U.S. Government Accountability Office Examines Challenges to Financial Stability Oversight Council and Office of Financial Research Missions

Sep 17, 2012

GAO: New Organizations Should Strengthen the Accountability and Transparency of Their Decisions

Tasked with examining any challenges faced by the newly created Financial Stability Oversight Council (“FSOC”) and Office of Financial Research (“OFR”) in fulfilling their respective missions, the U.S. Government Accountability Office (“GAO”) made various recommendations in a report (GAO-12-886) issued on September 11, 2012.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to the stability of the U.S. financial system and OFR to support FSOC and Congress by providing financial research and data.

A summary of the GAO report is reprinted below. To view the entire document, click here.

What the GAO Found

The FSOC and the OFR face challenges in achieving their missions. Key FSOC missions–to identify risks and respond to emerging threats to financial stability–are inherently challenging, in part, because risks to financial stability do not develop in precisely the same way in successive crises. Collaboration among FSOC members can also be challenging at times, as almost all of them represent independent agencies that retained existing authorities. The OFR faces the challenge of trying to establish and build a world-class research organization while meeting shorter-term goals and responsibilities.

The FSOC’s and OFR’s management mechanisms to carry out their missions could be enhanced to provide greater accountability and transparency. The FSOC and OFR have taken steps toward establishing such mechanisms. The FSOC has established seven standing committees generally composed of staff of its members and member agencies to support its mission and provide information to the FSOC for decision-making. It also adopted a memorandum of understanding on information sharing to help govern its activities. The FSOC and OFR have issued annual reports on their activities and created Web pages that provide some information to the public. However, certain mechanisms could be strengthened. For instance:

The FSOC’s Systemic Risk Committee, which is responsible for identifying risks to financial stability, has procedures to facilitate analysis of risks raised by staff. However, without a more systematic approach and comprehensive information, FSOC member agencies, on their own, may not be well-positioned to judge which potential threats will benefit from interagency discussions. The GAO recommends that the FSOC collect and share key financial risk indicators as part of a systematic approach to help identify potential threats to financial stability.

Public information on the FSOC’s and OFR’s decision-making and activities is limited, which makes assessing their progress in carrying out their missions difficult. The GAO recommends that (1) the FSOC keep detailed records of closed-door sessions, and (2) that both entities develop a strategy to improve communications with the public.

The FSOC’s annual reports–which serve as its key accountability documents–do not consistently identify which entities should monitor or implement the identified recommendations or give time frames for specific actions. To hold the FSOC accountable for its recommendations, the GAO recommends that the FSOC recommend a lead agency or agencies to monitor or implement each recommendation within specified time frames.

The OFR issued a strategic framework in March 2012 as an important first step in adopting a strategic planning and performance management system. However, that document lacked some leading practices such as linking activities to strategic goals and performance measurement systems. The GAO recommends that the OFR further develop a strategic planning and performance management system that includes these elements and will allow it to be held accountable.

Why the GAO Did This Study

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the FSOC to identify and address threats to the stability of the U.S. financial system. The OFR was created to support FSOC and Congress by providing financial research and data.

The GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions, (2) the FSOC and OFR’s efforts to establish management structures and mechanisms to carry out their missions, (3) the FSOC and OFR’s activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports.

The GAO reviewed FSOC documents related to the annual reports, rulemakings and committee procedures, as well as documents on the OFR’s budget, staffing and strategic planning. The GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups and academics.

What the GAO Recommends

The GAO made 10 recommendations to strengthen the accountability and transparency of the FSOC and OFR’s decisions and activities, as well as to enhance collaboration among FSOC members and with external stakeholders. As Chairperson, the U.S. Treasury said that the FSOC and OFR would consider the recommendations, but questioned the need for the FSOC and OFR to clarify responsibilities for monitoring threats to financial stability. The Treasury stated that the OFR expects to share some risk indicators. However, stronger and more systematic actions are still needed in these areas.

GAO Recommendations for Executive Action

Note: All recommendations listed below are currently in process.

Recommendation: The FSOC and OFR should clarify responsibility for implementing requirements to monitor threats to financial stability across the Treasury, FSOC and OFR (including FSOC members and member agencies) to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative.

Recommendation: As the FSOC continues to develop approaches for monitoring threats to financial stability, it should develop an 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.