can be applied in different ways. The only related OMB guidance on applying CRA’s $100 million threshold was included in the February 2011 guidance that provided answers to frequently asked questions about the regulatory impact analysis required by E.O. 12,866 and OMB Circular A- 4, to which independent regulatory agencies are not subject. According to OMB staff, the guidance was not offered to independent agencies as additional guidance to implement CRA. Without specific guidance addressed to agencies that must comply with CRA on how to apply CRA’s $100 million threshold, federal financial regulators may continue to inconsistently apply CRA’s major rule criteria and thus, inconsistently advise OMB on whether to classify rules as major. To the extent that any major rules are not being classified as such, those rules may become effective before the end of the 60-day congressional review period required under CRA. On the other hand, our third example also shows that some rules may be potentially misclassified as major and may not be made effective for 60 days after their submission to Congress or publication in the Federal Register when such a delay is not required.

Regulators Continue to Coordinate on Rulemakings

Federal agencies coordinated on 49 of the 70 Dodd-Frank regulations that we reviewed, as required by the act or voluntarily. The act also requires CFPB to coordinate with federal and state regulators in its supervision of certain banks and nonbanks that offer or provide consumer financial products or services. To date, CFPB has established a framework to coordinate with prudential regulators and is establishing a similar framework to coordinate with state regulators.

Federal Financial Regulators Have Continued to Coordinate on Their Dodd-Frank Rulemakings

Generally, federal financial regulators recognize the importance of interagency coordination during the rulemaking process. Coordination during the rulemaking process occurs when two or more regulators jointly engage in activities for a purpose such as reducing duplication and overlap in regulations. Effective coordination can help regulators minimize or eliminate staff and industry burden, administrative costs, conflicting regulations, unintended consequences, and uncertainty among consumers and markets. As we reported last year, agency staffs told us that most interagency coordination during rulemaking largely was informal and conducted at the staff level. For example, regulators held some formal interagency meetings early on in the Dodd-Frank rulemaking process, but subsequent coordination on specific rulemakings was mostly informal and conducted through e-mail, telephone conversations, and one-on-one conversations between staff, including several interagency meetings and teleconferences.

Recognizing the importance of coordination, the Dodd-Frank Act imposes interagency coordination or consultation requirements and responsibilities on regulators or in connection with certain rules. Dodd-Frank coordination requirements include topic-specific, agency-specific, and rule-specific requirements. For example:

Under Title VII, SEC and CFTC must coordinate and consult with each other and prudential regulators, to the extent possible, before starting a rulemaking or issuing an order on swaps or swap-related subjects. This requirement’s purpose is to assure regulatory consistency and comparability across the rules or orders. Title VII also directs CFTC, SEC, and the prudential regulators to coordinate with foreign regulators, as appropriate, in implementing swap reform regulations.

Under Title X of the act, CFPB is required to consult with the appropriate prudential regulators or other federal agencies, both before proposing a rule and during the comment process, on consistency with prudential, market, or systemic objectives administered by such agencies.

Section 165(i) requires certain financial institutions to conduct annual or semi-annual stress tests and directs regulators to issue consistent and comparable regulations implementing the stress test requirement in coordination with the Federal Reserve and Federal Insurance Office.

Section 201(b) provides that, for the purpose of defining “financial company,” no company shall be deemed to be predominantly engaged in activities that the Federal Reserve has determined are financial in nature or incidental to such financial activities, if the consolidated revenues of that company from such activities constitute less than 85 percentage of the total consolidated revenues of that company, as FDIC, in consultation with Treasury, shall establish by regulation.

We found evidence of coordination between the rulemaking agency and other regulators for 49 of the 70 regulations that we reviewed (see app. IV). We found the act required coordination, or it was unclear whether the act required coordination, in 39 of these 49 rulemakings.the rulemakings to document evidence of coordination among the agencies and also interviewed agency staff about their coordination efforts for the 39 rules. We found the following:

Twelve rules issued by CFTC and SEC implemented provisions in Title VII related to swaps and, thus, required coordination with each other and the prudential regulators to the extent possible. For example, CFTC specified that it coordinated with SEC on nine of the swap-related rules issued solely by CFTC, and with the prudential regulators, among others, on five of these nine rules.

CFPB indicated that it coordinated with prudential or other federal regulators, pursuant to Title X of the act, on 17 of its rulemakings under federal consumer financial laws. CFPB noted that it consulted or offered to consult with the prudential regulators on all 17 rules and the Federal Trade Commission, the Department of Housing and Urban Development, or other agencies on many of its rules.

For the other 10 rules where coordination was mandated, we found that CFTC, FDIC, the Federal Reserve, OCC, or SEC coordinated in response to rule-specific interagency coordination requirements in the act.

For 10 of the 49 rules, there was no Dodd-Frank requirement to coordinate, but we found evidence that the agencies voluntarily coordinated on the rulemakings. Most federal financial regulatory officials told us that they generally voluntarily engage in interagency coordination when their rules affect another agency or its supervised entities or when another agency has expertise that can inform their rulemakings.

Not all rules issued by CFTC or SEC required international coordination under Title VII of the Dodd-Frank Act. Some of the rules were not related to swaps. For other rules, the agency issuing the rule determined that international coordination was not necessary. For example, officials stated or the rules explained that the agencies did not engage in coordination with foreign regulators because their rules were consistent with rules promulgated by foreign regulators, recommendations issued by international entities, or international standards. communication and promote consistency in OTC derivatives reforms. CFTC and SEC also have developed supervisory cooperation arrangements or memoranda of understanding (MOU) with foreign authorities in major jurisdictions where regulated entities are located.

According to CFTC staff, these coordination efforts may inform CFTC’s rulemaking.

In our November 2011 report, we recommended that FSOC work with the federal financial regulators to establish formal coordination policies for rulemaking that clarify issues, such as when coordination should occur, the process that will be used to solicit and address comments, and what role FSOC should play in facilitating coordination. While FSOC has a coordination framework, we found at that time that the framework did not provide, nor according to FSOC staff was it intended to provide, any specifics about staff responsibilities or processes to facilitate coordination. To date, FSOC has not implemented this recommendation. According to FSOC staff, the agency has written protocols for coordinating on rules for which coordination is required under the Dodd-Frank Act. For these and other Dodd-Frank rules, FSOC’s Deputies Committee, composed of senior representatives of its members, and six functional committees, provide a forum in which agencies can coordinate or consult with each other. The Deputies Committee meets every two weeks to discuss FSOC’s agenda and coordinate and oversee the work of the six functional committees. However, as we previously reported, a number of industry representatives believe FSOC could play a greater role in coordinating member agencies’ rulemaking efforts. We further noted that the FSOC chairperson, in consultation with the other FSOC members, is required to regularly consult with the financial regulatory entities and other appropriate organizations of foreign governments or international organizations on matters relating to systemic risk to the international financial system. At a March 2013 congressional hearing, an FSOC official testified that Congress did not provide FSOC or its chairperson with authority to require its member agencies to coordinate in all cases, nor did the Dodd-Frank Act change the statutory independence of FSOC’s member agencies. He noted that FSOC, nevertheless, will continue to seek to identify ways to further enhance collaboration through FSOC’s committees and working groups. We continue to maintain that FSOC, working together with member agencies, should develop formal coordination policies, which could lead to improved coordination of rulemakings.

CFPB Has a Framework to Coordinate with Prudential Regulators and Is Establishing One with State Regulators

Under the Dodd-Frank Act, CFPB is authorized to supervise insured depository institutions and credit unions with more than $10 billion in assets (large banks) and their affiliates, and nonbank financial service providers (nonbanks). The statutory requirements for CFPB supervision of large banks and nonbanks largely are the same and include (1) examining such entities to assess, among other things, their compliance with federal consumer financial laws, (2) coordinating with other federal and state regulators, and (3) using, where possible, publicly available information and existing reports from federal or state regulators pertaining to supervised entities. CFPB launched its large bank and nonbank supervision programs in July 2011 and January 2012, respectively. CFPB has established a framework to comply with Dodd-Frank’s requirements to coordinate supervision with prudential regulators and is establishing a similar framework to comply with the act’s coordination requirements with state regulators.

While CFPB oversees large banks—that is, insured depository institutions and credit unions with more than $10 billion in assets—and their affiliates for compliance with federal consumer financial laws, prudential regulators also oversee the same entities for safety and soundness purposes and compliance with other laws and regulations. CFPB began operating its large bank supervision program in July 2011 and examining banks shortly thereafter. As of March 31, 2013, CFPB supervised 112 large banks and 37 affiliated banks.banks, and FDIC, the Federal Reserve, and NCUA are the prudential regulators for 26, 21, and 4 of the other large banks, respectively.

OCC is the prudential regulator for 61 of the large The Dodd-Frank Act requires CFPB and prudential regulators to coordinate their supervision of large banks and their affiliates to minimize regulatory burden. Specifically, CFPB and prudential regulators must (1) coordinate the scheduling of examinations of large banks and their affiliates; (2) conduct simultaneous examinations of large banks and their affiliates, unless otherwise requested by the institution; (3) share draft reports of such examinations with each other and provide the other regulator with at least 30 days to comment on the draft report before finalizing it; and (4) take into consideration any concerns raised by the Additionally, other regulator before issuing the final examination report. the act states that CFPB shall, to the fullest extent possible, use existing reports of supervised entities that have been provided to a federal or state regulator and information that has been reported publicly, and coordinate requirements regarding reports to be submitted by supervised entities.

To meet the statutory requirements for coordination, CFPB has developed a framework to coordinate its supervisory activities with the prudential regulators. The framework consists primarily of (1) an MOU between CFPB and the prudential regulators and (2) CFPB’s examination tools, which may be used to help ensure the required coordination is conducted, documented, and reviewed.

CFPB, Memorandum of Understanding on Supervisory Coordination, accessed on November 13, 2013, http://www.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf. information that the CFPB and the prudential regulators agree to share.

According to officials from CFPB and prudential regulators, the MOU serves as a roadmap to guide supervisory coordination, but its implementation is a work in progress. Included in the MOU is a provision under which the agencies agree to review the MOU’s operation after the first year of its execution and to consider revisions needed to better accomplish the MOU’s objectives. Officials told us that the review currently is underway and may become an annual undertaking.

