oversight

Dodd-Frank Act: Agencies' Efforts to Analyze and Coordinate Their Rules

Published by the Government Accountability Office on 2012-12-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office

GAO             Report to Congressional Addressees




                DODD-FRANK ACT
December 2012




                Agencies’ Efforts to
                Analyze and
                Coordinate Their
                Rules




GAO-13-101
                                              December 2012

                                              DODD-FRANK ACT
                                              Agencies’ Efforts to Analyze and Coordinate Their
                                              Rules
Highlights of GAO-13-101, a report to
congressional addressees




Why GAO Did This Study                        What GAO Found
The Dodd-Frank Act requires or                Federal agencies conducted the regulatory analyses required by various federal
authorizes various federal agencies to        statutes for all 54 regulations issued pursuant to the Dodd-Frank Wall Street
issue hundreds of rules to implement          Reform and Consumer Protection Act (Dodd-Frank Act) that GAO reviewed. As
reforms intended to strengthen the            part of their analyses, the agencies generally considered, but typically did not
financial services industry. GAO is           quantify or monetize, the benefits and costs of these rules. Most of the federal
required to annually study financial          financial regulators, as independent regulatory agencies, are not subject to
services regulations. This report             executive orders that require comprehensive benefit-cost analysis in accordance
examines (1) the regulatory analyses          with guidance issued by the Office of Management and Budget (OMB). Although
federal agencies performed for rules
                                              most financial regulators are not required to follow OMB’s guidance, they told
issued pursuant to the Dodd-Frank Act;
                                              GAO that they attempt to follow it in principle or spirit. GAO’s review of selected
(2) how the agencies consulted with
each other in implementing the final
                                              rules found that regulators did not consistently follow key elements of the OMB
rules to avoid duplication or conflicts;      guidance in their regulatory analyses. For example, while some regulators
and (3) what is known about the impact        identified the benefits and costs of their chosen regulatory approach in proposed
of the Dodd-Frank Act rules. GAO              rules, they did not evaluate their chosen approach compared to the benefits and
identified 66 final Dodd-Frank Act rules      costs of alternative approaches. GAO previously recommended that regulators
in effect between July 21, 2011, and          more fully incorporate the OMB guidance into their rulemaking policies, and the
July 23, 2012. GAO examined the               Office of Comptroller of the Currency and the Securities and Exchange
regulatory analyses for the 54                Commission have done so. By not more closely following OMB’s guidance, other
regulations that were substantive and         financial regulators continue to miss an opportunity to improve their analyses.
thus required regulatory analyses;
conducted case studies on the                 Federal financial agencies continue to coordinate on rulemakings informally in
regulatory analyses for 4 of the 19           order to reduce duplication and overlap in regulations and for other purposes, but
major rules; conducted case studies on        interagency coordination does not necessarily eliminate the potential for
interagency coordination for 3 other          differences in related rules. Agencies coordinated on 19 of the 54 substantive
rules; and developed indicators to            regulations that GAO reviewed. For most of the 19 regulations, the Dodd-Frank
assess the impact of the act’s systemic       Act required the agencies to coordinate, but agencies also voluntarily
risk provisions and regulations.              coordinated with other U.S. and international regulators on some of their
                                              rulemakings. According to the regulators, most interagency coordination is
What GAO Recommends                           informal and conducted at the staff level. GAO’s review of selected rules shows
GAO is not making new                         that differences between related rules may remain even when coordination
recommendations in this report but            occurs. According to regulators, such differences may result from differences in
reiterates its 2011 recommendations           their jurisdictions or the markets. Finally, the Financial Stability Oversight Council
that the federal financial regulators         (FSOC) has not yet implemented GAO’s previous recommendation to work with
more fully incorporate OMB’s guidance         regulators to establish formal interagency coordination policies.
into their rulemaking policies and that
                                              Most Dodd-Frank Act regulations have not been finalized or in place for sufficient
FSOC work with federal financial
regulators to establish formal                time for their full impacts to materialize. Recognizing these and other limitations,
interagency coordination policies for         GAO took a multipronged approach to assess the impact of some of the act’s
rulemaking. The agencies provided             provisions and rules, with an initial focus on the act’s systemic risk goals. First,
written and technical comments on a           GAO developed indicators to monitor changes in certain characteristics of U.S.
draft of this report, and neither agreed      bank holding companies subject to enhanced prudential regulation under the
nor disagreed with the report’s               Dodd-Frank Act (U.S. bank SIFIs). Although the indicators do not identify causal
findings.                                     links between their changes and the act—and many other factors can affect
                                              SIFIs—some indicators suggest that since 2010 U.S. bank SIFIs, on average,
                                              have decreased their leverage and enhanced their liquidity. Second, empirical
                                              results of GAO’s regression analysis suggest that, to date, the act may have had
View GAO-13-101. For more information,
contact A. Nicole Clowers at (202) 512-8678   little effect on U.S. bank SIFIs’ funding costs but may have helped improve their
or clowersa@gao.gov                           safety and soundness. GAO plans to update its analyses in future reports,
                                              including adding indicators for other Dodd-Frank Act provisions and regulations.
                                                                                        United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 6
               Regulatory Analyses Provide Limited Information about Benefits
                 and Costs of Chosen or Alternative Approaches                          10
               Regulators Continue to Coordinate Informally on Rulemakings, but
                 Differences among Related Rules Still Exist                            22
               Impacts of the Dodd-Frank Act Have Not Yet Fully Materialized
                 and Remain Uncertain                                                   32
               Agency Comments and Our Evaluation                                       70

