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Contact: Financial Services Committee Press

GAO Finds Regulator Secrecy on ‘Living Wills’ Could Undermine Confidence


 

WASHINGTON, April 12, 2016 -

Secrecy surrounding how Washington regulators determine whether the “living wills” submitted by banks are credible “could undermine public and market confidence,” according to a new report released today by the Government Accountability Office (GAO).

“Without greater transparency, the lack of clear understanding of the regulators’ decisions…may weaken public and market confidence in resolution planning and limit the extent to which the regulators can be held accountable for their decisions,” the GAO report states.

The report was requested by House Financial Services Committee Chairman Jeb Hensarling (R-TX), who has previously expressed concerns about regulators’ lack of transparency.

In a statement issued today about the GAO report, Chairman Hensarling said the report confirms many of the concerns he has raised.

“The secrecy and lack of accountability can lead to abuse by Washington regulators and is a tool for them to potentially exercise de facto management authority over major financial institutions.  Once again we’re seeing the uncertainty created by Dodd-Frank and its regulatory burden that impedes economic growth and makes it more difficult for working Americans to achieve financial independence,” Chairman Hensarling said today.

The Dodd-Frank Act passed by Congress in 2010 requires companies deemed to be “systemically important” to submit to the Federal Reserve and the FDIC resolution plans, or so-called “living wills,” on how they would be liquidated if they fail.

To read the report, click this link: http://1.usa.gov/1qGvMDQ

Among the GAO’s findings:

Regulators’ Framework for Assessing Plans Are Not Transparent

  • Regulators “have not disclosed their frameworks for determining whether a plan is not credible.  They also developed but have not disclosed their criteria for reducing plan requirements for many smaller companies.  Without greater disclosure, companies lack information they could use to assess and enhance their plans.  The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities.  A lack of information on how the regulators assess plans and allow some companies to file reduced plans could undermine public and market confidence in resolution plans.”

  • “[C]ompanies lack a full understanding of the regulators’ overall assessment frameworks for determining whether aspects of a plan are deficient.”

  • Companies “have not been provided with any assurances that addressing the shortcomings would mean that the regulators would not find aspects of their plans deficient.”

  • “Importantly, disclosing the assessment framework, at least in an abbreviated form, would provide companies with a more comprehensive understanding of the principal factors that the regulators use to identify plan deficiencies.”

  • “Without more fully disclosing the regulators’ frameworks for reviewing plans and identifying plan deficiencies, the companies lack key information for assessing and improving their plans.  In addition, companies and the public have a limited basis for understanding how the regulators are fulfilling their responsibility under the resolution plan rule, which could undermine the public’s confidence in the resolution planning process.”

Regulators Have Not Disclosed Their Criteria for Reductions in Small Company Plan Requirements

  • “According to the Office of Management and Budget’s directive on open government, transparency promotes accountability by providing the public with information about government activities.  Similarly, our prior work has recognized that transparency—balanced with the need to maintain sensitive regulator information—is a key feature of accountability.  Without more fully disclosing the regulators’ frameworks for reviewing plans and identifying plan deficiencies, the companies lack key information for assessing and improving their plans. In addition, companies and the public have a limited basis for understanding how the regulators are fulfilling their responsibility under the resolution plan rule, which could undermine the public’s confidence in the resolution planning process.”

  • “[C]ompanies would not know what steps, if any, they could take to decrease their risk profile and qualify for a reduced-plan filing in future years. Moreover, Wave 3 filers and the public also would not know whether the reduced-plan benefit was provided consistently.”

Annual Filing Requirements Create Challenges

  • “[T]he rule does not require FDIC and the Federal Reserve to substantively review the plans or provide feedback within any set time frame.”

  • “FDIC and Federal Reserve officials told us that they recognize the constraints the companies have experienced because of the timing of the regulators’ feedback…However, the resolution plan rule’s annual filing cycle may not be feasible… Absent a longer filing cycle, the rule may not effectively allow for the achievement of its intent.”

Assessment of Ability For Plans To Provide Orderly Resolution

  • “[U]ncertainty exists about the plans’ ability to provide for a rapid and orderly resolution of the largest SIFIs, in part because none has used its plan to go through bankruptcy… [T]his is a legally novel strategy.”

Wave 3 (Less Than $100 Billion) Filers May Not Pose Systemic Risk

  • “According to nearly all 15 of the Wave 3 companies and most of the 20 stakeholders we interviewed, resolution plans for most of the Wave 3 filers may not reduce systematic risk.  Most stakeholders told us that the failure of most Wave 3 companies would not threaten U.S. financial stability generally because of their limited size and complexity.”

Public Plans Are Of Limited Use

  • “[S]takeholders generally did not find the initial public sections to be useful.  For example, nearly all nine of the academics and credit rating agencies that we interviewed told us that the 2012 through 2014 public sections were not informative…”

Cost of Resolution Plan Rule

  • “According to FDIC data, the regulator spent around $3.2 million, $3.3 million, and $4.2 million on staff payroll related to the resolution planning in calendar years 2012, 2013, and 2014, respectively.”

  • “In addition to payroll costs, FDIC incurred other costs related to resolution planning.  For example, in 2012, FDIC paid a consulting company about $278,000…FDIC also incurred approximately $827,000, $326,000, and $10,000 in travel costs in calendar year 2012, 2013, and 2014, respectively.”

  • “Of the nine Wave 1, Wave 2, and nonbank filers that provided us with estimates, the cost of preparing resolution plans from 2012 through 2015 ranged from about $500,000 to about $105 million per plan…The amount of consulting or attorney fees paid by the companies in a given year ranged from around $500,000 to $25 million.”
  • “[N]early all of these Wave 3 filers hired external consultants or attorneys to help them prepare their initial plans, with total fees ranging from $15,000 to $3.5 million.”

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