FSOC consists of 10 voting members and 5 nonvoting members (fig. 1). The 10 voting members include 9 federal regulators and an independent insurance expert. The 5 nonvoting members include state-level representatives from bank, securities, and insurance regulators and directors of OFR and the Federal Insurance Office. As the chairperson of FSOC, the Secretary of the Treasury has certain powers and responsibilities related to FSOC’s meetings, rulemakings, recommendations, and reports and testimony to Congress. The Secretary, in consultation with the other FSOC members, is also responsible for regular consultation with the financial regulatory entities and other appropriate organizations of foreign governments or international organizations. FSOC has established seven standing committees that are generally composed of staff of FSOC members and member agencies to help carry out the council’s business. The Dodd-Frank Act established OFR 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. The act requires OFR to set up a data center and a research and analysis center to, among other things, perform applied and essential long-term research; develop tools for risk measurement and monitoring; and make the results of its activities available to financial regulatory collect and provide data to FSOC and member agencies; standardize the types and formats of data reported and collected; agencies. FSOC and OFR face several challenges as they work to carry out their responsibilities and achieve their missions. First, FSOC’s missions—to identify risks to U.S. financial stability and respond to emerging threats to stability—are inherently challenging, for several reasons. Identifying risks to financial stability is challenging because (1) key indicators, such as market prices, often do not reflect threats to financial stability; (2) such threats do not develop in precisely the same way in successive crises; (3) financial innovations are not well understood; and (4) according to experts, effectively monitoring and mitigating systemic risk is both vast and procedurally complex. In addition, actions to preemptively mitigate emerging threats may appear unnecessary or too costly at the time they are proposed or taken. Second, although the Dodd-Frank Act created FSOC to provide for a more comprehensive view of threats to U.S. financial stability, it left most of the fragmented and complex arrangement of independent federal and state regulators in place and generally preserved their statutory responsibilities. As a result, FSOC’s effectiveness in providing for a more comprehensive view of threats to U.S. financial stability hinges to a large extent on collaboration among its many members, almost all of whom have their own independent regulatory responsibilities. In testifying on the coordination of Dodd-Frank rulemakings assigned to specific FSOC members before the U.S. House Financial Services Committee in October 2011, the chairperson of FSOC recognized this challenge. However, he also noted that certain agencies were working much more closely together than before FSOC’s creation. The federal financial regulators have also emphasized the importance of maintaining their independence while serving as members of FSOC. For example, several member agencies noted in our prior work on Dodd-Frank rulemakings that any effort to coordinate rulemakings assigned to specific agencies through FSOC would need to be balanced against the statutory requirements of the independent agencies involved. Regulators have also pointed to their differing statutory requirements to explain why they have differing views on policy issues. During the Basel II deliberations prior to the financial crisis, for instance, U.S. bank regulators—the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and the Office of the Comptroller of the Currency (OCC)—each had a different view of various aspects of those requirements. The regulators traced their differences back to their specific statutory responsibilities. Third, OFR faces the challenge of trying to build a world-class research organization from the ground up, including acquiring staff with the needed skills, while meeting its short-term responsibility to support FSOC. The researchers who supported the creation of OFR suggested that it would take many years for the new entity to provide the insights that would ultimately be expected of it. Though OFR now has a confirmed director, these researchers had also noted that the long absence of a director for the organization had slowed this process. FSOC and OFR have taken steps toward meeting the challenges they face. For example, they have taken steps to build mechanisms to identify potential threats to financial stability, provide information to the public about their activities and progress, and establish management and planning structures. However, additional actions could strengthen the accountability and transparency of these efforts. As we have reported in the past, agencies can manage or mitigate many of the challenges of setting up new organizations by developing strong management structures and control mechanisms. FSOC has taken steps to meet its statutory responsibilities related to identifying risks and potential emerging threats to U.S. financial stability but has not yet developed comprehensive and systematic mechanisms to realize these goals. These steps include setting up the Systemic Risk Committee—one of the seven standing