Appendix I     Scope and Methodology                                                    74



Appendix II    Tables Listing Dodd-Frank Act Rules Effective as of
               July 23, 2012                                                            79



Appendix III   Summary of Rulemakings Related to the Dodd-Frank Act
               Provisions Applicable to Systemically Important Financial
               Institutions                                                             88



Appendix IV    Econometric Analyses of the Impact of Enhanced Regulation
               and Oversight on SIFIs                                                   91



Appendix V     Impact Analysis of the Debit Card Interchange Fees and
               Routing Rule                                                             99



Appendix VI    Econometric Analysis of the Impact the Debit Interchange
               Fee Standard on Issuer Banks’ Income                                    111



Appendix VII   Comments from the Securities and Exchange Commission                    116




               Page i                                  GAO-13-101 Dodd-Frank Act Regulations
Appendix VIII   Comments from the Department of the Treasury                             118



Appendix IX     GAO Contact and Staff Acknowledgments                                    119



Tables
                Table 1: Prudential Regulators and Their Basic Functions                   6
                Table 2: Summary of Four Major Rules Reviewed                             15
                Table 3: Documentation of Coordination in Releases of Dodd-
                         Frank Regulations, July 21, 2011 through July 23, 2012           25
                Table 4: Summary of Three Major Rules Reviewed                            27
                Table 5: Summary of Trends in Indicators for U.S. Bank SIFIs, from
                         Third Quarter 2010 through Second Quarter 2012                   36
                Table 6: Number and Median Size of U.S. Bank Holding Companies
                         and U.S. Bank SIFIs, at the End of Calendar Year Unless
                         Otherwise Noted (Assets in Billions of 2012 Q2 Dollars)          40
                Table 7: Foreign Legal Entities of Large U.S. Bank SIFIs, as of
                         October 22, 2012                                                 45
                Table 8: Estimated Changes in U.S. Bank SIFIs’ Funding Cost and
                         Measures of Safety and Soundness Associated with the
                         Dodd-Frank Act, from Third Quarter 2010 through Second
                         Quarter 2012                                                     56
                Table 9: Public Companies’ Say-on-Pay Proposals, from 2007
                         through June 25, 2012                                            69
                Table 10: Dodd-Frank Act Rules Effective between July 21, 2011,
                         and July 23, 2012                                                79
                Table 11: Dodd-Frank Act Rules Effective as of July 21, 2011              85
                Table 12: Rulemakings Implementing the Dodd-Frank Act
                         Provisions Applicable to Systemically Important Financial
                         Institutions and Their Status as of October 12, 2012             88
                Table 13: Estimated Impacts of the Dodd-Frank Act on Bank SIFIs,
                         from Third Quarter of 2010 through Second Quarter of
                         2012 (percentage points)                                         96
                Table 14: Estimated Impact of the Debit Interchange Fee Standard
                         on Covered Banks, from Fourth Quarter of 2011 through
                         Second Quarter of 2012 (percentage points)                      113




