The GAO has provided updates on outstanding recommendations that remain open from the FDIC and the Fed and asks the agencies to give priority to certain areas, including fintech, derisking, and stress testing.
Gene L. Dodaro, Comptroller General of the United States, has sent letters to both the Chairman of the Federal Deposit Insurance Corporation and the Chairman of the Federal Reserve Board on the status of the agencies’ implementation of Government Accountability Office’s recommendations. Dodaro’s letters to Jerome H. Powell, FedChairman and Jelena McWilliams, FDIC Chairman, are intended to call attention to areas where open recommendations should be given high priority. According to the letter, as of November 2018, on a government-wide basis, 77 percent of GAO recommendations made 4 years ago were implemented.
FDIC letter. As of Jan. 24, 2019, FDIC had 10 open recommendations according to the GAO. The letter listed two priority recommendations: consumer protection for financial data aggregation services; and derisking. The first recommendation relates to consumer protection for users of financial data aggregation services. Dodaro stated that consumers are using financial technology firms to aggregate information from their various financial accounts, including their assets in bank accounts and brokerage accounts, as a way to better manage their finances.
While financial institutions typically reimburse losses in credit card or bank accounts arising from unauthorized activity, the GAO found in March 2018 that market participants disagreed over whether consumers using these financial account aggregators would be reimbursed if they experience such losses. GAO had recommended that the FDIC engage in collaborative discussions with other relevant financial regulators and stakeholders to address these issues. However, according to the letter, there have been no coordinated public outcomes as of yet and urged the FDIC to continue its efforts "to help ensure that these efforts result in tangible outcomes that balance both financial institution and consumer interests."
The second priority cited in the letter is the area of derisking, which is the practice of banks limiting services or ending relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering. In a February 2018 report, GAO determined that Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory concerns have played a role in banks’ decisions to terminate and limit customer accounts and close bank branches. The GAO recommended that FDIC jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with the banking regulatory agencies and revise regulations or their implementation, as appropriate. According to the GAO letter, the review should focus on how banks’ regulatory concerns may be influencing their willingness to provide services.
Fed letter. The letter to the Fed Chair called attention to areas where open recommendations should be given high priority. According to the GAO, as of November 2018, the Fed’s implementation rate for recommendations was 100 percent. As of Jan. 24, 2019, the Fed had 34 open recommendations.
The GAO has identified 10 priority recommendations that fall into the following areas:
- consumer protection for financial data aggregation services;
- derisking; and
- stress testing.
With regard to consumer protection for users of financial data aggregation services, the GAO found in a March 2018 report that market participants disagreed over whether consumers using these financial account aggregators would be reimbursed if they experience such losses. The GAO recommended that the Fed engage in collaborative discussions with other relevant financial regulators and stakeholders to address these issues.
In a February 2018 report, GAO determined that BSA/AML regulatory concerns have played a role in banks’ decisions to terminate and limit customer accounts and close bank branches. The GAO has recommended that the Fed jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with the FDIC, Office of the Comptroller of the Currency, and the Financial Crimes Enforcement Network and revise regulations or their implementation, as appropriate.
According to the letter, the Fed’s approach to designing stress test scenarios has not included analysis of whether the current approach, which uses one severe economic scenario rather than several, is sufficient to assess the resilience of the banking system, or proactively considered levels of severity outside of U.S. postwar historical experience. Additionally, the GAO states that the Fed’s risk management of its stress test models has not included a focus on the risks associated with the system of models that produce the stress test results, in which the results of component models are combined with assumed or planned capital actions. And the Fed has not conducted sensitivity and uncertainty analyses of how its modeling decisions affect overall results, or developed a process for communicating information about uncertainty to the Board or a process for the Fed and senior staff to articulate tolerance levels for key risks.
The GAO had found limitations in the areas of scenario design and model risk management that the Fed needed to address. As of January 2019, some of recommendations had been addressed. The letter stated that completing the implementation of the GAO recommendations can help the Fed "identify and manage the risks introduced into its models and account appropriately for uncertainty and sensitivity of model results."
According to the letter, the Fed has projects are underway which—upon completion—may result in implementation of processes that are responsive to the recommendations. The letter suggested establishing a process to facilitate proactive consideration of scenario severity that may fall outside U.S. postwar historical experience. Additionally, the GAO noted that the Fed’s responsive actions in response to one recommendation are part of a proposed rulemaking that has yet to be finalized.
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