Examination Coordination Tools. CBPB’s Supervision and Examination Manual informs examiners about coordination requirements throughout the four phases of CFPB’s examination cycle. For the monitoring phase, where examiners maintain reasonably current information about a bank’s activities and risks to consumers or markets, the manual instructs examiners to review supervisory and public information about the bank, including prudential and state regulators’ examination reports, and to contact the bank’s prudential regulator to discuss any new issues raised by the information. For the pre-examination planning phase, where the examiner-in-charge collects information necessary to determine the examination’s scope, resource needs, and work plan, the manual directs the examiner-in-charge to review and update the monitoring information and request other relevant information from prudential and state regulators. In this phase, the examiner-in-charge prepares an information request for the supervised entity with a tailored list of information to be provided to examiners at the examination. In preparing this list, the manual directs examiners to coordinate the request with prudential and state regulators and keep them abreast of monitoring efforts, correspondence with the supervised entity, and schedule planning. For the examination phase, the manual instructs examiners to communicate regularly with the bank’s prudential regulator. Lastly, in closing an examination, the manual instructs the examiner-in-charge to share the examination draft report with the prudential regulator, provide it with no less than 30 days for review and comment, and consider any concerns before issuing a final examination report.

CFPB also has created electronic forms that examiners use to facilitate and document their compliance with the coordination requirements. For example, in the monitoring phase, examiners must complete or update a form to document information about CFPB’s coordination with the prudential or state regulators, including examination schedules. For the planning stage, CFPB has created an information request form that includes standardized text to inform the supervised entity that it generally need not provide documents to CFPB that it has provided to prudential regulators. According to CFPB officials, examiners also are instructed to provide the prudential regulator a copy of the information request. In closing the examination, CFPB has a form for preparing the examination letter sent to the supervised entity summarizing the examination findings. The form includes a field for carbon copying the letter to the prudential or state regulator.

The electronic storage of examination workpapers in CFPB’s Supervision and Examination System facilitates supervisory review for compliance with, among other things, coordination requirements. All examination workpapers and related documentation (including reports and other information collected from prudential regulators) must be maintained in electronic form and uploaded to the system. As such, the system includes records of examination schedules, dates on which examination report drafts were sent to prudential regulators, and comments received from the prudential regulators. Examiners-in-charge and, in turn, management, are required to review and sign off on the adequacy of the workpapers. Such reviews provide a mechanism to help ensure that CFPB is complying with its statutory coordination requirements as delineated in the MOU. In addition, CFPB’s manual notes that examination workpapers will be reviewed through an internal quality control process.

Although CFPB has developed these tools to help coordinate examinations with prudential regulators, some members of Congress have raised concerns about CFPB’s information collection activities or practices and the potential for overlap between CFPB’s information collection efforts and other regulators’ efforts. We have ongoing work examining these and related issues for several members of Congress.

State-chartered banks are subject to the supervision of their state banking regulators. Thus, certain large banks and their affiliates may be supervised by CFPB, a prudential regulator, and a state regulator. In addition, CFPB may share supervisory jurisdiction over certain nonbank entities in the mortgage origination and servicing, private education loan, payday loan, consumer reporting, and debt collection markets with state regulators overseeing these markets.mortgage lenders, brokers, and servicers and payday lenders in the first CFPB started examining half of 2012. Since that time, it has also begun examining nonbanks in the consumer reporting and debt collection markets.

The Dodd-Frank Act requires CFPB and state regulators to coordinate their supervision of large banks and nonbanks to minimize regulatory burden. The act states that CFPB shall coordinate supervisory activities, including examinations and requirements regarding information requests, with state regulators. As mentioned earlier, the act also states that CFPB shall, to the fullest extent possible, use existing reports of supervised entities that have been provided to federal or state regulators and information that has been reported publicly. In supervising nonbanks, CFPB must consult with state regulators on requirements or systems, including coordinated or combined systems for registration, where appropriate.

CSBS is the nationwide organization of banking regulators from all 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. Besides the MOU, on December 6, 2012, CFPB also issued a Statement of Intent for Sharing Information with state banking and financial services regulators that spells out specific items that CFPB intends to share with state regulators, including examination schedules, examination reports, consumer complaint information, among others. framework for coordinating supervisory activities. In May 2013, CFPB and CSBS, on behalf of the state regulators, agreed on a supervisory coordination framework. As part of the framework, CFPB and CSBS agreed to establish a State Coordinating Committee that would be in charge of coordinating with CFPB on nonbank supervision.officials told us that CFPB and state regulators are implementing the framework but much work remains.

CFPB has not yet undertaken rulemakings to require nonbanks to register and, thus, has not formally begun efforts to coordinate registration systems with state regulators. According to its website, the Nationwide Mortgage Licensing System, owned and maintained by the State Regulatory Registry, LLC, a wholly-owned subsidiary of CSBS, is the sole system for licensing mortgage companies for 54 state agencies and the sole system for licensing mortgage loan originators for 58 state and territorial agencies. In February 2012, CSBS stated that it intends to expand the system to other markets and, in April 2012, announced that five state banking agencies were expanding their use of the system to license and supervise nonbanks beyond the mortgage industry. CFPB officials told us that the agency has not yet determined when it will issue rulemakings on registration of nonbanks. They said they have engaged in discussions with CSBS to determine whether and how CFPB should leverage that system for registering nonbanks but no determinations have been made.

Impacts of the Dodd- Frank Act Are Uncertain, and Regulators Are Developing Plans to Review Rules Retrospectively

Federal financial regulators are continuing to implement reforms pursuant to the Dodd-Frank Act, but the full impact of the act remains uncertain. This uncertainty stems from a number of factors. In particular, the implementation of the reforms is being driven largely by rulemakings or other regulatory actions, but not all rules are finalized and effective. In addition, even when the act’s reforms are fully implemented, it will take time for the financial services industry to comply with the array of new regulations—meaning additional time will need to elapse to measure the impact of the rules. Moreover, the evolving nature of implementation makes isolating the Dodd-Frank Act’s effect on the U.S. financial marketplace difficult. This task is confounded by the many factors that can affect the financial marketplace, including factors that could have an even greater impact than the act.

Recognizing these limitations and difficulties, we developed a multipronged approach to analyze current data and trends that might be indicative of some of the Dodd-Frank Act’s initial impacts, as institutions react to issued and expected rules. First, we updated the indicators that we developed in our December 2012 report to monitor changes in certain characteristics of SIFIs, which are subject to enhanced prudential standards and oversight under the act. Although the indicators may be suggestive of the act’s impact, they do not identify causal links between their changes and the act. Further, many other factors can affect SIFIs and, thus, the indicators. Second, we also updated our difference-in- difference analysis to infer the act’s impact on the provision of credit by and the safety and soundness of bank SIFIs. The analysis is subject to limitations, in part because factors other than the act could be affecting these entities. Third, we developed indicators to monitor the extent to which certain of the Dodd-Frank Act’s swap reforms are consistent with the act’s goals of reducing risk. Like our SIFI indicators, our swap indicators have limitations. For example, they do not identify causal links between changes in swap markets and the act or its regulations. Finally, we assessed agencies’ plans to conduct retrospective reviews of their existing rules.

Indicators Suggest Increased Resilience and Size of Large SIFIs between the Third Quarter of 2010 and the Second Quarter of 2013

According to its legislative history, the Dodd-Frank Act contains provisions intended to reduce the risk of failure of a large, complex financial institution and the damage that such a failure could do to the economy. Such provisions include (1) authorizing FSOC to designate a nonbank financial company for Federal Reserve supervision if FSOC determines it could pose a threat to U.S. financial stability and (2) directing the Federal Reserve to impose enhanced prudential standards and oversight on bank holding companies with $50 billion or more in total consolidated assets (referred to as bank SIFIs in this report) and nonbank financial companies designated by FSOC (referred to as nonbank SIFIs in this report). Federal agencies and regulators have been working to implement these provisions. For example, in January and December 2012, the Federal Reserve proposed its enhanced prudential standards rules for certain U.S. and foreign companies operating in the United States, respectively, and has finalized rules implementing some of these standards.companies in July 2013 and a third in September 2013. (See app. V for a summary of SIFI-related provisions and their rulemaking status.)

In addition, FSOC designated two nonbank financial As we reported last year, the Dodd-Frank Act and its implementing rules may result in adjustments to SIFIs’ size, interconnectedness, complexity, leverage, or liquidity over time. We developed indicators to monitor changes in some of these SIFI characteristics. The size and complexity indicators reflect the potential for a single company’s financial distress to affect the financial system and economy. The leverage and liquidity indicators reflect a SIFI’s resilience to shocks or its vulnerability to financial distress. Like we did in our last report, we continue to focus our analysis on bank SIFIs, given that FSOC only recently designated three nonbank financial companies for Federal Reserve supervision. Our indicators have limitations. For example, the indicators do not identify causal links between changes in SIFI characteristics and the act. Rather, the indicators track changes in the size, complexity, leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act was passed to examine whether the changes are consistent with the goals of the act. However, other factors—including the economic downturn, international banking standards agreed upon by the Basel Committee on Banking Supervision (Basel Committee), European debt crisis, and monetary policy actions—also affect bank holding companies and, thus, the indicators.Act on SIFIs. Furthermore, because a number of rules implementing SIFI- related provisions have not yet been finalized, our indicators include the effects of these rules only insofar as SIFIs have changed their behavior in response to issued rules and in anticipation of expected rules. In this regard, our indicators provide baselines against which to compare future trends.

These factors may have a greater effect than the Dodd-Frank Table 2 summarizes the changes in our bank SIFI indicators from the third quarter of 2010 through the second quarter of 2013 and allows for the following observations. (See app. VI for more details on our indicators.)

First, the total number of bank SIFIs declined by three, including one large bank SIFI, over the period.share (measured in assets) for large bank SIFIs increased over the period. Even with one less large bank SIFI by mid-2013, the increase in the size of large bank SIFIs is consistent with an increase in the spillover effect posed by such SIFIs—that is, the potential for such a company’s financial distress to affect the financial system and economy. In contrast, median assets and median market share declined for other bank SIFIs over the period; these trends are consistent with a decrease in the spillover effects of those bank SIFIs.