                Page ii                                  GAO-13-101 Dodd-Frank Act Regulations
Figures
          Figure 1: Total Assets of U.S. Bank SIFIs, as of the Third Quarter of
                   2010 and Second Quarter of 2012                                    39
          Figure 2: Median Market Share for U.S. Bank Holding Companies
                   by Size, from First Quarter of 2006 through Second
                   Quarter of 2012                                                    41
          Figure 3: Total Legal Entities of U.S. Bank SIFIs, as of October 23,
                   2012                                                               44
          Figure 4: Median Tangible Common Equity as a Percent of Total
                   Assets for U.S. Bank Holding Companies by Size, from
                   First Quarter of 2006 through Second Quarter of 2012               48
          Figure 5: Median Tangible Common Equity as a Percent of Risk-
                   Weighted Assets for U.S. Bank Holding Companies by
                   Size, from First Quarter of 2006 through Second Quarter
                   of 2012                                                            49
          Figure 6: Median Short-Term Liabilities as a Percent of Total
                   Liabilities for U.S. Bank Holding Companies by Size, from
                   First Quarter of 2006 through Second Quarter of 2012               52
          Figure 7: Median Liquid Assets as a Percent of Short-term
                   Liabilities for U.S. Bank Holding Companies by Size, from
                   First Quarter of 2006 through Second Quarter of 2012               53
          Figure 8: Annual and Quarterly U.S. ABS Issuance, from 2000
                   through Second Quarter of 2012                                     65
          Figure 9: Annual and Quarterly U.S. ABS Issuance Excluding
                   Agency Mortgage-Related ABS, from 2000 through Second
                   Quarter of 2012                                                    66




          Page iii                                   GAO-13-101 Dodd-Frank Act Regulations
Abbreviations

APA               Administrative Procedure Act
ABS               asset-backed security
CCAR              Comprehensive Capital and Analysis Review
CFPB              Consumer Financial Protection Bureau
CFTC              Commodity Futures Trading Commission
CRA               Congressional Review Act
DCI               data collection instrument
EFTA              Electronic Fund Transfer Act
EO                Executive Order
FDIC              Federal Deposit Insurance Corporation
FSB               Financial Stability Board
FSOC              Financial Stability Oversight Council
GDP               gross domestic product
G-SIB             globally systemically important bank
NCUA              National Credit Union Administration
OCC               Office of the Comptroller of the Currency
OMB               Office of Management and Budget
OFR               Office of Financial Research
PIN               personal identification number
PRA               Paperwork Reduction Act
RFA               Regulatory Flexibility Act
SCAP              Supervisory Capital Assessment Program
SEC               Securities and Exchange Commission
SIFI              systematically important financial institutions
SRO               self-regulatory organization
TARP              Troubled Asset Relief Program
TSR               total absolute shareholder return




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Page iv                                            GAO-13-101 Dodd-Frank Act Regulations
United States Government Accountability Office
Washington, DC 20548




                                   December 18, 2012

                                   Congressional Addressees

                                   The 2007-2009 financial crisis created major disruptions in significant
                                   parts of the U.S. financial system and threatened the solvency of some
                                   large financial institutions, prompting the federal government to take
                                   extraordinary steps to moderate the adverse economic impacts. In
                                   response to the crisis, Congress passed the Dodd-Frank Wall Street
                                   Reform and Consumer Protection Act (Dodd-Frank Act) in 2010, which
                                   includes numerous reforms to strengthen oversight of financial services
                                   firms and consolidate certain consumer protection responsibilities in the
                                   Bureau of Consumer Financial Protection, commonly known as the
                                   Consumer Financial Protection Bureau (CFPB). 1 The act requires or
                                   authorizes various federal agencies to issue hundreds of regulations to
                                   implement its reforms. As agencies have turned their attention to
                                   implementing these requirements, some industry associations and others
                                   have raised concerns about the potential impact of the regulations,
                                   individually and cumulatively, on financial markets and financial and
                                   nonfinancial institutions.

                                   Agencies can anticipate and evaluate the consequences of their
                                   regulations through regulatory analysis, which provides a formal way of
                                   organizing evidence that can help in understanding potential effects of
                                   new regulations. Benefit-cost analysis, the primary tool used for
                                   regulatory analysis, helps to identify the regulatory alternatives with the
                                   greatest net benefits. We, along with the Office of Management and
                                   Budget (OMB) and others, have identified benefit-cost analysis as a
                                   useful tool that can inform decision making. The systematic process of
                                   determining benefits and costs helps decision makers organize and
                                   evaluate information about, and identify trade-offs among, alternatives.
                                   Because of the merits of benefit-cost analysis, many agencies are
                                   directed by statute or executive order to conduct such analysis as part of
                                   rulemaking. For example, Executive Order 12,866 (E.O. 12,866) requires
                                   executive agencies to assess anticipated costs and benefits not only of
                                   the proposed regulatory action but also of any alternatives. 2 However, this


                                   1
                                    Pub. L. No. 111-203, 124 Stat. 1376 (2010).
                                   2
                                    Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993), as supplemented and
                                   reaffirmed by Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 21, 2011).




