The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC) to identify and address threats to the stability of the U.S. financial system and Office of Financial Research (OFR) to support FSOC and Congress by providing financial research and data. In this report, the GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR’s efforts to establish management structures and mechanisms to carry out their missions, (3) 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. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR’s budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.
GAO made 10 recommendations to strengthen the accountability and transparency of FSOC/OFR’s decisions as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators.
Lofchie Comment: In addition to commenting on the performance of FSOC and OFR, the GAO report provides a good general description of the agencies’ resources and purposes for those who have an interest in the crisis and the response. One of the provisions of Dodd-Frank that I think most problematic is the power of FSOC under Title II of Dodd-Frank to designate certain financial institutions as being of systemic importance and so to impose on those institutions, selected by largely subjective means, substantial additional regulations likely to put them at material competitive disadvantage. The subjectivity of such designations gives a great discretionary power to the government that could be used to favor or disfavor market competitors. From that perspective, I view the report as confirming my concerns. For example, page 22 of the Report makes clear that FSOC does not really have any commonly-agreed method to assess systemic risk, and the report concludes that FSOC’s workings are not transparent.