Median assets and median market

Second, our complexity indicator suggests that large U.S. bank SIFIs in the second quarter of 2013 continue to be relatively more complex than other U.S. bank SIFIs, but they generally decreased their total number of legal entities over the period. In addition, four 2013 large bank SIFIs decreased their number or percentage of foreign legal entities, while the number of countries where their foreign legal entities operated decreased or remained stable over the period. In contrast, two 2013 large bank SIFIs increased both their number and percentage of foreign legal entities, and for one of them the number of countries where its foreign entities operated increased by 50 percent. Because of the mixed trends, the change in the spillover effects is unclear.

Third, our indicators suggest that bank SIFIs, on average, have decreased their leverage from the third quarter of 2010 to the second quarter of 2013, although one of our measures shows that leverage for bank SIFIs did not change substantially from mid-2012 to mid- 2013. Similarly, our liquidity indicators show that bank SIFIs improved their liquidity over the period, although one of our measures shows that large bank SIFIs’ liquidity deteriorated from mid-2012 to mid- 2013. Despite these recent trends, the changes in our leverage and liquidity indicators from the third quarter of 2010 through the second quarter of 2013 are consistent with an improvement in SIFIs’ resilience to shocks or vulnerability to financial distress.

According to our updated regression analysis, the Dodd-Frank Act has not been associated with a change in the cost of credit provided by U.S. bank SIFIs, but has been associated with an increase in the safety and soundness of the SIFIs. As we have noted, the Dodd-Frank Act requires the Federal Reserve to impose a variety of regulatory reforms on SIFIs, including enhanced risk-based capital, leverage, and liquidity requirements. These reforms may affect the safety and soundness of bank SIFIs and the cost and availability of credit provided by bank SIFIs. Although capital and leverage requirements may help reduce the probability of bank failures and promote financial stability, they could cause banks to raise lending rates and limit their ability to provide credit, especially during a crisis. Similarly, while stricter liquidity requirements may help reduce the probability of bank failures and promote financial stability, banks could respond to these requirements by increasing lending spreads to offset lower yields on assets or longer maturities on liabilities. To the extent that they increase the cost and reduce the availability of credit, these reforms may lead to reduced output and economic growth.

Our econometric analysis assesses the initial impact of the Dodd-Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our analysis leverages the Dodd-Frank Act’s requirement that bank holding companies with total consolidated assets of $50 billion or more are subject to enhanced regulation by the Federal Reserve but other bank holding companies are not. Specifically, we compare funding costs, capital adequacy, asset quality, earnings, and liquidity for bank SIFIs and non-SIFI bank holding companies before and after the enactment of the Dodd-Frank enhanced prudential requirements. All else being equal, the difference in the comparative differences is the inferred effect of the Dodd-Frank Act’s prudential requirements on bank SIFIs.

Our approach allows us to partially differentiate changes in funding costs, capital adequacy, asset quality, earnings, and liquidity associated with the Dodd-Frank Act from changes due to other factors. However, several factors make isolating and measuring the impact of the Dodd-Frank Act’s new requirements for SIFIs challenging. The effects of the act cannot be differentiated from the effects of simultaneous changes in economic conditions, such as the pace of the recovery from the recent recession, or regulations, such as those stemming from Basel III, or other changes, such as in credit ratings that differentially may affect bank SIFIs and other bank holding companies. In addition, many of the new requirements for SIFIs have yet to be implemented. For example, the Federal Reserve is required to implement enhanced prudential standards, including capital requirements, stress testing, liquidity requirements, single-counterparty credit limits, an early remediation regime, and risk-management and resolution planning. Only rules for resolution planning and stress testing have been finalized. Additionally, the Federal Reserve has proposed to implement a quantitative liquidity requirement for bank holding companies, savings and loan holding companies, and depository institutions with more than $250 billion in total assets and has indicated that it plans to impose a capital surcharge on the largest SIFIs. Nevertheless, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future trends.

Our estimates suggest that the Dodd-Frank Act has not been associated with a significant change in U.S. bank SIFIs’ funding costs (table 3). To the extent that the cost of credit provided by bank SIFIs is a function of their funding costs, the new requirements for SIFIs likely have had little effect on the cost of credit to date.

Our estimates also suggest that the Dodd-Frank Act is associated with improvements in most measures of U.S. bank SIFIs’ safety and soundness. As shown in table 3, bank SIFIs appear to be holding more capital than they otherwise would have held in every quarter since the Dodd-Frank Act was enacted. The quality of assets on the balance sheets of bank SIFIs also seems to have improved since the Dodd-Frank Act was enacted. The act is associated with higher earnings for bank SIFIs in the time period after the act’s enactment. It is also associated with improved liquidity as measured by the extent to which a bank holding company is using stable sources of funding. The only measure that has not clearly improved since the act’s enactment is liquidity as measured by the capacity of a bank holding company’s liquid assets to cover its volatile liabilities. Thus, the Dodd-Frank Act appears to be broadly associated with improvements in most indicators of safety and soundness for U.S. bank SIFIs. (See app. VII for more details on our regression analysis.)

Swaps Indicators Provide Baselines for Assessing the Future Impact of Some Swap Reforms

In general, swaps are types of derivative contracts that involve ongoing exchanges of one or more assets, liabilities, or payments for a specified period. For example, swaps can be used to exchange fixed-rate interest payments for floating interest payments based on market rates (one type of interest rate swap), or to protect against the default of a bond issuer (one type of credit default swap). Financial and nonfinancial firms use swaps and other derivatives to hedge risk, to speculate, or for other purposes. Unlike futures, which are standardized financial contracts that are traded on exchanges, swaps traditionally have been privately negotiated between two counterparties in the over-the-counter (OTC) market. Swaps include interest rate swaps, commodity-based swaps, equity swaps, and credit default swaps.

In varying degrees and ways, swaps and other OTC derivatives played a role in the most recent financial crisis. As FSOC reported, credit default swaps (CDS), including AIG’s large holdings of such swaps, exacerbated the crisis because they were not well understood by regulators or market participants. FSOC also noted that OTC derivatives generally were a factor in the propagation of risks during the recent crisis because of their complexity and opacity, which contributed to excessive risk taking, a lack of clarity about the ultimate distribution of risks, and a loss in market confidence. In that regard, the crisis illustrated that swaps and other OTC derivatives can contribute to systemic risk in at least two ways. First, while swaps can be used to manage risk and increase liquidity, swaps generally have not been subject to regulatory requirements for margin (i.e., collateral based on the market value of the swap). This allowed some swap participants to take large speculative positions using a relatively small amount of capital, thereby increasing leverage. Second, swaps increased the interconnectedness of the financial system by exposing many banks, financial entities, and end-users to the credit risk of a small number of swap dealers. The concentration of most OTC derivatives trading among a small number of dealers created the risk that the failure of one of these dealers could expose counterparties to sudden losses and destabilize financial markets.

Title VII of the Dodd-Frank Act establishes a new regulatory framework for 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. Title VII includes the following four major swaps reforms.

Registration and regulation. The title provides for the registration and regulation of swap dealers and major swap participants, including subjecting them to (1) prudential regulatory requirements, such as minimum capital and minimum initial and variation margin requirements and (2) business conduct requirements to address, among other things, interaction with counterparties, disclosure, and supervision.

Mandatory clearing. The title imposes mandatory clearing requirements on swaps, but exempts, among others, certain end users that use swaps to hedge or mitigate commercial risk.

Exchange trading. The title requires swaps subject to mandatory clearing to be executed on an organized exchange or swap execution facility, unless no facility offers the swap for trading.

Mandatory reporting. The title requires all swaps to be reported to a registered swap data repository or, if no such repository will accept the swap, to CFTC or SEC, and subjects swaps to post-trade transparency requirements (real-time public reporting of certain swap data).

Figure 1 illustrates these reforms and some of the differences between swaps traded on exchanges and cleared through clearinghouses and swaps traded in the OTC market.

According to the Dodd-Frank Act’s legislative history, key elements for reducing systemic risk include increasing the use of central clearinghouses and appropriate margining and capital for OTC derivatives. CFTC and SEC have issued final rules to implement many of the regulatory frameworks for clearing standardized swaps. In December 2012, CFTC issued a final rule establishing the first clearing requirement for four types of interest rate swaps and two types of CDSs. In July 2012, SEC issued a final rule on, among other things, the process that the agency will use to determine whether a security-based swap is required to be cleared but has not yet subjected any security-based swaps to the clearing requirement. CFTC, SEC, and the prudential banking regulators have proposed rules to implement Dodd-Frank’s margin and capital requirements for swap entities, but as of September 2013, these rules have not yet been finalized.listing select Dodd-Frank swap reform related rulemakings.) (See app. VIII for tables Once fully implemented, some provisions in Title VII of the act may help achieve the goal of reducing risk, in part by increasing the central clearing of swaps and posting of margin for uncleared swaps. We developed two sets of indicators to measure changes in (1) the central clearing of swaps and (2) the use of margin collateral for OTC derivatives. In this report, these indicators provide a baseline for measuring future changes in the central clearing of swaps and use of margin collateral, as the Dodd-Frank swap reforms have not been fully implemented. In future reports, we plan to update these indicators to determine whether changes in central clearing and the use of margin collateral are consistent with the act’s swap reforms. Importantly, these indicators have several key limitations. First, changes in our indicators do not necessarily suggest a change in risk, because the intended outcomes of the swap reforms may not necessarily reduce systemic risk. For instance, experts, including those from the IMF, have noted that an increase in central clearing of swaps may not, by itself, reduce risk and may increase risk. Second, our indicators do not identify causal links between changes in swap market and the Dodd-Frank Act, including its regulations. Rather, the indicators begin to track changes in central clearing and collateralization in the swaps since the Dodd-Frank Act’s passage to examine whether the changes are consistent with the act’s swap reform goals for central clearing and collateralization.

Federal financial regulators have reported that mandatory clearing through clearinghouses for certain swaps can reduce risk and provide other benefits. As noted by CFTC, central clearing mitigates counterparty risk to the extent that the clearinghouse is a more creditworthy counterparty relative to the original swap participants.have a variety of tools to monitor and manage counterparty risk, which include the contractual right to collect initial and variation margin associated with swap positions; issue margin calls whenever the margin in a customer’s account has dropped below predetermined levels; and close out the swap positions of a customer that does not meet margin calls within a specified period. Further, to the extent that swap positions move from facing multiple counterparties in the OTC derivatives market to being run through a smaller number of clearinghouses, clearing may facilitate increased netting, which reduces operational risk and may reduce the amount of collateral that a counterparty must post or pay in terms of initial and variation margin. Although centralized clearing could remove a large portion of the interconnectedness of current OTC markets that leads to systemic risk, CFTC and others have noted that central clearing, by its nature, concentrates risk in a handful of entities.