                                   Page 1                                          GAO-13-101 Dodd-Frank Act Regulations
order does not apply to independent regulatory agencies, including the
banking, futures, and securities regulators (federal financial regulators). 3

Section 1573(a) of the Department of Defense and Full-Year Continuing
Appropriations Act of 2011 amends the Dodd-Frank Act and directs GAO
to conduct an annual study of financial services regulations, including
those of CFPB. 4 In November 2011, we issued our first report under this
mandate. 5 Since that report, we have continued to monitor the
development of rules and regulations related to the Dodd-Frank Act.
Specifically, this report examines

•   the regulatory analyses, including benefit-cost analyses, that federal
    financial regulators have performed to assess the potential impact of
    selected final rules issued pursuant to the Dodd-Frank Act;
•   how federal financial regulators consulted with each other in
    implementing selected final rules issued pursuant to the Dodd-Frank
    Act to avoid duplication or conflicts; and
•   what is known about the impact of the Dodd-Frank Act regulations on
    the financial marketplace.

To address the first objective, we reviewed all final rules—a total of 66—
that were issued pursuant to the Dodd-Frank Act and became effective
between July 21, 2011, and July 23, 2012, to catalogue the regulatory
analyses (including benefit-cost analyses) the federal financial regulators




3
Independent regulatory agencies are those defined by 44 U.S.C. § 3502(5).
4
  Pub. L. No. 112-10, § 1573(a), 125 Stat. 38, 138-39 (2011) (codified at 12 U.S.C. §
5496b). Under the mandate, we are directed to analyze (1) the impact of regulation on the
financial marketplace, including the effects on the safety and soundness of regulated
entities, cost and availability of credit, savings realized by consumers, reductions in
consumer paperwork burden, changes in personal and small business bankruptcy filings,
and costs of compliance with rules, including whether relevant federal agencies are
applying sound cost-benefit analysis in promulgating rules; (2) efforts to avoid duplicative
or conflicting rulemakings, information requests, and examinations; and (3) other matters
deemed appropriate by the Comptroller General. As agreed with congressional staff, the
focus of our reviews will be limited to the financial regulations promulgated pursuant to the
Dodd-Frank Act.
5
 GAO, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional
Analyses and Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011).




Page 2                                              GAO-13-101 Dodd-Frank Act Regulations
conducted. 6 Combined with the 32 rules we identified in our first report,
we identified 98 Dodd-Frank Act rules in effect as of July 23, 2012. 7 To
assess the regulatory analyses of the agencies, we reviewed the 66 rules
that were issued and became effective between July 21, 2011, and July
23, 2012. Of these rules, 54 are substantive regulations while 12 are
interpretive rules; general statements of policy; and rules that deal with
agency organization, procedure, or practice. Unlike interpretive rules,
general statements of policy, and rules that deal with agency
organization, procedure, or practice, substantive regulations are subject
to the notice-and-comment rulemaking requirements of the Administrative
Procedure Act (APA) and generally include some form of regulatory
analysis. 8 Thus, our review focused on the 54 substantive regulations for
our analysis. Of the 54 regulations, 19 rules were determined by the
regulators and OMB to be “major” rules that could have an annual impact
on the economy of $100 million or more. For agencies subject to E.O.
12866, such major rules would be considered significant regulatory
actions and subject to formal benefit-cost analysis. 9 Three federal
financial regulators issued 18 of the 19 major rules: the Board of
Governors of the Federal Reserve System (Federal Reserve), Commodity
Futures Trading Commission (CFTC), and Securities and Exchange
Commission (SEC). In addition, the Department of the Treasury
(Treasury), which is subject to E.O. 12,866, issued the other major rule
pursuant to the Dodd-Frank Act. We selected four major rules for in-depth
review and compared the analyses conducted to the principles outlined in
OMB Circular A-4, which provides guidance to federal agencies on the




6
 In this report, we use the term rules generally to refer to Federal Register notices of
agency action pursuant to the Dodd-Frank Act, including regulations, interpretive rules,
general statements of policy, and rules that deal with agency organization, procedure, or
practice.
7
 A complete list of all Dodd-Frank Act rules in effect as of July 23, 2012, can be found in
appendix II.
8
 5 U.S.C. § 553.
9
  As defined by the Congressional Review Act, a major rule is a rule that the Administrator
of the Office of Information and Regulatory Affairs within OMB finds has resulted in or is
likely to result in (1) an annual effect on the economy of $100 million or more, (2) a major
increase in costs or prices, or (3) significant adverse effects on competition, employment,
investment, productivity, or innovation. 5 U.S.C. § 804(2). This is similar, but not identical,
to the definition of a “significant regulatory action” under E.O. 12866.




