Numerous international bodies with different missions and members have played a role in implementing the G20 financial regulatory reform agenda. In general, many of these bodies operate on a consensus basis and have no legally binding authority. Thus, financial reform agreements reached by these bodies must be adopted voluntarily by their member jurisdictions, such as through legislative or regulatory changes (or both), to take effect. Figure 1 depicts some of the international bodies involved in the G20 financial regulatory reforms and that partly comprise an international network often referred to as the “international financial architecture.” Within the international financial architecture, the G20 is a forum for international cooperation on global economic and financial issues. Its members include 19 countries and the European Union. The G20’s objectives are to coordinate policy among its members to achieve global economic stability and sustainable growth; promote financial regulations that reduce risks and prevent future financial crises; and modernize the international financial architecture. The G20 was established in 1999 as a forum for finance ministers and central bank governors in the aftermath of the financial crisis of 1997-1998. The G20 was elevated to the political leader level in 2008, when its member countries’ heads of state or government first met to respond to the global economic and financial crisis. G20 member jurisdictions account for approximately 90 percent of world gross domestic product, 80 percent of world trade, and are home to two-thirds of the world’s population. Since 2008, the G20 leaders have met at least annually. The presidency of the G20 rotates annually among its members, and the host government supplies the staff for the secretariat that runs the agenda and hosts meetings that year. In addition to the G20 leaders meetings, the G20 finance ministers and central bankers, and the Sherpas, who are representatives of the leaders, meet on a regular basis. As the G20 operates on the basis of consensus, its commitments reflect the agreement of its members, including the United States. The G20 established FSB in 2009 as the successor to the Financial Stability Forum to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies. FSB member institutions include finance ministries, financial regulatory authorities, and central banks of the G20 members, as well as those of Hong Kong Special Administrative Region (SAR), the Netherlands, Singapore, Spain, and Switzerland. FSB members also include international bodies—such as IMF, the Organisation for Economic Co-operation and Development, and the World Bank—and international standard-setting bodies, such as the Basel Committee on Banking Supervision (Basel Committee), International Accounting Standards Board (IASB), International Organization of Securities Commissions (IOSCO), and International Association of Insurance Supervisors (IAIS). According to FSB, it seeks to support the multilateral agenda for strengthening financial systems and the stability of international financial markets. FSB’s mandate includes (1) assessing vulnerabilities affecting the global financial system and identifying and overseeing actions needed to address them; (2) promoting coordination and information exchange among authorities responsible for financial stability; (3) undertaking reviews of the policy development work of the international standard- setting bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps; and (4) collaborating with IMF to conduct early warning exercises. In addition, FSB has instituted a framework for monitoring implementation of the G20 financial reforms and reports periodically to the G20 about standards development and implementation progress. Organizationally, a 70-person Plenary, composed of one to three representatives from each represented jurisdiction or organization, is the sole decision-making body of FSB. The Plenary approves reports, principles, standards, recommendations, and guidance developed by FSB, and approves work programs and the FSB budget. The FSB Plenary is led by the FSB Chairman. A Steering Committee coordinates work in between Plenary meetings. FSB’s work is carried out through the activities of standing committees, including the Standing Committee on Assessment of Vulnerabilities, the Standing Committee on Standards Implementation, and the Standing Committee on Supervisory and Regulatory Cooperation. The FSB Plenary is reviewing the structure of representation in FSB, which is to be completed by the next leaders summit in November 2014. As outlined in the FSB charter, FSB Plenary seat assignments are meant to reflect the size of the national economy, financial market activity, and national financial stability arrangements in a member jurisdiction. The staff of FSB members carry out the majority of FSB’s work. The FSB Secretariat has approximately 30 staff members who also support FSB’s work. IMF is an organization of 188 member jurisdictions. Founded in 1944, IMF’s primary purpose is to safeguard the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from one another. IMF’s main activities include (1) providing advice to members on adopting policies that can help them prevent or resolve a financial crisis, achieve macroeconomic stability, accelerate economic growth, and alleviate poverty; (2) making financing temporarily available to members to help them address balance of payments problems; and (3) offering technical assistance and training to countries, at their request, to help them build the expertise and institutions they need to implement sound economic policies. As part of its surveillance activities, IMF conducts surveillance of its members’ financial sectors at the bilateral and multilateral levels and research and analysis of macroeconomic and financial issues. A comprehensive and in-depth review of individual members’ and jurisdictions’ financial sectors is undertaken by the mandatory financial stability assessments (mandatory FSAs) or the Financial Sector Assessment Program (FSAP), while Article IV staff reports (and associated selected issue papers) cover financial sector issues at a higher frequency and often follow-up on mandatory FSA or FSAP recommendations. IMF’s multilateral surveillance appears in the form of regular reports, such as the Global Financial Stability Report, World Economic Outlook, Fiscal Monitor, and Spillover reports.IMF has worked with FSB and international standard-setting bodies to develop standards and guidance, to the extent those activities are consistent with its mandate. In addition to these activities, the G20 has tasked IMF and FSB with the responsibility for conducting early warning exercises, which typically take place twice a year, to assess risks to global financial stability. The Basel Committee is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Established in 1975, it sets supervisory standards and guidelines to promote global financial stability. The standards have no legal force but are developed and issued by Basel Committee members, with the expectation that individual national authorities will implement them. The Basel Committee members include central banks or bank supervisors for 27 jurisdictions. The Basel Committee expanded its membership in 2009, adding the financial authorities of Argentina, Hong Kong SAR, Indonesia, Saudi Arabia, Singapore, South Africa, and Turkey to its membership. With the G20’s support, the Basel Committee recently established a more active program to monitor members’ commitments to implement Basel Committee standards. The Basel Committee works with FSB, of which it is a member, and other international standard-setting bodies to address financial reform issues within its mandate. The Basel Committee is a sponsor organization of the Joint Forum, which also includes IOSCO and IAIS, and which coordinates work on issues of common concern. IOSCO sets global standards for the securities sector to protect investors, ensure efficient markets, and address systemic risks. Its members include more than 120 securities regulators. It also has affiliated members, including 80 other securities markets participants (such as stock exchanges). Established in 1983, IOSCO develops, implements, and promotes adherence to internationally recognized standards for securities regulation. It works with the G20 and FSB to develop standards and guidance to implement the global regulatory reforms that apply to securities markets and institutions. IOSCO is a founder of the Joint Forum, along with the Basel Committee and IAIS. IOSCO also works with the Committee on Payment and Settlement Systems (CPSS) on reform efforts related to financial market infrastructures, including central clearing counterparties. IAIS is the international standard-setting body responsible for developing and assisting in the implementation of principles, standards, and other supporting material for the supervision of the insurance sector. Established in 1994, IAIS’s objectives are to promote effective and globally consistent supervision of the insurance industry; to develop and maintain fair, safe, and stable insurance markets; and contribute to global financial stability. Its members include insurance supervisors and regulators from more than 200 jurisdictions in approximately 140 Nongovernmental organizations countries, including the United States.and private sector entities also participate in IAIS activities as observers. As noted above, IAIS is a member of the Joint Forum. CPSS is a standard-setting body for payment, clearing, and securities settlement systems. Established in 1990, it also serves as a forum for central banks to monitor and analyze developments in domestic payment, clearing, and settlement systems. Its members include 25 central banks responsible for payment and settlement systems. CPSS is a member of FSB and cooperates with other groups, including IOSCO and the Basel Committee, to address issues of common concern. IADI is the global standard-setting body for deposit insurers. IADI activities include developing principles, standards, and guidance to enhance the effectiveness of deposit insurance systems, methodologies for the assessment of compliance with its principles, standards, and guidelines, and facilitating assessment processes. IADI also provides guidance for establishing new—and enhancing existing—deposit insurance systems, and encourages international contact among deposit insurers and other interested parties. IADI has 73 member organizations from 