We developed two complementary clearing indicators. Our first indicator measures the gross notional amount of swaps that are required to be cleared and are being cleared as a percentage of the gross notional amount of swaps required to be cleared. This indicator shows the progress being made by market participants in complying with any mandatory clearing requirement. All else being equal, an increase in this indicator would be consistent with the act’s swaps reforms. However, an increase in compliance with mandatory clearing requirements may not increase central clearing overall if market participants substitute away from swaps that are required to be cleared in favor of swaps that are not required to be cleared. To assess the extent to which market participants are substituting away from swaps that are required to clear, we complement our first indicator with a second indicator that measures the gross notional amount of swaps that are required to be cleared (but are not necessarily cleared) as a percentage of the total gross notional amount of the swaps market. This indicator shows the share of the swap market comprised by swaps identified for mandatory clearing and helps determine the extent to which changes in the first indicator represent For example, an increase in the increases in central clearing overall.first indicator—the percentage of swaps that are required to be cleared that are cleared—would indicate an increase in central clearing overall if the second indicator—the percentage of all swaps that are required to clear—does not decrease at the same time. In contrast, if the first indicator increases while the second decreases, then some of the increase in the first indicator likely is due to substitution away from swaps that are required to be cleared in favor of swaps that are not required to be cleared, which is not consistent with the act’s swaps reforms.

Our indicators cover only the interest rate swaps and CDS markets, because only certain of these types of swaps are currently subject to CFTC’s mandatory clearing requirement. These are the two largest swaps markets. Based on CFTC’s Swaps Report, the total gross notional amounts outstanding of the interest rate swap and CDS markets were about $419 trillion and $20 trillion, respectively, as of August 30, 2013.

The indicators are developed using data in the proposed version of CFTC’s Swaps Report, which are estimates from a variety of sources that voluntarily submit the data. CFTC’s final version of its Swaps Report will use data collected in response to Dodd-Frank provisions, and CFTC staff stated that the agency was working to implement this transition.

Figure 2 shows the trends of our clearing indicators for interest rate swaps from January 2013 through August 2013. Our first indicator shows that market participants are making progress in meeting the clearing requirement: The percentage of swaps required to be cleared and that were cleared increased from around 53 percent to around 57 percent (based on gross notional amounts). Currently, not all interest rate swaps that are required to be cleared are being cleared, in part because CFTC is phasing in the requirement by staggering the compliance dates for different types of market participants and also because some nonfinancial entities that use swaps to hedge or mitigate commercial risk are exempt from the clearing requirement. The second indicator shows that interest rate swaps that are required to be cleared made up about 88 percent of the market (based on gross notional amount), and generally did not decrease during the period. This indicates that the increase in the first indicator represents an increase in central clearing that is consistent with the act’s swaps reforms.

Figure 3 shows the trends of our two clearing indicators for CDSs from January 2013 through August 2013. Our first indicator shows that, based on gross notional amount, about 27 percent of swaps required to be cleared were cleared at the end of the period, compared to about 24 percent at the beginning of the period. The second indictor shows that, based on gross notional amount, CDSs required to be cleared accounted for about 35 percent of the market at the end of the period, compared to about 30 percent at the beginning of the period. This trend in the percentage of all CDSs that are required to clear is not consistent with market participants substituting away from CDSs that are required to clear in favor of CDSs that are not required to clear. It follows that the increase in the percentage of required-to-clear CDSs that cleared over the period generally is consistent with the act’s swaps reforms.

We developed a second set of indicators to measure changes in the collection of margin collateral for OTC derivatives. The first margin indicator measures the fair value of collateral pledged by all counterparties to secure OTC derivatives contracts as a percentage of net current credit exposure to those counterparties for bank, financial, and savings and loan holding companies that reported positive credit exposure. The second set of margin indicators measures collateral pledged by different types of counterparties—banks and securities firms, monoline financial guarantors, hedge funds, sovereign governments, and corporations and all other counterparties—as a percentage of credit exposure to different types of counterparties. The net current credit exposure approximates the credit loss that a bank, financial, or savings and loan holding company would suffer if its counterparties defaulted on their OTC derivatives contracts.swap entity can require its counterparties to post margin collateral in an amount equal to or greater than the exposure of the contracts. An increase in these indicators would suggest that holding companies are requiring 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.

To protect itself from such a loss, a Although CFTC, SEC, and the prudential regulators have not finalized their margin rules for uncleared swaps, figures 4 and 5 show the trends in our margin indicators from the second quarter of 2009 through the fourth quarter of 2012. Figure 4 shows that holding companies in our sample have increased the rate of collateralization of their net current credit exposure from OTC derivatives from 62 percent to 82 percent over the period, suggesting that these holding companies are requiring 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.

Figure 5 shows that the rate of collateralization of net current credit exposure from OTC derivatives has consistently differed by the type of counterparty, with hedge funds posting the most collateral as a percentage of credit exposure and sovereign governments typically posting the least. According to OCC, the rates differ, in part, because swap dealers may require certain counterparties, such as hedge funds, to post both initial and variation margin and other counterparties, such as banks and securities firms, to post only variation margin. Depending on how the margin rules are finalized, the rates of collateralization for some counterparties may increase.

Our margin indicators are subject to important limitations. First, 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. Second, an average collateralization of 100 percent does not ensure that all current counterparty exposures have been eliminated, because one counterparty’s credit exposures may be overcollateralized but another counterparty’s credit exposure may be undercollateralized. Third, 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, so it is possible for the rate of collateralization to increase while the risk of uncollateralized losses also has increased, if a party has entered into riskier swaps. Fourth, there are over 1,000 holding companies in our sample, but less than 100 holding companies report positive credit exposure to counterparties in OTC derivatives contracts and five holding companies account for over 95 percent of the total gross notional amount of all derivatives contracts reported by all of the holding companies in our sample. Thus, trends in these indicators largely reflect collateralization rates for a small number of holding companies. Finally, these indicators do not reflect collateralization rates for companies, such as standalone broker-dealers, that have credit exposure to counterparties in OTC derivatives contracts but are not affiliated with a bank, financial, or savings and loan holding company.

Regulators Vary in Their Approaches and Progress in Developing Retrospective Review Plans

Federal financial regulators vary in their approaches and progress in developing and implementing plans to conduct retrospective reviews of their existing Dodd-Frank and other rules in recognition of Executive Order 13,579 (E.O. 13,579). Issued in July 2011, E.O. 13,579 seeks to facilitate the periodic review of existing significant regulations by asking independent regulatory agencies to consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome. Retrospective reviews complement the prospective analysis that agencies conduct as part of their rulemaking (discussed above) and can provide insights on how regulations actually are working. E.O 13,579 represents the first time the President has issued an executive order to ask independent regulatory agencies to produce retrospective review plans for public scrutiny. But independent regulators, such as the federal financial regulators, are not required to follow this order.

Most federal financial regulators told us that they were not developing retrospective review plans specifically in response to E.O. 13,579. As a matter of policy or to satisfy statutory obligations, federal financial regulators generally had been conducting retrospective reviews before the issuance of E.O. 13,579. In that regard, the prudential regulators told us that they generally view their retrospective rule reviews conducted in accordance with statute or policy to be consistent with the order’s principles and objectives. For example, prudential regulators noted that the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires them to review their regulations at least once every 10 years and identify and eliminate any regulatory requirements that are outdated, unnecessary, or unduly burdensome. The regulators reported on the results of their last EGRPRA review in July 2007, which was done over a 3-year period. During the review, the regulators undertook various efforts to reduce regulatory burden on their supervised institutions, including by streamlining supervisory processes. They also identified four areas to explore further for opportunities to revise regulations: suspicious activity reports, lending limits, the Basel II capital framework, and consumer disclosures. The next EGRPRA review must be completed by 2016. Three prudential regulators told us that they are actively planning for the review. According to one prudential regulator, CFPB, the Federal Reserve, FDIC, NCUA, and OCC, are working in a collaborative fashion under the auspices of the Federal Financial Institutions Examination Council to develop a program to conduct a comprehensive review of the regulations under EGRPGRA. In addition, some prudential regulators have conducted periodic, retrospective reviews of their existing rules as a matter of policy or practice. For example, NCUA has a policy of reviewing one-third of its rules on an annual basis, and the Federal Reserve has a policy of reviewing each of its rules at least once every 5 years. FDIC is undertaking a review of its regulations to eliminate and reduce unnecessary regulatory burden in light of the regulations it incorporated when it took on supervision of state- charted thrifts upon the dissolution of the Office of Thrift Supervision. In addition, according to FDIC staff, the agency recently revised its policies, in part, to reaffirm its commitment to periodically undertake a review of each FDIC regulation and policy statement. Lastly, as part of its effort to integrate the Office of Thrift Supervision into its agency, OCC has been undertaking a comprehensive review of its and the Office of Thrift Supervision’s regulations to eliminate duplication and reduce unnecessary regulatory burden.

According to CFPB officials, the agency is not developing a retrospective review plan in response to E.O. 13,579 but, instead, is focusing on fulfilling its retrospective review requirements under section 1022 of the Dodd-Frank Act. Under the act, CFPB is required to assess retrospectively each significant rule or order adopted by CFPB under federal consumer financial law to address, among other things, the rule or order’s effectiveness in meeting the act’s purposes and goals. CFPB is required to publish a report of its assessment no later than 5 years after the rule or order’s effective date, and is required to solicit public comment to inform its assessment. The officials said that they are in the initial stage of developing a review plan, which includes identifying what data will be needed and how such data can be collected, but have not yet drafted a plan. According to the officials, after the section 1022 reviews are completed and based on any lessons learned, CFPB may develop a plan pursuant to E.O. 13,579 to review its existing rules on a recurring basis. In a related effort, CFPB requested public comment in December 2011 on streamlining regulations it inherited from other federal agencies. As a result of the comments received, CFPB has identified several priority areas for regulatory action.