Page 3                                               GAO-13-101 Dodd-Frank Act Regulations
development of regulatory analysis. 10 Within our scope period, the
Federal Reserve and Treasury each issued one major rule that we
selected. We selected the lone SEC major rule during the period that
implemented new statutory authority. CFTC issued several major rules,
and we selected a rule based on our discussions with current and former
CFTC staff. We interviewed agency staffs and reviewed documentation
from the agencies to assess the quality of the benefit-cost or similar
analyses. We also reviewed statutes, regulations, agency guidance, and
other documentation to identify the analyses federal financial regulators
were required to conduct and how the agency intended to conduct them.

To examine interagency coordination among or between federal financial
regulators in developing rules, we reviewed the 66 Dodd-Frank rules that
were issued and became effective between July 21, 2011, and July 23,
2012, to identify which required interagency coordination and document
whether such coordination occurred. We identified 19 rules that required
interagency coordination. Of the rules requiring interagency coordination,
we selected three for case studies to examine the extent to which and
how agencies coordinated to avoid conflict and duplication in rulemaking.
We selected the rules to include at least one that two or more regulators
jointly issued and at least one that a single regulator issued. We also
selected rules to include as many of the federal financial regulators as
possible, including the Federal Reserve, CFTC, SEC, the Office of the
Comptroller of the Currency (OCC), and the Federal Deposit Insurance
Corporation (FDIC). We interviewed agency staff and reviewed
documentation from the agencies to assess the extent to which and how
agencies coordinated to avoid conflict and duplication in rulemaking.

To examine the impact of Dodd-Frank Act regulations on the financial
marketplace, we took a multipronged approach. We developed a set of
indicators to monitor changes in certain characteristics of systemically
important financial institutions (SIFI) that might be affected by Dodd-Frank




10
  As independent regulatory agencies that are not required to follow the economic
analysis requirements of E.O. 12,866, the financial regulators also are not required to
follow OMB Circular A-4. However, Circular A-4 is an example of best practices for
agencies to follow when conducting regulatory analyses, and the financial regulators have
told us that they follow the guidance in principle or spirit.




Page 4                                            GAO-13-101 Dodd-Frank Act Regulations
Act regulations. 11 To that end, we reviewed the legislative history of the
Dodd-Frank Act, the act itself, related regulations, academic studies,
GAO and agency reports, and other relevant documentation. Although
changes in the indicators may be suggestive of the impact of the act on
SIFIs, the indicators have a number of limitations, including that they do
not identify any causal linkages between the act and changes in the
indicators. Moreover, factors other than the act affect SIFIs and, thus, the
indicators. Additionally, we developed a set of indicators related to the (1)
cost of credit provided by bank SIFIs and (2) safety and soundness of
bank SIFIs. We used regression analysis to estimate the changes in the
indicators of bank SIFIs that may be associated with Dodd-Frank Act
provisions and proposed regulations related to the enhanced prudential
regulation of these bank holding companies by the Federal Reserve. Our
analysis does not differentiate the effects of the act from simultaneous
changes in economic conditions or other factors that may affect such
companies. We obtained and addressed high-level comments and
suggestions on all our indicators from Financial Stability Oversight
Council (FSOC) staff and two other market experts. Finally, we analyzed
the initial impacts of several major rules that were issued pursuant to the
Dodd-Frank Act and have been final for around 1 year or more. As part
of that work, we reviewed selected regulations, analyzed available data
about the potential impacts of the regulations, and interviewed agency
officials and market participants about such impacts. Appendix I contains
additional information on our scope and methodology.

We conducted this performance audit from December 2011 to December
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.



11
   The Dodd-Frank Act does not use the term “systemically important financial institution”
(SIFI). This term is commonly used by academics and other experts to refer to bank
holding companies with $50 billion or more in total consolidated assets and nonbank
financial companies designated by FSOC for Federal Reserve supervision and enhanced
prudential standards under the Dodd-Frank Act. For purposes of this report, we refer to
these bank and nonbank financial companies as bank systemically important financial
institutions (bank SIFI) and nonbank systemically important financial institutions (nonbank
SIFI), respectively. We also refer to nonbank SIFIs and bank SIFIs collectively as SIFIs
when appropriate.