71 countries. It recently worked with the Basel Committee to produce the Core Principles for Effective Deposit Insurance Systems, which was designated by FSB as one of the 12 key standards for sound financial systems. IASB is the standard-setting body of the IFRS Foundation, an independent, nonprofit, private sector organization working in the public interest. Established in 2001, IASB carries out the IFRS Foundation’s stated objective of developing a single set of high-quality, understandable, enforceable, and globally accepted accounting standards. IASB members are responsible for the development and publication of International Financial Reporting Standards (IFRS). IASB members are independent experts, and the board is required to reflect geographical diversity. The IFRS Foundation also has as principal objectives promoting the use and rigorous application of IFRS; taking account of the reporting needs of emerging economies and small and medium-sized entities; and promoting and facilitating the adoption of IFRS through the convergence of national accounting standards and IFRS. Various jurisdictions also have formed informal coalitions to address specific multilateral financial issues. For example, according to U.S. regulatory officials who are involved in the group, the OTC Derivatives Regulators Group (ODRG) is an informal group of regulators in jurisdictions that account for the most significant derivatives activity around the world: Australia, Brazil, the European Union, Hong Kong SAR, Japan, Ontario and Quebec (Canada), Singapore, Switzerland, and the ODRG focuses more strategically than the committees United States. and activities under FSB and IOSCO on addressing critical cross-border issues in the OTC derivatives markets. ODRG reports periodically to the G20 finance ministers and central bank governors about its progress in identifying and addressing cross-border regulatory issues. Securities are regulated at the province level in Canada. expanded the areas covered by their reform agenda.summarizes the key sectors and functional areas covered by the G20 financial reform commitments. The G20 leaders generally have called on their national authorities— along with FSB; standard setting bodies, such as the Basel Committee and IOSCO; and other bodies—to convert their broad financial reform commitments into more specific standards (including policies, principles, practices, or guidance). Although the standards are developed under the auspices of FSB or standard setting bodies (or both), the work of many of these entities largely is carried out by staff of finance ministries, central banks, and financial sector regulators of the member jurisdictions. Because international standards are not legally binding, individual countries or jurisdictions must voluntarily adopt them, such as through legislative or regulatory changes, or both, for the standards to take effect. For example, a jurisdiction may need to pass legislation and adopt regulations to implement one standard but only a regulation to implement another standard. In that regard, the legal and practical abilities of the G20 leaders to commit to legal and regulatory changes can vary widely, depending on the structure of the regulatory system in their jurisdictions (i.e., whether there are independent regulatory agencies) and on the nature of the relationship between the executive and legislative branches in their jurisdictions. Figure 2 illustrates this multistep process. Although the G20 is serving as the main forum at the international level for reforming financial regulations, some academics have questioned the reliance on the G20 and other international bodies to reform international financial standards, citing various potential challenges with the current approach. For example, some maintain that international financial standards existed before the 2007-2009 financial crisis and were intended to reduce systemic risk but failed to prevent or mitigate the recent crisis.However, U.S. regulators and others have pointed to gaps or weaknesses in the international framework or standards that existed before the crisis and that the G20 reforms are intended to address. Additionally, some academics have questioned the potential effectiveness of international financial agreements or standards, arguing that their informal and nonbinding nature allows members to suffer limited consequences for noncompliance. In contrast, they also note that the informal approach influences behavior, with many governments adopting international financial standards into domestic law, or maintain that a formal approach to enforcement would not necessarily be more effective and could raise domestic sovereignty issues. Finally, some academics have commented that FSB’s limited and skewed geographic membership—despite its expansion to include some emerging countries—still may affect perceptions about its legitimacy. However, FSB’s charter includes provisions for FSB to consult with nonmembers on strategic plans, principles, standards, and guidance, and to allow nonmembers to participate, on an ad hoc basis, in its working groups and committee meetings. As discussed earlier, FSB has a work plan to review the structure of its representation, which is to be completed by the November 2014 summit. Congress passed the Dodd-Frank Act in 2010 in response to the regulatory and oversight weaknesses identified after the 2007-2009 financial crisis. As summarized on the Senate Banking Committee’s website, the act seeks to (1) address risks to the stability of the U.S. financial system, in part through the creation of the Financial Stability Oversight Council (FSOC), (2) end too-big-to-fail bailouts of large, complex financial institutions, (3) increase transparency and regulation for certain complex financial instruments, and (4) strengthen protections for consumers and investors. The act requires federal agencies to issue hundreds of regulations to implement the act’s requirements. Regulators have proposed many of the rules, but many of the Dodd-Frank Act As discussed rulemakings had yet to be finalized as of December 2013.later in this report, many of the Dodd-Frank Act’s provisions are similar to the international financial reform commitments agreed to by the G20 leaders. The United States has been active in the international financial regulatory reforms intended to address regulatory and other weaknesses revealed by the 2007-2009 financial crisis. Through its participation in the G20, the United States has helped set the G20 financial regulatory reform agenda. Moreover, through their participation on various international bodies, U.S. financial regulators and, where relevant, Treasury have helped develop standards to implement the G20 reform agenda. However, U.S. financial regulators have faced challenges in implementing the G20 financial reform agenda. The United States has played an important role in elevating the G20 summits to the level of head of state (or government) and in setting G20 agendas for reforming international financial regulation. According to Treasury officials, during the acute phase of the financial crisis in 2008, the United States proposed elevating the G20 forum from the traditional level of finance ministers and central banks to the level of heads of state or government. To that end, the G20 leaders, including the U.S. President, held a summit for the first time in Washington, D.C., in November 2008. The main objective for elevating the G20 forum was to help the world’s major economies cope with the then-ongoing financial crisis and establish a framework to help prevent future financial crises. Among other things, the G20 leaders established principles for financial regulatory reform and developed a list of initial reform commitments. The U.S. President has attended the subsequent G20 leaders’ summits and has continued to play an active role in helping to support or expand the G20 financial reform agenda. The G20 members’ finance ministers and central bankers also have been meeting regularly to advance the reform agenda. In addition to the U.S. President’s direct participation in the G20 summits, the United States has helped to set the G20 financial reform agenda. For example, as host to the G20 summit in Washington (2008) and Pittsburgh (2009), U.S. officials were responsible for coordinating the preparation of the summit agendas and reform agreements. Agreements reached at the Pittsburgh summit included commitments by the G20 leaders to regulate the OTC derivatives markets and establish procedures to manage the failure of systemically important financial institutions. Moreover, U.S. officials have helped support and advance specific reform proposals for other summits. For example, in the lead-up to the London G20 summit in 2009, the United States publicly supported increasing capital requirements for banks, creating FSB, and expanding the scope of regulation to systemically important institutions and markets. In the lead- up to the Toronto summit in June 2010, the United States reiterated its support for more stringent capital and liquidity requirements for banks. At the Toronto summit, leaders pledged to endorse the forthcoming capital reforms (i.e., the Basel III capital standards) at their summit in Seoul in November 2010. The United States also has been coordinating with international bodies and regulators to put in place domestic financial reforms. For instance, after the G20 summit in Seoul in November 2010, U.S. officials noted that the passage of the Dodd-Frank Act put the United States at the forefront of global financial reform. U.S. officials also highlighted that a number of the Dodd-Frank Act’s provisions aligned with the G20 reform commitments. These included provisions for (1) a resolution regime, (2) a framework of oversight and reporting for OTC derivatives markets, (3) regulation of all firms that pose the most risk to the financial system, and Further, the (4) a registration requirement for advisers to hedge funds. officials noted that the United States is working closely with the European Union and others to ensure that the G20’s agenda for regulatory reform is implemented. White House Fact sheet on the Seoul summit, available at http://www.whitehouse.gov/the-press-office/2010/11/12/g-20-fact-sheet-us-financial- reform-and-g-20-leaders-agenda. FSB: FSB coordinates implementation of the G20 financial reform agenda. The Federal Reserve, SEC, and Treasury serve on FSB’s Steering Committee and Plenary, which is FSB’s decision-making body. These agencies