GAO, again, calls on Congress to consider combining regulatory agencies to address fragmentation, overlap

Repeating a recommendation made three years ago to Congress that federal financial regulators should be consolidated, the congressional watchdog Wednesday said again that doing so would address fragmentation and overlap in the financial regulatory structure.

In the section on “Modernizing the U.S. Financial Regulatory System” – contained in the report on “Substantial Efforts Needed to Achieve Greater Progress on High-Risk Areas” – the Government Accountability Office (GAO) said Congress should consider whether additional changes to the financial regulatory structure are needed to reduce or better manage fragmentation and overlap in the oversight of financial institutions and activities.

“For example, Congress could consider consolidating the number of federal agencies involved in overseeing the safety and soundness of depository institutions, combining the entities involved in overseeing the securities and derivatives markets, and determining the optimal federal role in insurance regulation, among other considerations,” the report states.

GAO suggested that changing the federal financial institution regulatory structure could improve the efficiency and effectiveness of oversight; the consistency of consumer and investor protections; and the consistency of financial oversight for similar institutions, products, risks, and services.

Three years ago, GAO released a report with essentially the same recommendations to Congress about consolidating the federal regulatory agencies (“Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness,” GAO-16-175, February 2016). Since then, no substantial action has been taken in Congress.

The report also made recommendations for regulatory changes, including:

  • That Treasury’s umbrella group of regulators – the Financial Stability Oversight Council (FSOC) – should clarify with Treasury’s Office of Financial Research (OFR) the respective responsibilities of each organization to monitor risks to financial stability and to avoid gaps and overlap.
  • The Federal Reserve should further assess key aspects of stress-test scenario design and take steps to improve its ability to manage model risk (that is, the potential for adverse consequences from decisions based on incorrect or misused model outputs). “Although the Federal Reserve has taken responsive actions related to some of our recommendations in this area, taking the additional steps we recommended can help the Federal Reserve identify and manage the risks introduced into its models, and account appropriately for uncertainty and sensitivity of model results,” GAO said.
  • The Fed and the Office of the Comptroller of the Currency (OCC) should develop plans for how they will conduct required retrospective analyses of rulemakings, including how and when they will collect, analyze, and report needed data.
  • FSOC should work with its member federal regulators to establish formal coordination policies that “clarify issues such as when interagency coordination should occur around rulemakings and the role FSOC should play in facilitating that coordination.”

The report also suggested that Congress should consider whether changes in the law are necessary to align FSOC’s authorities with its mission to respond to systematic risks. “Congress could do so by making changes to FSOC’s mission, its authorities, or both, or to the missions and authorities of one or more of the FSOC member agencies to support a stronger link between the responsibility and capacity to respond to systemic risks,” the report states.

GAO High-Risk Series: Substantial Efforts Needed to Achieve Greater Progress on High-Risk Areas