Only CFTC and SEC voluntarily developed retrospective review plans in response to the executive order. In a June 2011 request for information, CFTC outlined a two-phase plan to conduct periodic, retrospective reviews of its existing regulations. Under the first phase, CFTC has examined and revised a number of its existing regulations as part of its implementation of the Dodd-Frank Act. Under the second phase, CFTC plans to conduct retrospective reviews of the remainder of its regulations after substantial completion of its Dodd-Frank rulemakings. CFTC has provided OMB with periodic status reports on its retrospective review plan and reported in July 2013 that it still is in phase one. In a September 2011 request for information, SEC requested public comments to assist it in developing a retrospective review plan as part of its ongoing efforts to update its regulations and in light of E.O. 13,579. At the same time, SEC noted that it has formal and informal processes for reviewing existing rules to assess their continued utility and effectiveness.

According to SEC staff, they have reviewed public comments received in response to the release and worked on a draft plan, but the agency has not yet approved or issued a final plan.

M-11-28 (July 22, 2011). categorize regulations by type and seek public comment on them. According to FDIC staff, prudential regulators currently are discussing how best to obtain public input for the EGRPRA process. Each year, NCUA invites the public to comment on the rules proposed for review that year. Also, CFPB is required to solicit public comment to inform its statutorily required retrospective reviews.

Prioritization. Per OMB’s guidance, the plan should specify factors that the agency will consider and the process that the agency will use in setting priorities and selecting rules for review. To the extent feasible, the plan should also include an initial list of candidate rules for review over the next two years, with clear timelines and deadlines. Regulators generally have not specified the factors that they will use to prioritize and select rules for review but have indicated that they plan to do so. CFTC and SEC asked for public comments on the factors they should use to prioritize and select rules for review. In its plan, CFTC noted that its Regulatory Review Group, consisting of senior staff, will recommend to the CFTC Commission a list of candidate rules for review, in part based on public comments. Under the EGRPRA review, the prudential regulators are required to categorize regulations by type and seek public comment on them to identify regulatory areas that are outdated, unnecessary, or unduly burdensome. According to FDIC staff, prudential regulators are developing a plan to efficiently and effectively complete the EGRPRA review process. Lastly, CFPB’s review under the Dodd-Frank Act must cover all of its significant rules, and NCUA’s review covers one- third of the agency’s rules annually.

Analysis of costs and benefits. Per OMB’s guidance, agencies may find it useful to engage in a retrospective analysis of the costs and benefits (both quantitative and qualitative) of regulations chosen for review. The guidance suggests that the plan may address the metrics that the agency will use to evaluate regulations after they have been implemented, and the steps the agency has taken to ensure that it has high-quality data and robust models with which to conduct retrospective analyses. Regulators generally have not yet specified the metrics they will use to evaluate regulations or steps to be taken to ensure that they have high-quality data with which to conduct their retrospective analysis. SEC asked for public comments on, among other things, how it can obtain and consider data and analyses to assess the benefits of its rules. Likewise, CFPB officials told us that they are exploring what data they may collect to analyze their rules.

Structure and staffing. Per OMB’s guidance, responsibility for retrospective review should be vested with a high-level agency official who can secure cooperation across the agency. The plan should also consider how best to maintain sufficient independence from the offices responsible for writing and implementing regulations. Finally, the plan should identify possible actions to strengthen internal review expertise, if necessary. Regulators generally expect their office of general counsel or other nonrulemaking group to be responsible for overseeing implementation of their plans. For example, SEC has indicated that its Division of Economic and Risk Analysis will conduct the retrospective evaluations, and CFTC plans to form a group of senior staff that will implement its retrospective review plan. CFPB officials told us that the agency’s research group likely will oversee the reviews. NCUA’s Office of General Counsel conducts the agency’s retrospective reviews.

Coordination with other forms of retrospective analysis and review. Per OMB’s guidance, many independent agencies already are engaged in retrospective analysis and review under existing requirements and authorities. The guidance states that it is appropriate to use existing processes and information as significant inputs into plans. As discussed, prudential regulators are using their existing retrospective reviews in lieu of developing specific retrospective review plans in response to E.O. 13,579.

Revisiting their retrospective analyses of their Dodd-Frank regulations after the regulations are implemented will allow regulators to determine whether regulations are achieving their intended purpose without creating unintended consequences that negatively impact the markets. Such reviews can also signal whether changes should be made to the existing rules to better achieve their intended purposes. In our prior work, we identified procedures and practices that could be particularly helpful in improving the effectiveness of retrospective reviews. In particular, we noted that agencies would be better prepared to undertake reviews if they had identified the needed data before beginning a review and, even better, before promulgating the rule. If agencies fail to plan for how they will measure the performance of their rules and how they will obtain the data they need to do so, they may be limited in their ability to accurately measure the progress or true effect of the regulations. In that regard, we recommended in our prior report that the federal financial regulators develop plans that determine how they will measure the impact of Dodd- Frank regulations—for example, determining how and when to collect, analyze, and report needed data. To date, regulators have not implemented our recommendation. We maintain that doing so would position them to make their future retrospective reviews as robust as possible.

Conclusions

Federal financial regulators have considerable work under way to implement the Dodd-Frank Act reforms that could improve the U.S. financial system in many ways. However, much work remains to implement the reforms. For example, many rulemakings are yet to be finalized. Moreover, completing the rulemaking process does not mean that reforms are fully implemented. Rather, it will take time—beyond the time spent on finalizing the rulemakings—for regulators and industry to adopt the reforms contained in the rulemakings, and even longer to determine the actual effect of the reforms.

To date, OMB, in consultation with federal agencies, has classified 36 of the Dodd-Frank rules as major under CRA and, thus, expects them to have a large effect on the economy. As provided by CRA, these rules could not take effect until the later of 60 days after Congress receives the rule report, or 60 days after the rule is published in the Federal Register, as long as Congress does not pass a joint resolution of disapproval. OMB provided guidance on implementing CRA in 1999, but such guidance does not establish standardized processes for submitting rules to OMB for its review or applying CRA’s criteria. In the absence of such guidance, we found that federal financial regulators may have used different processes for submitting their rules and analyses to OMB, and for applying CRA criteria. These inconsistent processes could lead to the inconsistent classification of some rules. To the extent that any major rules are not being classified as such, those rules would not be subject to the 60-day congressional notice required under CRA before major rules become effective.

Recommendations for Executive Action

To help ensure that OMB, in consultation with federal financial regulators, consistently classifies Dodd-Frank rules as major under CRA, we recommend that the Director of OMB, through the Administrator of the Office of Information and Regulatory Affairs, issue additional guidance to help standardize processes for identifying major rules under CRA, including on (1) the extent to which agencies should submit rules to OMB for review, such as whether agencies should submit only those rules their analyses indicate are major or all rules, and (2) how agencies should apply CRA’s major rule criteria in their analyses, such as whether agencies should include indirect benefits or costs, combine benefits or costs of separate but related rules, or aggregate benefits or costs for jointly issued rules.

Agency Comments and Our Evaluation

We provided a draft of this report to CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, NCUA, OMB, OCC, SEC, and Treasury for review and comment. CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, OMB, OCC, SEC, and Treasury provided technical comments, which we have incorporated, as appropriate. Treasury (on behalf of FSOC) and NCUA provided written comments that we have reprinted in appendixes IX and X, respectively. In its comment letter, Treasury noted that FSOC has taken a variety of actions to facilitate coordination and consultation among financial regulators, such as through its deputies and functional committees, and continually seeks ways to further enhance collaboration. We describe these actions in the draft report. In its letter, NCUA agreed with our findings, conclusions, and recommendation.

OMB staff provided comments on a draft of our report via e-mail through their GAO liaison on November 25, 2013. In those comments, OMB disagreed with our findings and recommendation concerning OMB’s application of the major rule criteria under CRA. Specifically, OMB disagreed with our findings that OMB inconsistently applied CRA criteria in its designation of major rules and stated that the examples in our draft report are not actual inconsistencies in the application of the CRA criteria. In addition, OMB noted that two of our examples reflected a challenge faced by OMB in determining whether a rule is major. Specifically, agencies often do not have the data needed to conduct a precise analysis of a rule’s economic impact but, nevertheless, will recommend that a rule be designated as major if their analysis strongly suggests that the rule may be major. OMB said that in these circumstances, it generally will rely on an agency’s expert judgment and concur with its recommendation. Furthermore, OMB said that even if some rule determinations under CRA were inconsistent, such outcomes may not result in any real-world consequence. For example, a rule incorrectly determined to be non-major under CRA could have an effective date less than 60 days after the rule’s submission to Congress, but only if the agency did not plan to set the rule's effective date 60 or more days after the rule’s submission. Finally, given these concerns, OMB questioned what new guidance to agencies would entail. Therefore, OMB suggested eliminating the recommendation from the draft report.

We maintain that the findings and recommendation on the major rule designation process are appropriate. First, we did not seek to determine whether any of the individual rules we reviewed were misclassified under CRA. Instead, our analysis identified examples in which federal agencies used different processes (1) for submitting their rules and supporting analyses to OMB and (2) in applying the CRA major rule criteria, which we concluded could lead to inconsistent classifications of similar rules under CRA. Indeed, determining whether any of the rules we reviewed actually were misclassified is not possible without clear guidance on whether agencies, for example, may consider a rule's indirect consequences, combine similar rules, or add a rule's benefits and costs in developing their designation recommendation. Our recommendation serves to address this gap in guidance and help ensure more standardized processes. We clarified a heading in the draft report to reflect our focus on the processes used by OMB and federal financial regulators.

Second, we agree that federal financial regulators face challenges in quantifying the benefits and costs of their rules and have highlighted such challenges in our prior reports. However, again, our findings and recommendation focus on inconsistencies in the processes used by OMB and federal financial regulators to designate major rules under CRA—not on the analyses conducted by the regulators.

Third, CRA gives Congress 60 days to review a major rule before the rule can become effective, during which time Congress can issue a joint resolution disapproving the rule. While OMB notes that there might not be a real-world consequence if a rule is misclassified as non-major, this outcome relies on the issuing agency setting an effective date for the rule of at least 60 days after a rule’s submission to Congress. Moreover, such a misclassification could infringe upon Congress’s ability to reject the rule. Additionally, under CRA, GAO is required to provide Congress with a report on each major rule that contains GAO’s assessment of each issuing agency’s compliance with the procedural steps required by various acts and executive orders, including preparation of a cost-benefit analysis. In its mandated annual reports to Congress discussing the benefits and costs of federal regulations, OMB has stated that it uses GAO major rule reports as the sole source of information for analyzing major rules issued by independent regulatory agencies.misclassification of a major rule as non-major would mean that information on that rule would not be highlighted to Congress and the public in a GAO report and would, in turn, not be considered in OMB’s annual reports to Congress on the benefits and costs of federal regulations.