also chair or are members of three key standing committees and, with CFTC, FDIC, the Federal Reserve Bank of New York, and OCC, have participated in or chaired other FSB working groups. Basel Committee: The Basel Committee develops prudential standards for banks. FDIC, the Federal Reserve, and OCC are members of the Basel Committee. OCC chairs one of two key subcommittees—the Supervision and Implementation group. FDIC officials noted that the agency chairs a task force exploring options to improve the simplicity and comparability of the capital framework. IOSCO: IOSCO sets global standards for the securities sector. SEC and CFTC have served in leadership roles in IOSCO and informal groups. For example, SEC and CFTC are both members of the IOSCO Board. In addition, CFTC and SEC co-chaired an IOSCO OTC derivatives task force that established standards for mandatory clearing. CFTC also co-chairs a separate IOSCO committee on commodity derivatives. CPSS: CPSS sets global standards for payment, clearing, and securities settlement systems. The Federal Reserve and Federal Reserve Bank of New York are members of CPSS. They have participated in a number of CPSS and CPSS-IOSCO efforts, including the development of risk management standards for financial market infrastructures. IAIS: IAIS sets global standards for the insurance industry. The U.S. Treasury’s Federal Insurance Office chairs an IAIS committee that leads the development of prudential standards. The Federal Insurance Office also has served in leadership roles and as a member of other IAIS committees, subcommittees, and working groups. IADI: IADI sets global standards for deposit insurers. The FDIC is an active member of IADI, sits on its Executive Council, and chairs and participates in a number of IADI committees, subcommittees, and working groups. Figure 3 shows which U.S authorities are members of selected international bodies (as represented by the solid lines). Although CFTC, FDIC, and OCC are not members of FSB, they have participated in or chaired FSB working groups (as represented by the dashed lines). As members of FSB and international standard setting bodies, U.S. financial regulators and Treasury have been actively involved in developing many of the international financial standards (including policies, principles, practices, or guidance) that implement the G20 financial reform commitments. Since 2008, FSB and international standard setting bodies have developed an array of new or revised standards covering a broad range of issues including banking, OTC derivatives, compensation practices, shadow banking, and SIFIs and resolution regimes. (See appendix III for a more detailed list of reform areas and objectives, related standards, and the participation of U.S. agencies.) Examples of standards that U.S. authorities helped develop include the following: Basel capital standards: FDIC, the Federal Reserve, Federal Reserve Bank of New York, and OCC, as U.S. representatives to the Basel Committee, helped develop the Basel III capital standards, which set higher levels for capital requirements for banks and introduced a new global liquidity standard. The Basel Committee released Basel III in December 2010, in part in response to the G20 leaders’ calls for higher standards for capital and enhanced supervision. OTC derivatives reforms: CFTC, the Federal Reserve, or SEC helped develop standards issued by IOSCO or CPSS (or both) for financial market infrastructures, central clearing of OTC derivatives, and reporting of OTC derivatives. These standards respond to the G20 leaders’ commitment in 2009 to ensure that all standardized OTC derivative contracts would be traded on organized platforms, where appropriate, and cleared through central counterparties; and all OTC derivatives contracts would be reported to trade repositories. CFTC, FDIC, the Federal Reserve, OCC, and SEC helped develop standards issued by the Basel Committee and IOSCO on margin requirements for non-centrally cleared OTC derivatives, as requested by the G20. Enhanced supervision of SIFIs and resolution regimes: FDIC, the Federal Reserve Bank of New York, and Treasury helped develop standards issued by FSB for resolution regimes. The regimes would help enable authorities to resolve failing financial firms in an orderly manner and without exposing the taxpayer to the risk of loss. According to FSB, these standards respond to a 2009 request by the G20 leaders to address too-big-to-fail problems associated with SIFIs—that is, when the threatened failure of a SIFI leaves public authorities with no option but to provide public funds to avoid widespread financial instability and economic damage. Moreover, the standards are part of a broader SIFI framework intended to reduce both the probability and impact of SIFIs failing. In our discussions with U.S. federal financial regulators, they identified time or resource constraints as key challenges in helping to develop international financial standards. One regulator said its staff members feel tension between allocating time to their routine regulatory duties and their international work. A U.S. regulator also said that since 2008, there has been a constantly increasing number of work streams, groups, and projects flowing from the G20, many with relatively short deadlines. Moreover, the number of overall projects tends to increase over time as old projects evolve into new areas and new projects are initiated. One of the regulators estimated that the number of projects had at least doubled since the start of the 2007-2009 financial crisis. Two of the regulators also told us they have faced resource constraints, such as not having the travel funds to attend meetings. The number of members from any one country is intended to be representative of the size of national economies, financial market activities, and national financial stability arrangements. However, two U.S. regulators told us FSB’s selection of members has created additional coordination work for U.S. federal authorities. According to a U.S. regulator, U.S. membership in international bodies does not always reflect the significance of the U.S. economy. For example, while U.S. firms have a dominant share of the OTC derivatives markets, CFTC—one of the primary U.S. regulators responsible for overseeing derivatives markets— has no representation on the FSB Plenary, the FSB decision-making body. As a result, U.S. regulators have had to devote time and effort coordinating input and responses from U.S. regulators not represented on FSB. Treasury officials told us that FSB must limit the number of representatives from any member jurisdiction to prevent its membership from becoming too unwieldy, but recognized that this limitation creates additional coordination work for U.S. financial regulators. Treasury staff told us that to address this limitation Treasury established a liaison, who coordinates closely and regularly with all U.S. financial regulators to keep them informed of FSB’s activities and work products and to obtain their input. The United States and other jurisdictions report having made progress implementing the G20’s international financial reforms, but most reforms have not been implemented by all jurisdictions. Under its mandate, FSB is responsible for coordinating and promoting the monitoring of the implementation of the G20 reform commitments and reporting on the implementation progress to the G20. In collaboration with standard setting bodies, FSB established a framework in 2011 to monitor and report on the implementation of the G20 financial reform commitments, including In addition, FSB and IMF the related international financial standards.have programs to assess members’ compliance with international financial standards and foster a level playing field. However, a broad range of legal, economic, and political factors can create implementation challenges for jurisdictions. The failure to implement the international reforms consistently could, among other things, hinder the ability of national authorities or international bodies to protect against developments affecting national and international financial stability. FSB has selected priority reform areas that undergo more intensive monitoring and detailed reporting than other reform areas, and the list of priority areas is reviewed annually by FSB and revised as needed. FSB selects the areas based on the importance of their consistent and comprehensive implementation to global financial stability. For each priority area, an FSB working group or standard setting body is responsible for monitoring implementation progress and periodically preparing a progress report.Basel framework; (2) OTC derivatives market reforms; (3) policy measures for SIFIs; (4) resolution regimes, (5) compensation practices; Currently, FSB’s priority areas are (1) the and (6) shadow banking.vary in their implementation stage of the priority area reforms. At their 2010 summit in Seoul, the G20 leaders endorsed Basel III capital standards and committed to adopt and implement the standards. According to the Basel Committee’s progress report issued in October 2013, 11 of its 27 members had implemented in full the Basel capital framework, which includes Basel II, 2.5, and III standards (see table 2). Specifically, 12 jurisdictions reported that they had issued final Basel III capital rules that were legally in force. At that time, the United States and 14 other jurisdictions reported that they had issued final rules to implement the Basel III capital standards, but the rules had not yet taken The remaining member jurisdiction reported that a regulation on effect.Basel III was to be issued in 2013. As previously discussed, although the Basel Committee members have adopted or will adopt rules to implement the Basel capital standards, the adoption of the standards does not necessarily ensure that they will be applied consistently across banks and jurisdictions. In that regard, the Basel Committee established the Regulatory Consistency Assessment Program in 2012. The committee monitors the transposition of Basel III standards into domestic regulations semiannually based on information provided by each of its member jurisdictions. The aim of such monitoring is to ensure that the internationally agreed timeline remains on track. The committee publishes its results in regular progress reports (discussed earlier). The Basel Committee also assesses the consistency of implementation of the Basel III standards. These assessments are done on a jurisdictional and thematic