FSOC committees—that is responsible for systemic risk monitoring and plays a key role in reviewing sources of systemic risk. The committee is operating under draft procedures, with member agency staff suggesting risks or threats that, in their view, may benefit from interagency coordination.FSOC policy staff, if there is agreement that an issue warrants further examination, an agency is assigned to develop it, including identifying vulnerabilities in the financial system. When the committee determines that the issue is sufficiently developed, it presents the issue to the Deputies Committee. According to the draft procedures, if issues are elevated beyond the Deputies Committee to FSOC members, agencies may respond with a variety of actions, including enhanced monitoring, additional analysis, the development of potential policy responses, or the implementation of a particular policy response. Potential threats to financial stability are also discussed at FSOC meetings; for example, According to FSOC officials noted that a teleconference was convened to discuss MF Global’s bankruptcy. OFR participates in the Systemic Risk Committee and is building capacity to monitor the financial system for threats to financial stability. OFR has developed the Financial Stability Monitor, a collection of metrics and indicators related to financial stability that is to be continuously updated, according to OFR and Treasury officials. According to these officials, OFR began sharing the Financial Stability Monitor with the Systemic Risk Committee and FSOC member agency staff in February 2012. OFR is also assessing options for analyzing risks to financial stability and produced a working paper in collaboration with outside researchers, published in January 2012 to survey existing approaches. OFR and FSOC sponsored conferences in December 2011 and December 2012 to discuss a range of issues related to risks to financial stability. OFR staff said that they were evaluating a range of metrics and methods for measuring and analyzing financial markets and systems and were in the early stages of developing network maps and other tools to assess financial stability. For example, OFR evaluated 11 measures against a series of crises over time and reported on some of these efforts in its 2012 Annual Report. Dimitrios Bisias, Mark Flood, Andrew W. Lo, and Stavros Valavanis, A Survey of Systemic Risk Analytics, Office of Financial Research Working Paper #0001 (Washington, D.C.: Jan. 15, 2012). positioned to judge which potential threats will benefit from interagency discussions. FSOC and OFR could improve their efforts to identify risks and threats by collecting and sharing a common set of financial indicators. Systematic collection, analysis, and sharing of financial indicators of key risk factors such as leverage, liquidity, concentrations, underwriting standards, collateral quality, and delinquencies should provide insight into vulnerabilities affecting particular types of financial intermediaries or reveal patterns occurring across the financial system. OFR, through a mechanism such as the Financial Stability Monitor, could play a role in collecting, analyzing, and reporting on these indicators. To improve FSOC’s approaches for monitoring threats to financial stability, we recommended that FSOC develop an approach that included systematic sharing of key financial risk indicators across FSOC members and member agencies to assist in identifying potential threats for further monitoring or analysis. In addition, FSOC does not have sufficient processes for identifying or prioritizing potential emerging threats to U.S. financial stability for its annual reports. FSOC’s annual reporting process is an ongoing responsibility which, in the absence of a strategic plan, functions as its major strategic planning document and method for communicating with Congress and the public, especially regarding potential emerging threats to U.S. financial stability. FSOC’s 2011 and 2012 annual reports generally addressed the subjects mandated by the Dodd-Frank Act. These reports also provided extensive information about the current economy and complex issues, such as high-frequency trading and the MF Global bankruptcy. In addition, the reports contained extensive discussions of current known threats, such as those associated with money market funds and the European sovereign-debt crisis, and made some recommendations to address them. However, FSOC has not developed a structure that supports having a systematic or comprehensive process for identifying potential emerging threats. In particular, FSOC does not have processes for consistently identifying such threats, separating them from more current threats, or prioritizing them. For instance, certain potential threats related to U.S. debt are not in the 2011 Annual Report. However, the 2012 Annual Report identifies the U.S. debt as a potential threat but does not explain what has changed since the 2011 report. Similarly, the 2011 or 2012 annual reports identify risks, such as those associated with the European sovereign debt crisis or money market funds, which are ongoing or have previously been identified as potentially emerging. Further, FSOC identifies a large number of threats without explicitly prioritizing them. In contrast, other entities, such as the International Monetary Fund and European Central Bank, issue reports that explicitly prioritize potentially significant threats.