Banking and Finance Law Daily Wrap Up, FEDERAL RESERVE SYSTEM—Banking agencies’ regulatory analysis policies need improvement, GAO says, (Jul 19, 2024)
Organizations Mentioned:Office of the Comptroller of the Currency
By Nora Macaluso
Cost-benefit analyses and documentation of data sources were said to be lacking in many cases.
Analyses conducted by banking agencies for 22 “major” bank capital and liquidity rules issued from 2012 to 2021 could have been better, a Government Accountability Office report said. While analyses have improved in recent years, with agencies including more information on the expected impact of rules, the studies the GAO reviewed for the report “did not always identify alternative approaches or quantify benefits and costs,” according to the GAO report (GAO-24-106206, July 18, 2024).
The Federal Reserve “had little to no documentation of its analyses” for three of 21 rules in which it was involved, beyond Federal Register notices, the report said. And documentation for the other 18 “did not consistently discuss methods and data used and how conclusions were reached,” the GAO found.
Policies at the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency “now largely align with leading practices,” following revisions in 2022 and 2021, the GAO said.
The Fed, however, has not updated its policies since 1994, the GAO said, adding that improvements such as cost-benefit assessment and documentation of data sources and analyses “would help the Federal Reserve ensure its rules are cost-beneficial and its conclusions are transparent.”
Regulators generally didn’t perform retrospective reviews of the effects of existing rules, though Executive Order 13579 encourages to have plans for such reviews, the GAO said. The FDIC in December 2022 adopted a policy to conduct one retrospective review a year, while the OCC and Fed do not have similar policies. “Implementing one could help them assess whether their rules have had intended effects and inform future rulemakings,” the report said.
GAO investigators interviewed officials from “several banking organizations,” who generally said recent changes to stress tests, such as a capital buffer requirement, were an improvement over prior stress tests and simplified requirements, the report said.
However, other officials, market participants, and observers had concerns about the timeframes for requirements and the number of scenarios required. A public interest organization said the removal of the requirement that banks include qualitative assessments of their internal capital planning practices provide “less assurance that banks have appropriate processes to manage capital levels,” the report said. And “an academic” said the qualitative assessment had provided insight into capital planning and Fed oversight.
The GAO recommended that the Fed and the OCC “develop and implement policies and procedures for systematically performing retrospective reviews of regulations.”
The Fed, in written comments included in the report, said it agreed with the recommendation, and added that it had “engaged in a large number of retrospective reviews” over the past 10 years. The GAO noted that the Fed’s reviews “either did not include an analysis of the effects of its capital and liquidity regulations or independent Federal Reserve analyses as part of the review.”
The OCC neither agreed nor disagreed with the recommendations, but said it would develop and implement retrospective review policies and procedures by March 31, 2025.
The Office of Management and Budget in November 2023 provided guidance (Circular No. A-4, Nov. 9, 2023) to federal agencies on the development of regulatory analysis as required under Executive Order 12866. The guidance includes sections on benefit-cost analysis, which it called “the primary analytical tool used for regulatory analysis,” steps in developing a regulatory analysis, and guidance on developing an analytic baseline.
“A high-quality regulatory analysis is designed to inform policymakers, other government stakeholders, and the public about the effects of alternative actions,” the OMB said in a circular outlining the guidance. “Regulatory analysis can help agencies in developing regulations by clarifying the likely effects of a regulation under consideration, and it is meant to inform the public about the anticipated consequences of government action [and alternatives],” the circular said.
RegulatoryActivity: FederalReserveSystem OversightInvestigations