basis. Member jurisdictional assessments review the extent to which domestic Basel III regulations in each member jurisdiction are aligned with the Basel III standards. The assessments examine the consistency and completeness of the adopted standards, including the significance of any deviations in the standards, and provide an overall assessment of compliance using a four-grade scale: compliant, largely compliant, materially non-compliant, and noncompliant. As of year-end 2013, the committee had completed seven jurisdictional assessments. In its assessments of Brazil, China, Switzerland, Singapore, and Japan, the committee found their rules generally to be compliant with the Basel standards. The committee conducted assessments of the European Union’s and United States’ proposed Basel III rules but did not assign them a grade because of the draft nature of the rules. Thematic assessments review regulatory outcomes to ensure that the prudential ratios calculated by banks are consistent across banks and jurisdictions and predominantly reflect differences in risk rather than in practice. The committee initially focused its thematic assessments on analyzing how banks were weighing (or valuing) assets based on their risk level, because differences in the application of the Basel standards can lead to variations in the amount of capital banks have to hold. In that regard, the objective of the assessments generally has been to obtain a preliminary estimate of the potential for variation in risk-weighted assets across banks and highlight aspects of the Basel standards that contribute to this variation. The committee’s two assessments on this issue found considerable variation across banks in the average risk-weighted assets for market risk in the trading book and credit risk in the banking book. Part of the variation was attributed to differences in supervisory practices or decisions. According to a Basel Committee Chairman, information from the studies is being used by national supervisors and banks to take action where needed, such as to improve consistency. The Basel Committee also plans to use the results as part of its ongoing policy work. At the 2009 summit in Pittsburgh, the G20 leaders committed that all standardized OTC derivatives should be traded on organized trading platforms and centrally cleared; all OTC derivatives should be reported to a repository; and all noncentrally cleared OTC derivatives should be subject to higher capital requirements. At the 2011 summit in Cannes, the G20 leaders further agreed to require noncentrally cleared OTC derivatives to be subject to margin requirements—the posting of collateral to offset losses caused by the default of a derivatives counterparty. FSB and standard setting bodies, including the Basel Committee, CPSS, and IOSCO, have issued most of the standards needed to implement the G20 OTC derivatives reforms. According to FSB’s sixth progress report on implementation of OTC derivatives market reforms issued in September 2013, over half of FSB’s 19 member jurisdictions, including the United States, reported having proposed or enacted legislation to require OTC derivatives transactions to be centrally cleared, traded on organized trading platforms, and reported to trade repositories. As shown in table 3, five jurisdictions, including the United States, reported having proposed or enacted legislation to implement the margin requirements. Table 3 also shows that the United States is the only jurisdiction with regulations in force and operating for the central clearing, organized platform trading, and trade reporting requirements (for at least part of the market), but many jurisdictions reported having adopted regulations for the trade reporting requirement. Only one jurisdiction reported having adopted regulations for the margin requirement. According to FSB, the schedule for further changes in legislative and regulatory frameworks is uneven across jurisdictions and commitment areas. In its progress report, FSB also noted that in light of the global nature of OTC derivatives markets, cross-border coordination was needed to avoid unnecessary duplicative, inconsistent, or conflicting regulations. FSB plans to publish a progress report by April 2014 that provides, among other things, an updated assessment of reform implementation, including any remaining issues in the cross-border application of regulations. While cross-border coordination issues persist, we reported in late 2013 that CFTC and SEC took steps to coordinate with foreign authorities on several rulemakings related to Dodd-Frank swap reforms, which include clearing, exchange trading, and reporting requirements.CFTC issued many swap-related rules and noted that it coordinated with international bodies, such as the European Securities Markets Authority, European Central Bank, and regulators in the United Kingdom, Japan, Hong Kong SAR, Singapore, Sweden, and Canada. On the swap entities rule, CFTC and SEC staffs said that they participated in numerous conference calls and meetings with international regulators. The 2007-2009 financial crisis revealed weaknesses in the existing regulatory framework for overseeing SIFIs, which FSB defines as institutions of such size, market importance, and interconnectedness that their distress or disorderly failure could destabilize the financial system and result in severe economic consequences. According to FSB, when the threatened failure of a SIFI leaves public authorities with no option but to provide public funds to avoid financial instability and economic damage, the SIFI can be considered too big—or too important—to fail. The knowledge that this can happen could encourage SIFIs to take excessive risks (referred to as moral hazard) and may represent a large implicit public subsidy of private enterprise. At the Pittsburgh Summit in 2009, G20 leaders called on FSB to propose measures to address the systemic and moral hazard risks associated with SIFIs. FSB developed a framework intended to reduce the probability and impact of SIFIs failing.The SIFI framework recommends new international standards for national resolution regimes (called “Key Attributes of Effective Resolution Regimes for Financial Institutions”) and requirements for banks determined to be globally systemically important to have additional loss absorption capacity to reflect the greater risk they pose to the global financial system. At the 2010 summit in Seoul, the G20 leaders endorsed the FSB’s SIFI framework. In its April 2013 peer review report on resolution regimes, FSB reported that some of its member jurisdictions developed new or revised existing For example, FSB noted that the United States has resolution regimes.implemented a new resolution regime—referred to as Orderly Liquidation Authority (OLA)—aligned with FSB’s key attributes through its passage of the Dodd-Frank Act. OLA includes broad authorities to wind-up failing financial companies that meet certain systemic criteria. FSB also noted that Australia, Germany, Mexico, Netherlands, Spain, Switzerland, and the United Kingdom have amended their resolution regimes through legislative changes.member jurisdictions need to take further legislative measures to implement the key attributes fully in substance and scope. In its report entitled Report on Progress and Next Steps Towards Ending Too-Big-To- Fail (TBTF) issued in September 2013, FSB noted that it will coordinate with IMF, the World Bank, and international standard setting bodies to finalize a methodology to assess implementation of the key attributes at the national level for use by IMF and the World Bank in their Standards and Codes Initiative (discussed later). At the same time, FSB noted that many of its In addition to legislative changes, FSB found that sector-specific regimes for restructuring or winding down financial firms exhibited a broad range of practices in terms of scope and authorities. According to FSB, this is to be expected, because the key attributes do not prescribe the specific form of the resolution regime as long as the regime is consistent with the key attributes. All FSB members, including the United States, reported that they have specific powers to restructure or wind up banks (or both) that are distinct from ordinary corporate insolvency (see table 4). However, the extent to which the resolution regimes also cover insurers, investment or securities firms, and financial market infrastructure varies across jurisdictions. Additionally, in its April 2013 peer review report on resolution regimes, FSB reported that the resolution regimes of most of its members neither require nor prohibit cooperation with foreign resolution authorities. FSB regards legal frameworks for cross-border cooperation as a key attribute of resolution regimes. According to FSB, eight jurisdictions have statutory provisions that explicitly empower or strongly encourage resolution authorities to cooperate with foreign authorities (Australia, Hong Kong SAR, Indonesia, Japan, Spain, Switzerland, United Kingdom, and United States) while several others indicated that it is their policy to cooperate where possible. In 2012, we reported that international coordination remains a critical component in resolving the failure of a large, complex financial company and that regulators have been taking steps to address this issue, including through their work with FSB. More recently, in a 2013 report, we examined the advantages and disadvantages of certain proposals to revise the U.S. Bankruptcy Code for financial company bankruptcies, including proposals to change the role of financial regulators in the bankruptcy process and the special treatment of qualified financial contracts, such as derivatives. We recommended that FSOC should consider the implications for U.S. financial stability of changing the role of regulators and the treatment of qualified financial contracts in financial company bankruptcies. Although our recommendation continues to have merit, FSOC has not yet implemented the recommendation. FSB made related recommendations in its peer review on resolution regimes (discussed later)—namely designating a lead authority for resolving domestic entities of the same group and introducing powers to impose a temporary stay on the exercise of contractual acceleration or early termination rights in financial contracts, subject to suitable safeguards. Identification of Largest and Most Complex SIFIs Complementing the resolution regime reforms, FSB, the Basel Committee, IAIS, and others have taken steps to reduce