Page 5                                             GAO-13-101 Dodd-Frank Act Regulations
Background

Financial Services                          The U.S. financial regulatory structure is a complex system of multiple
Regulation                                  federal and state regulators as well as self-regulatory organizations
                                            (SRO) that operate largely along functional lines. That is, financial
                                            products or activities generally are regulated according to their function,
                                            no matter who offers the product or participates in the activity. The
                                            functional regulator approach is intended to provide consistency in
                                            regulation, focus regulatory restrictions on the relevant functional areas,
                                            and avoid the potential need for regulatory agencies to develop expertise
                                            in all aspects of financial regulation.

                                            In the banking industry, the specific regulatory configuration depends on
                                            the type of charter the banking institution chooses. Charter types for
                                            depository institutions include commercial banks, thrifts, and credit
                                            unions. These charters may be obtained at the state or federal level. The
                                            federal prudential banking regulators—all of which generally may issue
                                            regulations and take enforcement actions against industry participants
                                            within their jurisdiction—are identified in table 1.

Table 1: Prudential Regulators and Their Basic Functions

Agency                                          Basic function
Office of the Comptroller of the Currency       Charters and supervises national banks and federal thrifts.
Board of Governors of the Federal Reserve Supervises state-chartered banks that opt to be members of the Federal Reserve
System                                    System, bank holding companies, thrift holding companies and the nondepository
                                          institution subsidiaries of those institutions, and nonbank financial companies designated
                                          by the Financial Stability Oversight Council.
Federal Deposit Insurance Corporation           Supervises FDIC-insured state-chartered banks that are not members of the Federal
                                                Reserve System, as well as federally insured state savings banks and thrifts; insures the
                                                deposits of all banks and thrifts that are approved for federal deposit insurance; and
                                                resolves all failed insured banks and thrifts and has been given the authority to resolve
                                                large bank holding companies and nonbank financial companies that are subject to
                                                supervision by the Board of Governors of the Federal Reserve System and subject to
                                                                                  a
                                                enhanced prudential standards.
National Credit Union Administration            Charters and supervises federally chartered credit unions and insures savings in federal
                                                and most state-chartered credit unions.
                                            Source: GAO.

                                            a
                                            12 U.S.C. § 5384


                                            In addition, the Dodd-Frank Act created CFPB as an independent bureau
                                            within the Federal Reserve System that is responsible for regulating the
                                            offering and provision of consumer financial products and services under


                                            Page 6                                                GAO-13-101 Dodd-Frank Act Regulations
the federal consumer financial laws. Under the Dodd-Frank Act, at the
designated transfer date, certain authority vested in the prudential
regulators transferred to CFPB. 12

The securities and futures industries are regulated under a combination of
self-regulation (subject to oversight by the appropriate federal regulator)
and direct oversight by SEC and CFTC, respectively. SEC oversees the
securities industry SROs, and the securities industry as a whole, and is
responsible for administering federal securities laws and developing
regulations for the industry. SEC’s overall mission includes protecting
investors; maintaining fair, orderly, and efficient markets; and facilitating
capital formation. CFTC oversees the futures industry and its SROs.
Under the Dodd-Frank Act, CFTC also has extensive responsibilities for
the regulation of swaps and certain entities involved in the swaps
markets. CFTC has responsibility for administering federal legislation and
developing comprehensive regulations to protect the public from fraud
and manipulation, to insure the financial integrity of transactions, and to
reduce systemic risk in the marketplace.

In addition, the Dodd-Frank Act created FSOC. 13 FSOC’s three primary
purposes are to identify risks to the financial stability of the United States,
promote market discipline, and respond to emerging threats to the
stability of the U.S. financial system. FSOC consists of 10 voting
members and 5 nonvoting members and is chaired by the Secretary of
the Treasury. 14 In consultation with the other FSOC members, the
Secretary is responsible for regular consultation with the financial
regulatory entities and other appropriate organizations of foreign
governments or international organizations.