Finally, although OMB issued guidance to federal agencies in 1999 on implementing CRA, the guidance did not clearly articulate the processes agencies should use to (1) submit their rules and analysis to OMB or (2) apply the CRA major rule criteria. In the absence of such guidance, we found that federal financial regulators varied in the processes they used to submit rules and analysis to OMB and their application of CRA criteria. For example, as we discuss in the report, SEC and CFPB staff told us that they did not know whether they were permitted to add costs and benefits or combine rules, respectively, in assessing whether a rule was major. In that regard, we maintain that additional guidance on the processes we identified would enhance the ability of OMB and federal financial regulators to fulfill their responsibilities under CRA.

We are sending copies of this report to CFPB, CFTC, FDIC, the Federal Reserve Board, FSOC, NCUA, OMB, OCC, SEC, Treasury, interested congressional committees and members, and others. This report will also be available at no charge on our website at http://www.gao.gov.

Should you or your staff have questions concerning this report, please contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix XI.

Appendix I: Objectives, Scope, and Methodology

This report examines rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). More specifically, we examined (1) the regulatory analysis conducted by federal agencies in their Dodd-Frank rulemakings, including their assessments of which rules they considered to be major rules under the Congressional Review Act (CRA); (2) interagency coordination by the agencies in their Dodd-Frank rulemakings and by the Consumer Financial Protection Bureau (CFPB) with other agencies in connection to its supervision of large banks and certain nonbank financial service providers; and (3) possible impact of selected Dodd-Frank provisions and their implementing regulations and agency plans to assess such regulations retrospectively.

To examine the regulatory analyses and coordination conducted by the regulators, we focused our analysis on final rules issued pursuant to the Dodd-Frank Act that became effective from July 24, 2012, through July 22, 2013, a total of 70 rules (see app. II). To identify these rules, we used a website maintained by the Federal Reserve Bank of St. Louis that tracks Dodd-Frank regulations. from the agencies under review.

In this report, we use the terms “rules,” “regulations,” or “rulemakings” generally to refer to Federal Register notices of agency action pursuant to the Dodd-Frank Act, including regulations, interpretive rules, general statements of policy, guidance, and rules that deal with agency organization, procedure, or practice. Combined with our past two reports, we have reviewed all Dodd-Frank Act rules in effect as of July 22, 2013. See GAO, Dodd- Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011), and Dodd-Frank Act Regulations: Agencies’ Efforts to Analyze and Coordinate Their Rules, GAO-13-101 (Washington, D.C.: Dec. 18, 2012). under the Administrative Procedure Act—and required the agencies to conduct some form of regulatory analysis. For each of the 59 rules, we reviewed final rule Federal Register releases to document and summarize the analyses conducted by the regulators under review. Using GAO’s Federal Rules database we found that 10 of the 59 rules were classified by the Office of Management and Budget (OMB), in consultation with the rulemaking agencies, as major rules under CRA (that is, have 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 12,866 (E.O. 12,866), such major rules would be considered significant regulatory actions and subject to formal benefit- cost analysis. We developed a data collection instrument to compare and assess the regulatory analysis conducted for the 10 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 proposed and final rules. To examine how OMB, in consultation with federal agencies, classifies rules as major, we reviewed CRA, GAO reports, and other material. Rather than limiting our scope to major rules effective from July 24, 2012, through July 22, 2013, we reviewed and analyzed all final Dodd-Frank rules classified as major as of July 22, 2013. To identify such major rules, we relied on GAO’s Federal Rules database. We identified 36 major rules issued pursuant to the Dodd- Frank Act (which includes the 10 major rules mentioned above) and corroborated our list with federal agencies under review. To examine the basis for classifying the rules as major, we reviewed the impact analyses prepared by the agencies and provided to OMB, if available; GAO reports on major rules; and Federal Register releases on the rules. We also interviewed officials from OMB and federal agencies about the processes used to classify major rules.

To examine interagency coordination among the regulators, we reviewed the Dodd-Frank Act, Federal Register releases, and GAO reports to identify the interagency coordination or consultation requirements for the 70 Dodd-Frank rules within our scope. We also interviewed officials or staff from the Commodity Futures Trading Commission (CFTC), CFPB, and the Securities and Exchange Commission (SEC) to identify which rules were subject to interagency coordination requirements under Titles VII and X of the act. We found evidence of coordination between the rulemaking agency and other regulators for 49 of the 70 regulations that we reviewed. We reviewed the Federal Register releases of the proposed and final rules and interviewed agency officials to document whether the agencies coordinated or consulted with other U.S., foreign, or international regulators, as required by the Dodd-Frank Act or on a voluntary basis. To examine steps taken by CFPB to comply with the act’s interagency coordination and information-sharing requirements for its supervision activities, we reviewed the act; CFPB’s Supervision and Examination Manual, memorandums of understanding with federal and state regulators on interagency coordination, and other agency documents; and GAO reports. We also interviewed officials from CFPB and federal prudential regulators about their coordination with each other and coordination challenges.

Finally, we took a multipronged approach to analyze what is known about the impact of the Dodd-Frank Act on the financial marketplace. First, we used bank holding company data from the Federal Reserve Bank of Chicago (from FR Y-9C), Bureau of Economic Analysis, and Federal Reserve Board’s National Information Center, to update our indicators monitoring changes in certain characteristics of systemically important financial institutions (SIFI) that might be affected by Dodd-Frank regulations.impact of the act on SIFIs, the indicators have a number of limitations, including that they do not identify any causal linkages between the act and changes in the indicators. Moreover, factors other than the act affect SIFIs and, thus, the indicators. Second, we used the Federal Reserve Bank of Chicago data to update our economic analysis estimating changes in the (1) cost of credit provided by bank SIFIs and (2) safety and soundness of bank SIFIs. Our analysis does not differentiate the effects of the act from simultaneous changes in economic conditions or other factors that may affect such companies. Third, the Dodd-Frank Act requires CFTC, SEC, and the prudential regulators to implement new reforms for swaps and security-based swaps to reduce risk, increase transparency, and improve market integrity. For example, the act provides for the registration of swap dealers, including subjecting them to minimum margin requirements, and authorizes CFTC and SEC to impose mandatory clearing requirements on swaps. We developed margin and clearing indicators that may reflect the act’s impact on these activities using bank holding company data from the Federal Reserve Bank of Chicago (from FR Y-9C) and CFTC’s Swaps Report, respectively. As new data become available, we expect to update and, as warranted, revise our indicators and create additional indicators to cover other provisions. Although changes in our indicators may be suggestive of the act’s impact on the swaps market, the indicators have a number of limitations, including that they do not identify causal linkages between the act and changes in the indicators. Fourth, to assess agency plans to conduct retrospective reviews of their existing rules, we reviewed executive orders, including E.O. 13,579 that asks independent regulatory agencies to prepare retrospective review plans; OMB guidance; Federal Register releases, policies, and other agency documents pertaining to retrospective reviews; and GAO reports. Finally, we interviewed federal financial regulators about their plans to conduct retrospective reviews of their Dodd-Frank rules. For parts of our methodology that involved the Although changes in the indicators may be suggestive of the analysis of computer-processed data, we assessed the reliability of these data and determined that they were sufficiently reliable for our purposes.

We conducted this performance audit from January 2013 to December 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Dodd-Frank Rules Effective as of July 22, 2013

The following table lists the Dodd-Frank rules that we identified as effective during the scope period for this review—July 24, 2012, through July 22, 2013.

The following table lists the Dodd-Frank rules that we identified as final and effective during the scope period for our November 2012 review— July 22, 2011, through July 23, 2012.

The following table lists the Dodd-Frank rules that we identified as final and effective during the scope period for our November 2011 review— July 21, 2010, through July 21, 2011.

Appendix III: Dodd-Frank Rules Classified as Major, Final as of July 22, 2013

The following table lists the Dodd-Frank rules that have been designated as major by OMB and are final as of July 22, 2013.

Appendix IV: Interagency Coordination for Dodd-Frank Rules Effective on July 24, 2012, through July 22, 2013

The following table lists Dodd-Frank rules effective from July 24, 2012 through July 22, 2013 where the issuing regulator(s) coordinated with at least one other federal or foreign regulator during the rulemaking process.

Appendix V: Summary of Rulemakings Related to Selected Dodd-Frank Provisions Applicable to Systemically Important Financial Institutions

The Dodd-Frank Act contains several provisions that apply to nonbank financial companies designated by the Financial Stability Oversight Council for Federal Reserve supervision and enhanced prudential standards (nonbank SIFI) and bank holding companies with $50 billion or more in total consolidated assets (bank SIFI). Table 9 summarizes some of those provisions and the rulemakings, including their status, to implement those provisions.

Appendix VI: Trends in GAO Indicators for Bank SIFIs

As we reported last year, some Dodd-Frank Act provisions and related rules may result in adjustments to the size, interconnectedness, complexity, leverage, or liquidity of systemically important financial institutions (SIFI) over time. We developed indicators to monitor changes in some of these SIFI characteristics. The size and complexity indicators reflect the potential for a single company’s financial distress to affect the financial system and economy. The leverage and liquidity indicators reflect a SIFI’s resilience to shocks or its vulnerability to financial distress. Like we did in our last report, we continue to focus our analysis on bank SIFIs, given that FSOC only recently designated three nonbank financial firms for Federal Reserve supervision. Our indicators have limitations. For example, the indicators do not identify causal links between changes in SIFI characteristics and the act. Rather, the indicators track changes in the size, complexity, leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act was passed to examine whether the changes are consistent with the act. However, other factors—including the economic downturn, international banking standards agreed upon by the Basel Committee on Banking Supervision (Basel Committee), European debt crisis, and monetary policy actions—also affect bank holding companies and, thus, the indicators. These factors may have a greater effect than the Dodd-Frank Act on SIFIs. As discussed, some rules implementing SIFI-related provisions have not yet been finalized. Thus, trends in our indicators include the effects of these rules only insofar as SIFIs have changed their behavior in response to issued rules and in anticipation of expected rules. In this sense, our indicators provide baselines against which to compare future trends.