the probability of the failure of SIFIs in part by working to establish requirements aimed at increasing SIFIs’ capacity to absorb losses. In November 2013, FSB published its updated annual list of global systemically important banks (G-SIB), which generally comprise the largest and most complex internationally active banks. As shown in table 5, there were 29 G-SIBs headquartered in 11 countries: 8 in the United States; 4 each in France and the United Kingdom; 3 in Japan; 2 each in China, Spain, and Switzerland; and 1 each in Germany, Italy, Netherlands, and Sweden. G- SIBs are grouped into one of five buckets based on their systemic importance, which correspond to increasing levels of additional loss absorbency requirements. The requirements are to be updated shortly and implemented by jurisdictions and phased in from January 2016, with full implementation by January 2019. According to the Basel Committee’s August 2013 progress report, Canada and Switzerland have issued final regulations for G-SIBs and domestic systemically important banks (D-SIBs) and begun to enforce them. Ten of the Basel Committee members have issued final D-SIB regulations that were not yet in force (South Africa and EU member states). The remaining member jurisdictions, including the United States, had not yet issued draft rules. At the time, U.S. regulators expected to issue a notice of proposed rulemaking for G-SIBs by year-end 2013.of February 2014, the U.S. regulators had not issued a rule proposal to implement regulation for the Basel Committee G-SIB risk-based capital surcharge framework. FSB and standard setting bodies also have been extending the SIFI framework to other institutions. First, in response to a request by the G20 leaders, FSB extended the G-SIFI framework to domestic systemically important banks. In October 2012, the Basel Committee issued its framework for dealing with such banks, which focuses on the impact that the distress or failure of banks will have on the domestic economy. Second, IAIS developed a methodology to identify global systemically important insurers. In July 2013, FSB, in consultation with IAIS and national authorities, identified nine insurers (including three U.S. insurers) as global systemically important insurers, which will be subject to a set of policy measures consistent with the SIFI framework.FSB, in consultation with IOSCO, has developed draft methodologies to Third, identify nonbank, noninsurance G-SIFIs, which were issued for public consultation in January 2014. According to FSB’s second progress report issued in August 2013, all but two FSB jurisdictions (Argentina and Indonesia) have implemented FSB’s compensation principles and standards in their national regulation or supervisory guidance. The principles and standards for significant financial institutions include having a board remuneration committee as an integral part of their governance structure, ensuring that total variable compensation does not limit institutions’ ability to strengthen their capital base, and providing annual reports on compensation to the public on a timely basis. In light of the implementation status, FSB concluded that national implementation of the principles and standards can be considered largely complete and noted that the focus now is on effective supervision and oversight of firms. In addition, the report noted that while good progress continues to be made, more work needs to be done by national authorities and firms to ensure that implementation of the FSB principles and standards is effectively leading to more prudent risk-taking behavior. The report also noted that there still is some way to go before the improvements in compensation practices can be deemed effective and sustainable, particularly given the practical challenges to embedding risk management in firms’ compensation practices. According to FSB, several authorities noted that firms still were expressing some concerns about a level playing field with respect to jurisdictions that may not have fully implemented the principles and standards. At the same time, FSB noted that national authorities have yet to see any real evidence that the implementation of the principles and standards has impeded or diminished the ability of supervised institutions to recruit and retain talent. In 2012, FSB established the bilateral complaint handling process—a mechanism for national supervisors from FSB jurisdictions to bilaterally report, verify, and, if needed, address specific compensation-related complaints by financial institutions based on level playing field concerns. According to FSB, no firm had submitted a complaint, as of August 2013. FSB plans to continue to monitor the implementation of the principles and standards. The United States and other FSB members reported that they have implemented or are in the process of implementing most of the G20 financial reform commitments in the nonpriority areas. FSB generally monitors the implementation of the G20 reforms in the nonpriority areas less intensively—primarily through annual surveys of its members. Specifically, FSB’s 2013 survey of its members covered the G20 financial reform commitments in the nonpriority areas. The data are self-reported by FSB member jurisdictions, and FSB generally does not evaluate the survey responses to verify the accuracy or assess the effectiveness of implementation. Although the priority and nonpriority areas overlap in some areas, the reform commitments in the nonpriority areas cover a broader range of sectors and functions, including shadow banking, hedge funds, securitization, credit rating agencies, financial markets, and supervision. As shown on table 6, implementation of the G20 financial reform commitments varies by nonpriority reform area. All FSB members reported that they implemented or have been implementing 15 of the commitments. For example, all members reported making progress in implementing commitments to strengthen oversight of shadow banking, register hedge funds, regulate credit rating agencies, and enhance supervision, accounting standards, and financial consumer protection. In contrast, one or more FSB members reported no action to implement 11 nonpriority commitments, which include strengthening supervisory requirements for investment in structured products, enhancing disclosure of securitized products, strengthening national deposit insurance arrangements, and enhancing market transparency in commodity markets. Table 6 also shows the United States reported that it has taken action to implement all but one of the nonpriority G20 reform commitments— strengthening of supervisory requirements or best practices for investment in structured products—and has completely implemented 19 of the 27 nonpriority reform commitments.reported being the furthest along—completely implementing 23 of the 27 nonpriority commitments. Additionally, 21 of the 24 FSB member jurisdictions reported having completely implemented 16 or more of the nonpriority commitments. Although the FSB survey data provide a broad picture of the implementation status of the G20 reform commitments in the nonpriority areas, the survey and its data have limitations. Importantly, the data are self-reported by FSB members. According to an FSB official, the FSB Secretariat has followed up bilaterally in a small number of cases to collect additional information and clarify certain responses, but FSB generally does not evaluate the survey responses to verify the accuracy or assess the effectiveness of implementation. As a result, the survey findings do not allow straightforward comparisons between jurisdictions or across reform areas. Also, some commitments are broadly defined and, to an extent, open to interpretation. For example, one reform commitment for hedge funds is enhancing counterparty risk management, and FSB reported that 19 members effectively implemented the reform. One of these members reported addressing the issue partly through an annual hedge fund survey; in contrast, another member reported adopting legislation and regulation to implement the reform. To interpret each G20 reform commitment, FSB added a new field in its 2013 survey that identifies the international standard associated with a particular reform commitment. While the Basel Committee conducts reviews of its members (discussed earlier), IMF and FSB also have programs to monitor the implementation of international financial standards and review the effectiveness of the supervision. These programs include IMF and the World Bank’s Financial Sector Assessment Program (FSAP) and Reports on the Observance of Standards and Codes (ROSC) assessments, as well as FSB thematic and country peer reviews. FSAP provides the framework for comprehensive and in-depth assessments of a country’s financial sector. FSAP assessments gauge the stability of the financial sector and assess its potential contribution to growth. Historically, participation in FSAP has been voluntary, but in 2010 IMF made financial stability assessments under FSAP a mandatory part of the surveillance for members with systemically important financial sectors. As of November 2013, IMF has identified 29 jurisdictions, including the United States, as having such a sector, in part based on the size and interconnectedness of each country’s financial sector. Similarly, following the 2007-2009 financial crisis, the G20 countries committed to undergo an FSAP every 5 years. For the first time, the United States underwent an FSAP between 2009 and 2010, when the Dodd-Frank Act was being deliberated and before it was enacted. The FSAP report discussed, among other things, the U.S. experience with and recovery from the recent financial crisis, factors that contributed to the crisis, and legislative actions being undertaken by the United States to reform its financial system. The report included a number of recommendations broadly intended to institutionalize and strengthen systemic risk oversight; redesign the regulatory architecture; strengthen micro-prudential regulation and supervision; strengthen oversight of market infrastructure; enhance crisis management, resolution, and systemic liquidity arrangements; and address too-big-to-fail issues and the future of the housing government-sponsored enterprises. The report recognized that the Dodd-Frank Act was largely consistent with the FSAP recommendations but noted effective implementation would be key. IMF and the World Bank also have a program to assess member compliance with international financial sector standards, the results