12
     12 U.S.C. § 5581.
13
  The provisions of the Dodd-Frank Act concerning FSOC are contained primarily in
subtitle A of title I, §§ 111-123, codified at 12 U.S.C. §§ 5321-5333, and title VIII, codified
at 12 U.S.C. §§ 5461-5472.
14
  The 10 voting members provide a federal regulatory perspective and an independent
insurance expert’s view. The 5 nonvoting members offer different insights as state-level
representatives from bank, securities, and insurance regulators or as the directors of two
new offices within Treasury—the Office of Financial Research and Federal Insurance
Office—that were established by the Dodd-Frank Act. For additional information on
FSOC, see GAO, Financial Stability: New Council and Research Office Should Strengthen
the Accountability and Transparency of Their Decisions, GAO-12-886 (Washington, D.C.:
Sept. 11, 2012).




Page 7                                                GAO-13-101 Dodd-Frank Act Regulations
Regulations and Federal   The federal government uses regulation to implement public policy.
Rulemaking                Section 553 of APA contains requirements for the most common type of
                          federal rulemaking—informal rulemaking or “notice and comment”
                          rulemaking. 15 While there are inter- and intra-agency variations in the
                          informal rulemaking process, federal financial regulators generally share
                          three basic rulemaking steps or phases:

                          •    Initiation of rulemaking action. During initiation, agencies gather
                               information that would allow them to determine whether rulemaking is
                               needed and identify potential regulatory options. To gather information
                               on the need for rulemaking and potential regulatory options, agencies
                               may hold meetings with interested parties or issue an advanced
                               notice of proposed rulemaking. At this time, the agencies also will
                               identify the resources needed for the rulemaking and may draft
                               concept documents for agency management that summarize the
                               issues, present the regulatory options, and identify needed resources.
                          •    Development of proposed rule. During this phase of the rulemaking
                               process, an agency will draft the notice of proposed rulemaking,
                               including the preamble (which is the portion of the rule that informs
                               the public of the supporting reasons and purpose of the rule) and the
                               rule language. The agency will begin to address analytical and
                               procedural requirements in this phase. The agency provides
                               “interested persons” with an opportunity to comment on the proposed
                               rule, generally for a period of at least 30 days. 16
                          •    Development of final rule. In the third phase, the agency repeats, as
                               needed, the steps used during development of the proposed rule.
                               Once the comment period closes for the proposed rule, the agency
                               either would modify the proposed rule to incorporate comments or
                               address the comments in the final rule release. This phase also
                               includes opportunities for internal and external review. As published in
                               the Federal Register, the final rule includes the date on which it
                               becomes effective.


                          15
                            APA also contains requirements for formal rulemaking, which is used in rate-making
                          proceedings and other cases involving a statute that requires rules to be made “on the
                          record.” Formal rulemaking incorporates evidentiary (or “trial type”) hearings, in which
                          interested parties may present evidence, conduct cross-examinations of other witnesses,
                          and submit rebuttal evidence. However, few statutes require such on-the-record hearings.
                          16
                            5 U.S.C. § 553. The notice of proposed rulemaking is to contain (1) a statement of the
                          time, place, and nature of public rulemaking proceedings; (2) reference to the legal
                          authority under which the rule is proposed; and (3) either the terms or substance of the
                          proposed rule or a description of the subjects and issues involved.




                          Page 8                                            GAO-13-101 Dodd-Frank Act Regulations
                 APA’s notice and comment procedures exclude certain categories of
                 rules, including interpretative rules; general statements of policy; rules
                 that deal with agency organization, procedure, or practice; or rules for
                 which the agency finds (for good cause) that notice and public comment
                 procedures are impracticable, unnecessary or contrary to the public
                 interest.


Dodd-Frank Act   Under the Dodd-Frank Act, federal financial regulatory agencies are
Regulations      directed or have the authority to issue hundreds of regulations to
                 implement the act’s provisions. In some cases, the act gives the agencies
                 little or no discretion in deciding how to implement the provisions. For
                 instance, the Dodd-Frank Act made permanent a temporary increase in
                 the FDIC deposit insurance coverage amount ($100,000 to $250,000);
                 therefore, FDIC revised its implementing regulation to conform to the
                 change. However, other rulemaking provisions in the act appear to be
                 discretionary in nature, stating that (1) certain agencies may issue rules to
                 implement particular provisions or that the agencies may issue
                 regulations that they decide are “necessary and appropriate”; or (2)
                 agencies must issue regulations to implement particular provisions but
                 have some level of discretion over the substance of the regulations. As a
                 result, for these rulemaking provisions, the agencies may decide to
                 promulgate rules for some or all of the provisions, and may have broad
                 discretion to decide what these rules will contain and what exemptions, if
                 any, will apply.

