This week, the Senate Banking Committee debated [1] on whether consumer financial regulations that have passed since the crisis are helping or harming consumers.
Meanwhile, the Government Accountability Office (GAO [2]) noted in a recent report [3] that while the current financial regulatory structure has contributed to the overall growth and stability of the U.S. economy, the structure has also “created challenges to effective oversight.”
“Fragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers,” the GAO said.
For example, the GAO said inconsistencies in examination activities of depository institution regulation can not only result in difficulties identifying emerging trends, but can also result in different conclusions when it comes to the safety and soundness of an institution. Also, the regulation of securities and derivatives markets by separate agencies has resulted in duplicative and inconsistent regulation of entities that engage in similar activities.
The GAO said its report that it established a framework in 2009 in order to evaluate regulatory reform proposals, and that an effective regulatory system would need to address structural shortcomings created by fragmentation and overlap. The existing regulatory structure, however, does not ensure efficient and effective oversight, consistent financial oversight, or consistent consumer protections; and as a result of this, “negative effects of fragmented and overlapping authorities persist throughout the system,” according to the GAO.
“Fragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.”
Government Accountability Office
The financial crisis highlighted the need for an agency to monitor and address risks across the financial system, which the Dodd-Frank Act tried to address by creating the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) in 2010. The GAO noted that “collaborative efforts have not been sufficient, and FSOC’s authorities are limited and unclear,” however.
“Although FSOC's mission is to respond to systemic risks, which may involve multiple entities, its recommendations are not binding and do not guarantee regulatory response,” the GAO said in its report. “FSOC has authorities to designate certain entities or activities for enhanced supervision by a specific regulator, but these authorities may not allow FSOC to address certain broader risks that are not specific to a particular entity. For such risks, FSOC can recommend but not compel action.”
The GAO concluded that Congress should consider whether changes are necessary to the current financial regulatory structure in order to reduce, or better manage, fragmentation and overlap, and also whether legislative changes will be necessary in order to align FSOC’s authority with its mission to respond to systemic risks.
“GAO also recommends that OFR and the Federal Reserve (1) jointly articulate individual and common goals for their systemic risk monitoring activities and engage in collaborative practices to support those goals; and (2) regularly and fully incorporate their monitoring tools, assessments, or results of monitoring activities into Systemic Risk Committee deliberations,” the GAO said in the report, noting that the Fed and OFR agreed with the GAO’s recommendations.
Click here [3] to view the GAO’s complete report.