SIFI Size

We developed three indicators of size. The first indicator tracks the number of U.S. bank SIFIs. The second indicator measures a SIFI’s size based on the total assets on its balance sheet. The third indicator measures the extent to which industry assets are concentrated among the individual SIFIs, reflecting a SIFI’s size relative to the size of the industry. A limitation of these indicators is that they do not include an institution’s off-balance sheet activities and thus may understate the amount of financial services or intermediation an institution provides. Furthermore, asset size alone is not an accurate determinant of systemic risk, as an institution’s systemic risk significance also depends on other factors, such as its complexity and interconnectedness.

As shown in figure 6, there were 33 bank SIFIs (i.e., bank holding companies with $50 billion or more in total consolidated assets) in the second quarter of 2013. The figure also shows that six of the bank SIFIs had more than $500 billion in total consolidated assets (referred to as large bank SIFIs in this report) and were considerably larger than the other bank SIFIs.

Our indicators show that the number and size of U.S. bank SIFIs declined from the third quarter of 2010 through the second quarter of 2013, and several SIFIs continue to dominate and have increased their dominance of the market.

Table 10 shows that the total number of U.S. bank SIFIs decreased by three over the period: (1) the number of large bank SIFIs decreased by one and (2) the number of other bank SIFIs decreased by two. In our November 2012 report, we noted that there were seven large SIFIs as of the second quarter of 2012. Six of them continue to be large bank SIFIs as of the third quarter of 2013. In February 2013, the remaining one received regulatory approval to deregister as a bank holding company.

Table 10 also shows that the median assets for U.S. bank SIFIs declined by about $21.5 billion (about 12 percent) over the period. However, median assets for large bank SIFIs increased from $1,278.1 billion to $1,662.3 billion, or by $384.2 (about 30 percent), in part because one of the large bank SIFIs deregistered as a bank holding company in 2013. Median assets for the other bank SIFIs decreased from $139.8 billion to $118.8 billion, or by $21 billion (about 15 percent).

Figure 7 shows that the median market share for large bank SIFIs increased from 7.4 percent to 10.3 percent (or by about 40 percent) of the industry’s assets from the third quarter of 2010 through the second quarter of 2013. In contrast, the median market share for the other bank SIFIs declined from 0.8 percent to 0.7 percent (or by about 9 percent) over the same period.

Our indicators of complexity are the number of legal entities of bank SIFIs, the percentage of foreign legal entities of large SIFIs, and the number of countries where they are located. An institution’s operational complexity may reflect an institution’s diverse lines of business and locations in which the institution operates, which are reflected partly through its various legal structures. Consequently, 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. One limitation of our indicator is that it does not provide information on the relative complexity of SIFIs resulting directly from their various lines of business. Additionally, changes in the operational complexity of a SIFI may be reflected in our indicators only insofar as they result in a change in the number of legal entities.

The complexity indicators continue to show that most large bank SIFIs have a relatively large number of legal entities compared with other U.S. bank SIFIs and that they operate in various countries. They also show that some of the large bank SIFIs may be becoming less but others more complex:

Figure 8 shows that the six large bank SIFIs in the second quarter of 2013 continue to have more than 2,300 legal entities, with two of them having more than 7,000 and 10,000, respectively. Five of the large SIFIs had fewer legal entities at the end of the second quarter of 2013 than they had at the end of the second quarter of 2010. The median number of legal entities for the large bank SIFIs decreased from 4,991 to 3,682 from the second quarters 2010 to the second quarter of 2013. The median for the remaining 27 bank SIFIs also declined from 108 to 107 over the same period. Within this group, 21 of the 27 bank holding companies had less than 200 legal entities over the period.

Table 11 shows that five of the six large U.S. bank SIFIs in the second quarter of 2013 continue to have a high number or percentage of foreign legal entities, and some may be becoming less complex but others more complex based on these indicators. Four large bank SIFIs decreased their number or percentage of legal entities located outside of the United States from the second quarter of 2010 to the second quarter of 2013. Additionally, for these large SIFIs, the number of countries where their foreign legal entities operate decreased or remained stable over the period. In contrast, two large bank SIFIs increased both their number and percentage of legal entities located outside of the United States over the period, and for one of them the number of countries where its foreign entities operated increased by 50 percent.

Although there are many ways to measure leverage, we use two measures: (1) tangible common equity as a percentage of total assets, and (2) tangible common equity as a percentage of risk-weighted assets. The two indicators differ, in part because total risk-weighted assets reflect some of an institution’s off-balance sheet activity but total assets do not.

We focus on tangible common equity, because it most closely approximates the amount of capital available to absorb losses in asset values in the short term. A limitation of both indicators is that they may not fully reflect an institution’s exposure to risk. Total assets do not reflect an institution’s risk exposure from off-balance sheet activities and generally treat all assets as equally risky. The calculation of risk-weighted assets is designed to reflect differences in risk, but the weights assigned to the assets may not fully reflect the risk exposure associated with those assets, for example, because assets in broad categories of loans all receive the same risk weight.

Our indicators suggest that large and other bank SIFIs have decreased their leverage since the third quarter of 2010, but have slightly decreased or not changed their leverage levels over the past year.

Figure 9 shows that median tangible common equity as a percentage of total assets generally continued its upward trend for large and other bank SIFIs from the third quarter of 2010 through the second quarter of 2013. For large bank SIFIs, the indicator increased from 6.3 percent to 6.8 percent (or by about 8 percent). For the other bank SIFIs, the indicator increased from 6.8 percent to 8.2 percent (or by about 21 percent).

Figure 10 shows that median tangible common equity as a percentage of risk-weighted assets, which include off-balance sheet activity, increased from the third quarter of 2010 through the second quarter of 2013 but fluctuated over the period. For large bank SIFIs, the indicator increased from 10.8 percent to 11.8 percent (or by about 9 percent) over the period. For the other SIFIs, the indicator increased from 9.4 percent to 10.3 percent (or by about 10 percent) over the period. This measure of leverage did not change much for either group of SIFIs from mid-2012 to mid-2013.

We developed two indicators to analyze changes in SIFI 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 are balance sheet obligations due within 1 year; an institution’s short-term liabilities as a percentage of total liabilities are a measure of its need for liquidity. Liquid assets can easily be sold without affecting their price and, thus, can be easily converted 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 access to liquidity. For example, if this percentage is under 100 percent, the institution does not have sufficient access to liquidity and is unlikely to have enough liquid assets to cover its short-term debt. A limitation of both of these indicators is that they do not include off-balance sheet liabilities, such as callable derivatives or potential derivatives-related obligations. The second indicator also does not include off-balance sheet liquid assets, such as short-term income from derivative contracts.

Our indicators show that U.S. bank SIFIs have improved their liquidity from the third quarter of 2010 through the second quarter of 2013, although one of our measures shows that large bank SIFIs’ liquidity deteriorated from mid-2012 to mid-2013. The figures also show that large bank SIFIs held relatively more short-term liabilities and liquid assets to cover such liabilities than other bank SIFIs.

Figure 11 shows that median short-term liabilities as a percentage of total liabilities for large bank SIFIs decreased from 55.1 percent to 52.0 percent (or by about 6 percent) over the period, but it increased from mid-2012 to mid-2013, reversing a downward trend. For the other bank SIFIs, the indicator continued its downward trend over the period—declining from 25.4 percent to 20.8 percent (or by about 18 percent).

Figure 12 shows that median short-term (or liquid) assets as a percentage of short-term liabilities generally continued its upward trend for both large and other SIFIs from the third quarter of 2010 through the second quarter of 2013. Specifically, the indicator increased from 100.7 percent to 136.5 percent (or by 35 percent) for large bank SIFIs and from 79.0 percent to 104.9 percent (or by 33 percent) for other bank SIFIs.

Appendix VII: Econometric Analyses of the Impact of Enhanced Regulation and Oversight on SIFIs

Methodology

We conducted an econometric analysis to assess the impact of the Dodd- Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our multivariate econometric model uses a difference-in-difference design that exploits the fact that the Dodd-Frank Act subjects bank holding companies with total consolidated assets of $50 billion or more to enhanced regulation by the Federal Reserve but not others, so we can view bank holding companies with total consolidated assets of $50 billion or more (bank SIFIs) as the treatment group and other bank holding companies as the control group. We compared the changes in the characteristics of U.S. bank SIFIs over time to changes in the characteristics of other U.S. bank holding companies over time. All else being equal, the difference in the differences is the initial impact of new requirements for bank SIFIs primarily tied to enhanced regulation and oversight under the Federal Reserve.

Our general regression specification is the following: ybq = α + β + γSIFIbq + X’bqΦ + εbq where b denotes the bank holding company, q denotes the quarter, ybq is the dependent variable, α is a bank holding company-specific intercept, β is a quarter-specific intercept, SIFIbq is an indicator variable that equals 1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is a list of other independent variables, and εbq is an error term. We estimated the parameters of the model using quarterly data on top-tier bank holding companies that filed form FR Y-9C for the period from the first quarter of 2006 to the second quarter of 2012.

The parameter of interest is γ, the coefficient on the SIFI indicator, which is equal to one for bank holding companies with consolidated assets of $50 billion or more in the quarters starting with the treatment start date and is equal to zero otherwise. The Dodd-Frank Act was enacted in July 2010, so the treatment start date is the third quarter of 2010. Thus, the parameter γ measures the average difference in the difference in dependent variable between bank SIFIs and other bank holding companies after and before the Dodd-Frank Act was enacted.

We use different dependent variables (ybq) to estimate the initial impacts of the new requirements for SIFIs on the cost of credit provided by bank SIFIs and on various aspects of bank SIFIs’ safety and soundness, including capital adequacy, asset quality, earnings, and liquidity.

Funding cost. A bank holding company’s funding cost is the cost of deposits or liabilities that it then uses to make loans or otherwise acquire assets. More specifically, a bank holding company’s funding cost is the interest rate it pays when it borrows funds. All else being equal, the greater a bank holding company’s funding cost, the greater the interest rate it charges when it makes loans. We measure funding cost as an institution’s interest expense as a percentage of interest- bearing liabilities.