of which are summarized in a ROSC. IMF and the World Bank have recognized international standards in policy areas identified as key for sound financial systems and deserving of priority implementation in consideration of a country’s circumstances. The standards include those developed by the Basel Committee, CPSS, IOSCO, IAIS, IADI, and IASB. These assessments are voluntary, even in jurisdictions for which an FSAP stability assessment is mandatory. ROSCs can be done on a stand-alone basis or as part of an FSAP. For example, the FSAP review of the United States included ROSCs covering international banking, securities, insurance, clearing, and settlement standards. assessment of the U.S. supervisory system against international codes identified many positive aspects but also some important shortcomings. International Monetary Fund, “United States: Publication of Financial Sector Assessment Program Documentation— Reports on Observance and Codes,” IMF Country Report No. 10/250 (July 2010). playing field. Under the FSB charter, member jurisdictions have committed to undergo periodic peer reviews. FSB’s peer program includes two types of reviews: thematic and country. Thematic reviews focus on the implementation and effectiveness of FSB- endorsed international standards deemed important for global financial stability. The objectives of the reviews are to encourage consistent cross- country and cross-sector implementation, evaluate (where possible) the extent to which standards have had their intended results, and identify gaps and weaknesses in reviewed areas. As previously discussed, FSB has conducted thematic peer reviews in the priority reform areas, such as compensation and resolution regimes. It also has conducted peer reviews in nonpriority reform areas, including the following: The ongoing peer review on credit ratings was assessing FSB member progress implementing FSB’s Principles for Reducing The interim report Reliance on Credit Rating Agency Ratings.identified several areas where accelerated progress is needed, including the need for FSB members to provide incentives to financial institutions to develop their own independent credit assessment processes. It also identified challenges that need to be addressed, which include reducing undue reliance on credit ratings in international standards, identifying suitable alternative standards of creditworthiness, and addressing constraints in the development of internal risk assessment systems. The peer review on risk governance found that national authorities, since the crisis, have taken several measures to improve regulatory and supervisory oversight of risk governance at financial institutions. These measures include developing or strengthening existing regulation or guidance, raising supervisory expectations for the risk management function, engaging more frequently with the board and management, and assessing the accuracy and usefulness of the information provided to the board to enable effective discharge of their responsibilities. It also made four recommendations targeting areas in which more substantial work was needed, including strengthening regulatory and supervisory guidance, reviewing principles for risk governance, and exploring ways to formally assess risk culture at financial institutions. FSB’s country reviews focus on the implementation of international standards and their effectiveness nationally. The reviews examine steps taken or planned by national authorities to address FSAP and ROSC recommendations of IMF and the World Bank. (FSB peer reviews take place 2 to 3 years following an FSAP.) Unlike an FSAP, an FSB country review does not comprehensively analyze a jurisdiction’s financial system structure or policies, or its compliance with international financial standards. According to an FSB official, both country and thematic peer reviews have the inherent limitation of being primarily “desktop-based” reviews, which constrains the review team’s ability to engage in on-site interactions to assess implementation progress, challenges, and impact. FSB’s peer review handbook notes that country peer reviews will include a brief on-site visit in the reviewed jurisdiction to meet with the authorities, and subject to the agreement of the reviewed jurisdiction, the on-site visit Such a also may include meetings with relevant market participants.visit should support the peer review’s objective and be consistent with equal treatment of members under the peer review process, and its expected benefits should outweigh the resource costs. As part of this commitment, the United States volunteered to undergo a country peer review in 2013. The review found that U.S. authorities had made good progress in following up on FSAP recommendations, particularly in regard to systemic risk oversight arrangements and the supervision and oversight of financial market infrastructures. At the same time, the review included recommendations targeted at systemic risk oversight arrangements, supervision and oversight of financial market infrastructures, and insurance supervision. For example, FSB recommended that FSOC develop a more systematic, analytical, and transparent macroprudential framework for coordinating efforts and incorporating the bottom-up views of member agencies to address systemic risk. In addition, FSB recommended that FSOC develop a more in-depth and holistic analysis of the systemic risks to financial stability. Similarly, in 2012, we reported that FSOC’s establishment of a Systemic Risk Committee to facilitate coordination among its member staffs can help FSOC analyze known risks, but the approach does not take full advantage of FSOC member agency resources to identify new threats to the financial system. We also reported that FSOC identifies a number of potential emerging threats to financial stability in its annual reports, but does not use a systematic, forward-looking approach to identify such threats. To address these weaknesses, we recommended, among other things, that FSOC develop (1) a monitoring approach that includes systematic sharing of key financial risk indicators across FSOC members and member agencies to assist in identifying potential threats for further monitoring or analysis; and (2) a more systematic, forward-looking approach for reporting on potential emerging threats to financial stability in annual reports. In its comment letter, Treasury stated that officials will carefully consider the report’s findings and recommendations. As of March 2014, Treasury had taken some steps to implement the recommendations, but the recommendations had not been fully implemented. While FSB noted that federal and state authorities in the United States began addressing FSAP recommendations on the insurance sector—for example, establishing the Federal Insurance Office—it also noted that significant additional work is needed. According to FSB, the structure and characteristics of insurance supervision in the United States—the multiplicity of state regulators, the absence of federal regulatory powers to promote greater regulatory uniformity, and the limited rights to preempt state law—constrain the federal government’s ability to ensure regulatory uniformity in this sector.should promote greater regulatory uniformity in the insurance sector, including by conferring additional powers and resources at the federal level where necessary. As recognized by regulators, industry associations, and academics, a broad range of legal, economic, and political factors can create implementation challenges for jurisdictions. For example, differences in economic development of countries and differences in philosophy or ideology between jurisdictions can make it difficult for the international standards to be implemented consistently across jurisdictions. Representatives from one industry association told us that when standard setting bodies set narrow or detailed principles, such principles can become difficult to implement consistently because of jurisdictional differences. In addition, legislatures and industry groups may support more or less stringent requirements than called for by the standards. Finally, domestic regulators may apply or interpret the standards differently from other domestic regulators. As discussed previously, the Basel Committee’s thematic reviews found variation in the application of the capital standards across jurisdictions and partly attributed the variations to differences in supervisory practices. As recognized by the G20 leaders, international bodies, industry associations, and others, the failure to implement the international financial standards consistently across jurisdictions could have a number of negative consequences. Most importantly, such inconsistencies could hinder or weaken the ability of national authorities or international bodies to protect against developments affecting national and international financial stability and help prevent or mitigate future financial crises. Moreover, a regulator stated that inconsistent implementation could lead to an unlevel playing field for financial institutions or regulatory arbitrage. For example, financial markets or services could migrate to less-regulated or unregulated jurisdictions. It also could impose a variety of avoidable costs on financial institutions with negative consequences for customers, investors, and national and global economies. For example, financial institutions operating in multiple jurisdictions could be subject to conflicting or duplicative rules and, thus, higher compliance costs. Some academics and industry associations also have noted that complete global consistency across all financial regulations is not necessarily possible or preferable. Two academics suggest that if jurisdictions face significant limitations in their ability to reach agreement, harmonization efforts might lead to agreement on only weak global standards. An academic we interviewed said that harmonized regulations across all jurisdictions may provide a level playing field but could be problematic, in part by not providing jurisdictions with the flexibility to respond to their differences. He also said that standardizing regulations could cause financial institutions to behave in the same way and unintentionally concentrate risk (e.g., holding the same types of assets). Similarly, an industry association noted that international consistency does not require uniformity but an appropriate level of similarity, comparability, and predictability of regulatory outcomes across jurisdictions. According