Capital adequacy. Capital absorbs losses, promotes public confidence, helps restrict excessive asset growth, and provides protection to creditors. We use two alternative measures of capital adequacy: tangible common equity as a percentage of total assets and tangible common equity as a percentage of risk-weighted assets.

Asset quality. Asset quality reflects the quantity of existing and potential credit risk associated with the institution’s loan and investment portfolios and other assets, as well as off-balance sheet transactions. Asset quality also reflects the ability of management to identify and manage credit risk. We measure asset quality as performing assets as a percentage of total assets, where performing assets are equal to total assets less assets 90 days or more past due and still accruing interest, assets in non-accrual status, and other real estate owned.

Earnings. Earnings are the initial safeguard against the risks of engaging in the banking business and represent the first line of defense against capital depletion that can result from declining asset values. We measure earnings as net income as a percentage of total assets.

Liquidity. Liquidity represents the ability to fund assets and meet obligations as they become due, and liquidity risk is the risk of not being able to obtain funds at a reasonable price within a reasonable time period to meet obligations as they become due. We use two different variables to measure liquidity. The first variable is liquid assets as a percentage of volatile liabilities. This variable is similar in spirit to the liquidity coverage ratio introduced by the Basel Committee on Banking Supervision and measures a bank holding company’s capacity to meet its liquidity needs under a significantly severe liquidity stress scenario. We measure liquid assets as the sum of cash and balances due from depository institutions, securities (less pledged securities), federal funds sold and reverse repurchases, and trading assets. We measure volatile liabilities as the sum of federal funds purchased and repurchase agreements, trading liabilities (less derivatives with negative fair value), other borrowed funds, deposits held in foreign offices, and large time deposits held in domestic offices. Large time deposits are defined as time deposits greater than $100,000 prior to March 2010 and as time deposits greater than $250,000 in and after March 2010.

The second liquidity variable is stable liabilities as a percentage of total liabilities. This variable measures the extent to which a bank holding company relies on stable funding sources to finance its assets and activities. This variable is related in spirit to the net stable funding ratio introduced by the Basel Committee on Banking Supervision, which measures the amount of stable funding based on the liquidity characteristics of an institution’s assets and activities over a 1 year horizon. We measure stable funding as total liabilities minus volatile liabilities as described earlier.

Finally, we include a limited number of independent variables (Xbq) to control for factors that may differentially affect SIFIs and non-SIFIs in the quarters since the Dodd-Frank Act was enacted. We include these variables to reduce the likelihood that our estimates of the impact of new requirements for SIFIs are reflecting something other than the impact of the Dodd-Frank Act’s new requirements for SIFIs.

Nontraditional income. Nontraditional income generally captures income from capital market activities. Bank holding companies with more nontraditional income are likely to have different business models than those with more income from traditional banking activities. Changes in capital markets in the period since the Dodd- Frank Act was enacted may have had a greater effect on bank holding companies with more nontraditional income. If bank SIFIs typically have more nontraditional income than other bank holding companies, then changes in capital markets in the time since the Dodd-Frank Act was enacted may have differentially affected the two groups. We measure nontraditional income as the sum of trading revenue; investment banking, advisory, brokerage, and underwriting fees and commissions; venture capital revenue; insurance commissions and fees; and interest income from trading assets less associated interest expense, and we express nontraditional income as a percentage of operating revenue.

Securitization income. Bank holding companies with more income from securitization are likely to have different business models than those with more income from traditional banking associated with an originate-to-hold strategy for loans. Changes in the market for securitized products in the period since the Dodd-Frank Act was enacted may thus have had a greater effect on bank holding companies with more securitization income. If bank SIFIs typically have more securitization income than other bank holding companies, then changes in the market for securitized products in the time since the Dodd-Frank Act was enacted may have differentially affected the two groups. We measure securitization income as the sum of net servicing fees, net securitization income, and interest and dividend income on mortgage-backed securities minus associated interest expense, and we express securitization as a percentage of operating revenue. Operating revenue is the sum of interest income and noninterest income less interest expense and loan loss provisions.

Foreign exposure. Changes in other countries, such as the sovereign debt crisis in Europe, may have a larger effect on bank holding companies with more foreign exposure. If bank SIFIs typically have more foreign exposure than other bank holding companies, then changes in foreign markets may have differentially affected the two groups. We measure foreign exposure as the sum of foreign debt securities (held-to-maturity and available-for-sale), foreign bank loans, commercial and industrial loans to non-U.S. addresses, and foreign government loans. We express foreign exposure as a percentage of total assets.

Size. We include size because bank SIFIs tend to be larger than other bank holding companies, and market pressures or other forces not otherwise accounted for may have differentially affected large and small bank holding companies in the time since the Dodd-Frank Act was enacted. We measure the size of a bank holding company as the natural logarithm of its total assets.

CPP participation. We control for whether or not a bank holding company participated in the Capital Purchase Program (CPP) component of the Troubled Asset Relief Program (TARP) to differentiate any impact that this program may have had from the impact of the Dodd-Frank Act.

We also conducted several sets of robustness checks:

We restricted our sample to the set of institutions with assets that are “close” to the $50 billion cutoff for enhanced prudential regulation for bank SIFIs. Specifically, we analyzed two restricted samples of bank holding companies: (1) bank holding companies with assets between $25 billion and $75 billion and (2) bank holding companies with assets between $1 billion and $100 billion.

We examined different treatment start dates. Specifically, we allowed the Dodd-Frank Act’s new requirements for SIFIs to have an impact in 2009 quarter 3, 1 year prior to the passage of the act. We did so to allow for the possibility that institutions began to react to the act’s requirements in anticipation of the act being passed.

We analyzed alternative measures of capital adequacy, including equity capital as a percentage of total assets and Tier 1 capital as a percentage of risk-weighted assets.

We allowed the effect of the treatment to vary by quarter.

Data

We conducted our analysis using quarterly data on bank holding companies that filed form FR Y-9C obtained from the Federal Reserve Bank of Chicago for the period from the first quarter of 2006 to the second quarter of 2013.

Results

Our econometric analysis assesses the initial impact of the Dodd-Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they provide and (2) their safety and soundness. Our analysis leverages the Dodd-Frank Act’s requirement that bank holding companies with total consolidated assets of $50 billion or more are subject to enhanced regulation by the Federal Reserve but other bank holding companies are not by comparing funding costs, capital adequacy, asset quality, earnings, and liquidity for bank SIFIs and non-SIFI bank holding companies before and after the implementation of the enhanced prudential requirements. All else being equal, the difference in the comparative differences is the inferred effect of the Dodd-Frank Act on bank SIFIs. While some of the SIFI-related rulemakings have yet to be finalized, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future results.

Our baseline estimates suggest that the Dodd-Frank Act has not been associated with a significant change in U.S. bank SIFIs’ funding costs (table 12). To the extent that the cost of credit provided by bank SIFIs is a function of their funding costs, the new requirements for SIFIs are likely to have had little effect on the cost of credit to date.

Our baseline estimates also suggest that the Dodd-Frank Act is associated with improvements in most measures of U.S. bank SIFIs’ safety and soundness. Bank SIFIs appear to be holding more capital than they otherwise would have held in every quarter since the Dodd-Frank Act was enacted (see “Baseline” column in table 12). The quality of assets on the balance sheets of bank SIFIs also seems to have improved since the Dodd-Frank Act was enacted. The act is associated with higher earnings for bank SIFIs in the time period after the act’s enactment. It is also associated with improved liquidity as measured by the extent to which a bank holding company is using stable sources of funding. The only measure that has not clearly improved since the act’s enactment was liquidity as measured by the capacity of a bank holding company’s liquid assets to cover its volatile liabilities. Thus, the Dodd-Frank Act appears to be broadly associated with improvements in most indicators of safety and soundness for U.S. bank SIFIs (relative to non-SIFI bank holding companies).

Our approach allows us to partially differentiate changes in funding costs, capital adequacy, asset quality, earnings, and liquidity associated with the Dodd-Frank Act from changes due to other factors. However, several factors make isolating and measuring the impact of the Dodd-Frank Act’s new requirements for SIFIs challenging. The effects of the act cannot be differentiated from the effects of simultaneous changes in economic conditions, such as the pace of the recovery from the recent recession, or regulations, such as those stemming from Basel III, or other changes, such as in credit ratings that differentially may affect bank SIFIs and other bank holding companies. In addition, some of the new requirements for SIFIs have yet to be implemented. Nevertheless, our estimates are suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and provide a baseline against which to compare future trends.

The results of our robustness checks are as follows:

Our results for funding costs are generally robust to restricting the set of bank holding companies we analyze to those with assets of $25 billion-$75 billion, but our results for capital adequacy, asset quality, earnings, and liquidity are not.

Our results are generally robust to restricting the set of bank holding companies we analyze to those with assets of $1 billion-$100 billion.

Our results are generally robust to starting the treatment in the third quarter of 2009, 1 year prior to the passage of the Dodd-Frank Act. This finding is consistent with the idea that bank holding companies began to change their behavior in anticipation of the act’s requirements, perhaps as information about the content of the act became available and the likelihood of its passage increased. However, there may be other explanations, including anticipation of Basel III requirements, reactions to stress tests, and market pressures to improve capital adequacy and liquidity.

Our results for the impact on capital adequacy are generally similar when we measure capital adequacy using Tier 1 capital as a percentage of assets or risk-weighted assets but not when we measure capital adequacy using equity capital as a percentage of assets (see table 13).

Our results are generally robust to allowing the treatment effect to vary by quarter (see table 14).

Appendix VIII: Dodd-Frank Rules Implementing Central Clearing, Capital, and Margin Swap Reforms

The following tables list select Dodd-Frank rules that implement sections of Title VII related to central clearing requirements for swaps and security- based swaps, and margin and capital requirements for swaps entities, as of November 15, 2013.

Appendix IX: Comments from the Financial Stability Oversight Council

Appendix X: Comments from the National Credit Union Administration

Appendix XI: GAO Contact and Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Richard Tsuhara (Assistant Director), Silvia Arbelaez-Ellis, Timothy Bober, William R. Chatlos, Jeremy Conley, Rachel DeMarcus, Courtney LaFountain, Thomas McCool, Marc Molino, Patricia Moye, Barbara Roesmann, and Susan Offutt made key contributions to this report.