to the association, international consistency also means striking a balance between consistency and the need for sensible local differences and supervisory discretion. In light of the potential for inconsistent implementation in areas that may result in unnecessary negative consequences, the review programs operated by FSB, IMF, and international standard-setting bodies likely will play an important role in addressing this issue. Indeed, some academics and industry associations view FSB’s peer reviews as an important mechanism for monitoring and encouraging compliance with international financial standards. Moreover, one academic suggests that the reviews may help deepen commitment to the standards by domestic officials by holding member jurisdictions accountable not only to an international body but also to each other. However, some express concern about the potential effectiveness of FSB peer reviews, in part because any of their recommendations, like the international financial standards, are not binding. We provided a draft of this report to CFTC, FDIC, FSB, the Federal Reserve, IMF, OCC, SEC, and Treasury, for their review and comment. All of the agencies except for the Federal Reserve provided technical comments, which we have incorporated, as appropriate. Treasury and SEC provided written comments that we have reprinted in appendixes V and VI, respectively. In commenting on our draft report, Treasury noted that the G20, FSB, and international standard-setting bodies have been cooperating since the financial crisis on advancing the international financial reform agenda and strengthening the global financial system. Treasury further noted that the United States has played a leadership role in designing and implementing this agenda. Finally, Treasury agreed with the report that international reform efforts are not complete. Treasury noted that it would continue to work with other regulators to forge high-quality, compatible rules, encouraging reforms in other jurisdictions as strong as those in the United States, and would continue to promote greater consistency and convergence. SEC noted that it welcomed GAO's review of the international reform efforts and valued GAO’s perspective in this area. SEC stated that the report correctly notes that international standards are not legally binding and rely on the decision of national authorities to implement the standards (reflecting, among other considerations, appropriate respect for national sovereignty). SEC also noted that it was pleased that the report acknowledges that while negative consequences can flow from varying degrees of implementation of international standards, there also can be good reasons behind such differences, such as avoiding a movement to less robust standards or the unintentional concentration of risks. SEC agrees with the report’s discussion that there may be reasons to take into account variations in national legal and market structures and conditions, including differences in economic development and enforcement authority. SEC also comments on a number of specific issues in the report. SEC noted that it does not share the view that international organizations “implement” international standards, nor should they have that authority. Our report summarizes the international financial reform process, drawing a clear line between the development of international standards under the auspices of FSB or standard-setting bodies (or both) and the voluntary adoption of rules or policies consistent with these standards by jurisdictions, such as through legislation or regulations. SEC also noted that interconnections permitted disruptions to spread quickly across borders but was unsure that such interconnections increased systemic risk as stated in our report. No single definition for systemic risk exists, but systemic risk has been viewed as the possibility that a single event could broadly affect the entire financial system, causing widespread losses rather than just losses at one or a few institutions. As we recently reported in January 2013, the 2007-2009 financial crisis illustrated the potential for systemic risk to be generated and propagated outside of the largest financial firms (such as by money market mutual funds), in part because of interconnections not only between firms but also between markets. SEC also noted the particular status of the accounting standard- setting bodies. In particular, both IASB and the Financial Accounting Standards Board are independent, private-sector organizations. Although the IASB is an FSB member, the legitimacy of the accounting standards that these bodies set depends, among other things, on those bodies’ ability to set accounting standards free from political interference. We have added a clarifying note in figure 4 in appendix II to reflect this comment. Finally, SEC noted that our report uses the term “shadow banking” and it is not appropriate to use this term to refer to market-based financing, which serves a credit intermediation function. Our report discusses shadow banking, because it is one of the G20 financial reform commitments—expanding the regulatory perimeter, including strengthening of the regulation and oversight of shadow banking. Our report does not define shadow banking but rather uses FSB’s Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos (see appendix III, table 7) as a reference document. According to FSB, this policy was intended to help strengthen oversight and regulation of the shadow banking system. The policy notes that the “shadow banking system” can broadly be described as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system.” Therefore, the use of the term shadow banking is appropriate for this report. We are sending copies of this report to CFTC, FDIC, the Federal Reserve, OCC, SEC, and 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 VII. This report reviews the (1) U.S. role in the international financial reform efforts, including the development of international financial standards, and (2) implementation status of recent international financial reforms in the United States relative to other jurisdictions and challenges or concerns that any uneven progress could present. To address the first objective, we reviewed and analyzed declarations, communiqués, and other statements issued by the G20 leaders about their agreed-to commitments to reform financial regulations. In addition, we reviewed and analyzed reports or other documents issued since 2008 by various international bodies—including the Financial Stability Board (FSB), International Monetary Fund (IMF), Basel Committee on Banking Supervision, International Organization of Securities Commissions, Committee on Payment and Settlement Systems, and International Accounting Standards Board—about their role in implementing the G20 reforms, such as through the development of international financial standards, or monitoring the implementation status of the G20 reforms at the international and jurisdictional levels. We also reviewed press statements, policy documents, or other material issued by U.S. and other jurisdictions about their work to support the G20 financial reforms. We interviewed U.S. financial regulatory authorities, including the Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), and Department of the Treasury—and FSB and IMF officials about their role in the G20 reform efforts, including implementation challenges. To gain insights about the G20 financial reforms and associated implementation challenges, we also reviewed numerous studies by academics and other experts and interviewed four professors in the fields of law, economics, and political science and two industry associations representing banks or over-the-counter (OTC) derivatives market participants. We judgmentally selected these parties based on studies or other material they issued on the G20’s international financial reforms, and the results are not generalizable. To address the second objective, we reviewed, analyzed, and summarized progress reports, peer reviews, surveys, or other material prepared by FSB and international bodies, including the Basel Committee on Banking Supervision and IMF, on the implementation status of the G20 reforms in the priority areas at the jurisdictional level. Similarly, we also reviewed and analyzed FSB’s annual surveys of its member jurisdictions on their implementation status of the G20 reforms in the nonpriority areas. We reviewed the accuracy of U.S. responses to questionnaires administered by FSB or a standard setting body that covered U.S. progress implementing Basel II, 2.5, and III and the G20’s OTC derivatives reforms, including the requirements for OTC derivatives transactions to be centrally cleared, traded on organized trading platforms, and reported to trade repositories, and we generally found the U.S. responses were accurate. We also asked audit offices of 14 jurisdictions that are members of FSB—and which are participating in an International Organization of Supreme Audit Institutions working group on financial reforms—to do the same for their regulators’ responses. Finally, as identified above, we interviewed officials representing U.S. regulators, FSB, IMF, industry associations, and academics about challenges or concerns that uneven implementation of the G20 financial reforms across jurisdictions could present. We conducted this performance audit from March 2013 to April 2014 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. As shown in figure 4, a variety of international bodies are part of the international financial architecture. The Bank for International Settlements provides a forum for international cooperation among central banks and within financial and supervisory communities. Its members as of July 2013 are central banks or monetary authorities of 59 economies plus the European Central Bank. The Bank for International Settlements acts as a bank for central banks; publishes economic and monetary research; and acts as a counterparty for central banks in their financial transactions and as agent or trustee in connection with international financial operations. It also hosts other international financial organizations and groups, such as FSB and the Basel Committee. The Committee on the Global Financial System is a central bank forum to monitor issues relating to financial markets and systems. It works to identify and assess potential sources of stress in global financial markets. The Financial Action Task Force is an organization of 36 jurisdictions that sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. The Organisation for Economic Co-operation and Development is a membership organization of 34 countries that promotes economic growth and employment among its members, while maintaining financial stability. It has cooperated with the G20 in areas related to promoting economic growth, and in areas of financial regulation such as developing principles on consumer protection. It also is involved in global tax standards development. The World Bank, established in 1944, provides financial and technical assistance to developing countries with the goals of ending extreme poverty and promoting shared prosperity by fostering income growth of the bottom 40 percent of every country. Headquartered in Washington, D.C., with 10,000 staff in 120 offices worldwide, the bank provides financial assistance products and services and engages in a range of knowledge-sharing activities. The Monitoring Board of the IFRS Foundation oversees the work of the International Accounting Standards Board (IASB). As noted in the background section of this report, the IASB carries out the IFRS Foundation’s stated objectives of developing a single set of high-quality, understandable, enforceable, and globally accepted accounting standards. IASB members are responsible for the development and publication of International Financial Reporting Standards (IFRS). The members of the Monitoring Board are the Growth and Emerging Markets Committee of the International Organization of Securities Commissions, the Financial Services Agency of Japan, the European Commission, and the U.S. Securities and Exchange Commission. Additional members of the Monitoring Board selected in January 2014 are the Comissão de Valores Mobiliários of Brazil and the Financial Services Commission of Korea. The Basel Committee on Banking Supervision is an observer. The Group of Twenty (G20) leaders have committed to undertake a broad range of financial regulatory reforms at the various summits held since 2008. The G20 leaders generally have tasked their national authorities— along with the Financial Stability Board (FSB), standard-setting bodies, such as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO), International Association of Insurance Supervisors (IAIS), and other bodies—with converting their broad financial reform commitments into more specific standards (including policies, principles, practices, or guidance). Although the standards are developed under the auspices of FSB or standard setting bodies (or both), the work of many of these entities largely is carried out by staff of finance ministries, central banks, and financial sector regulators of the member institutions. As shown in table 7, various U.S. agencies have participated in the development of standards needed to implement the G20 reform commitments, and all have been involved in their review. The Financial Stability Board (FSB) is responsible for coordinating the implementation of the Group of Twenty’s (G20) financial reform commitments and reporting implementation progress to the G20. In collaboration with standard setting bodies, FSB established a framework in 2011 to monitor and report on the implementation of the G20 financial reform commitments. FSB has selected priority reform areas that undergo more intensive monitoring and detailed reporting than other reform areas, and the list of priority areas is reviewed annually by FSB and revised as needed. Priority reform areas are selected based on the importance of their consistent and comprehensive implementation toward global financial stability. For each priority area, an FSB working group or a standard setting body is responsible for monitoring implementation progress and periodically preparing a progress report. Currently, FSB’s priority areas are (1) the Basel II, 2.5, and III framework; (2) OTC derivatives market reforms; (3) compensation practices; (4) policy measures for global SIFIs; (5) resolution regimes; and (6) shadow banking. For the G20 financial reform commitments in the nonpriority areas, FSB generally monitors their implementation less intensively, primarily through annual surveys of its member jurisdictions.member jurisdictions covered 27 G20 financial reform commitments. The survey data are self-reported by FSB member jurisdictions, and FSB generally does not evaluate the survey responses to verify the accuracy or assess the effectiveness of implementation. FSB’s 2013 survey of its Figure 5 provides country profiles that summarize information on the implementation status of selected G20 financial reform commitments by the 11 countries that are home to global systemically important banks, as identified by FSB. The country profiles include information on the implementation status of G20 reform commitments in priority and nonpriority areas. The profiles also provide examples of how countries have implemented certain nonpriority reforms, such as through legislative or regulatory changes. These examples are excerpts taken from FSB’s 2013 surveys completed by the jurisdictions and reflect the differences in the approaches taken by the jurisdictions. Finally, each profile includes information on a country’s population, gross domestic product (GDP), and global competitiveness index. In addition to the contact named above, Richard Tsuhara (Assistant Director), Rudy Chatlos, Catherine Gelb, Camille Keith Jennings, Thomas McCool, Thomas Melito, Marc Molino, Akiko Ohnuma, Barbara Roesmann, and Jessica Sandler made key contributions to this report.

Summary: Cross-border interconnections in the financial markets and other factors helped spread disruptions during the 2007-2009 financial crisis and increased systemic risk. In response to the crisis, the G20 positioned itself as the main international forum for reforming financial regulations. In 2008, the G20 leaders committed to implement a broad range of reforms designed to strengthen financial markets and regulatory regimes. In light of the G20's reform efforts and the potential implications of the reforms for the United States, GAO examined (1) the U.S. role in the international financial reform efforts and (2) the implementation status of recent international financial reforms in the United States relative to other countries and challenges that uneven implementation may present. To address these issues, GAO reviewed and analyzed reports or other documents issued by the G20, FSB, IMF, and other international bodies since 2008 and studies on the G20 reforms by academics, industry associations, and others. GAO reviewed the accuracy of U.S. responses to select questionnaires administered by FSB and asked other countries' national audit offices to do the same for their regulators' responses. Finally, GAO interviewed officials representing U.S. agencies, FSB Secretariat, IMF, industry associations, and academics. GAO is not making any recommendations in this report. The United States has played an active role in helping to reform financial regulations to address weaknesses revealed by the 2007-2009 financial crisis. According to Treasury officials, during the acute phase of the crisis, the United States proposed elevating the Group of Twenty (G20) forum—representing 19 countries (including the United States) and the European Union—from the level of finance ministers and central banks to the level of heads of state or government. In 2008, the U.S. President and other G20 leaders held their first summit in Washington, D.C., in part to establish a framework to help prevent financial crises. The G20 leaders established principles for financial regulatory reform and agreed on a series of financial reforms, which they have revised or expanded at subsequent summits. To implement their reforms, the G20 leaders generally have called on their national authorities—finance ministries, central banks, and regulators—and international bodies, including the Financial Stability Board (FSB) and standard setting bodies, such as the Basel Committee on Banking Supervision. In 2009, the G20 leaders established FSB to coordinate and promote implementation of the financial reforms, which typically involves standard setting bodies developing international standards (e.g., principles, policies, or guidance) and then jurisdictions voluntarily adopting rules or policies consistent with these standards, such as through legislation or regulations. As members of FSB and international standard setting bodies, U.S. federal authorities have actively helped formulate the standards that implement the G20 reforms and cover, among other things, banking, derivatives, and hedge funds. The United States and other jurisdictions have made progress implementing many of the G20 financial reform commitments, but most reforms have not been fully implemented by all jurisdictions. FSB and standard setting bodies collaboratively monitor and report on the implementation status of the G20 reforms. According to recent progress reports, the United States, like most FSB members, has implemented or is implementing G20 reforms that FSB designated as a priority based on their importance to global financial stability—including higher capital standards, derivatives reforms, compensation practices, policy measures for systemically important financial institutions, and regimes for resolving failing financial institutions. However, implementation varies among jurisdictions. For example, according to a September 2013 progress report, only the United States reported having rules at least partly in effect to implement the G20 reforms requiring derivatives to be centrally cleared, traded on organized trading platforms, and reported to trade repositories, while many other jurisdictions reported having rules in effect for only some of these reforms or adopted or proposed legislation to implement the reforms. To promote and monitor the adoption of the international standards by each jurisdiction, such as to ensure a level playing field, FSB, the International Monetary Fund (IMF), and the Basel Committee have established programs to review and assess their members' implementation of the standards. At the same time, legal, economic, and political factors can create implementation challenges for jurisdictions. For example, regulators in different jurisdictions may apply or interpret the standards differently. However, in some cases, inconsistent implementation of international financial standards could lead to certain activities migrating to less regulated jurisdictions (regulatory arbitrage) or adversely affect financial stability.