                 In many instances, exemptions to Dodd-Frank Act provisions are
                 encompassed in definitions of certain terms that are broadly established
                 in statute and require clarification through regulation. Persons or entities
                 that meet the regulatory definitions are subject to the provision, and those
                 that do not meet the definitions are not. For example, CFTC and SEC
                 promulgated a regulation that defined the terms ‘‘swap dealer,’’ ‘‘security-
                 based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based
                 swap participant,’’ and ‘‘eligible contract participant.’’ 17 Persons that do
                 not meet the definitions of these terms may not be subject to the Dodd-
                 Frank Act provisions concerning swaps and security-based swaps,
                 including registration, margin, capital, business conduct, and other
                 requirements. Similarly, FSOC promulgated a regulation and interpretive



                 17
                  77 Fed. Reg. 30,596 (May 23, 2012).




                 Page 9                                     GAO-13-101 Dodd-Frank Act Regulations
                          guidance regarding the specific criteria and analytic framework FSOC
                          would apply in determining whether a nonbank financial company could
                          pose a threat to the financial stability of the United States. 18 Financial
                          firms that are not designated by FSOC, acting pursuant to the statutory
                          standards, would not be subject to enhanced prudential supervision by
                          the Federal Reserve.


                          Federal agencies conducted the regulatory analyses required by various
Regulatory Analyses       federal statutes for all 54 Dodd-Frank Act regulations that we reviewed.
Provide Limited           As part of their analyses, the agencies generally considered, but typically
                          did not quantify or monetize, the benefits and costs of these regulations.
Information about         As independent regulatory agencies, the federal financial regulators are
Benefits and Costs of     not subject to executive orders that require comprehensive benefit-cost
                          analysis in accordance with guidance issued by OMB. While most
Chosen or Alternative     financial regulators said that they attempt to follow OMB’s guidance in
Approaches                principle or spirit, we found that they did not consistently follow key
                          elements of the guidance in their regulatory analyses. We previously
                          recommended that regulators should more fully incorporate the OMB
                          guidance into their rulemaking policies.


Regulators Were Not       As part of their rulemakings, federal agencies generally must conduct
Required to Assess        regulatory analysis pursuant to the Paperwork Reduction Act (PRA) and
                          the Regulatory Flexibility Act (RFA), among other statutes. 19 PRA and
Benefits and Costs of
                          RFA require federal agencies to assess various impacts and costs of their
Regulatory Alternatives   rules, but do not require the agencies to formally assess the benefits and
                          costs of alternative regulatory approaches or the reason for selecting one
                          alternative over another. In addition to these requirements, authorizing or
                          other statutes require certain federal financial regulators to consider




                          18
                            77 Fed. Reg. 21,637 (Apr. 11, 2012).
                          19
                            Pub. L. No. 104-13, 109 Stat. 163 (1995) (codified at 44 U.S.C. §§ 3501-3520); Pub. L.
                          No. 96-354, 94 Stat. 1164 (1980) (codified at 5 U.S.C. §§ 601-612). PRA requires
                          agencies to justify any collection of information from the public to minimize the paperwork
                          burden the collection imposes and to maximize the practical utility of the information
                          collected. 44 U.S.C. § 3504. RFA requires federal agencies to (1) assess the impact of
                          their regulation on small entities, including businesses, governmental jurisdictions, and
                          certain not-for-profit organizations with characteristics set forth in the act, and (2) consider
                          regulatory alternatives to lessen the regulatory burden on small entities. 5 U.S.C. § 603.




                          Page 10                                               GAO-13-101 Dodd-Frank Act Regulations
specific benefits, costs, and impacts of their rulemakings, as the following
describes.

•     CFTC, under section 15(a) of the Commodity Exchange Act, is
      required to consider the benefits and costs of its action before
      promulgating a regulation under the Commodity Exchange Act or
      issuing certain orders. Section 15(a) further specifies that the benefits
      and costs shall be evaluated in light of the following five broad areas
      of market and public concern: (1) protection of market participants and
      the public; (2) efficiency, competitiveness, and financial integrity of
      futures markets; (3) price discovery; (4) sound risk-management
      practices; and (5) other public interest considerations. 20
•     Under the Consumer Financial Protection Act (Title X of the Dodd-
      Frank Act), CFPB must consider the potential benefits and costs of its
      rules for consumers and entities that offer or provide consumer
      financial products and services. These include potential reductions in
      consumer access to products or services, the impacts on depository
      institutions with $10 billion or less in assets, as directed by 12 U.S.C.
      § 5516, and the impacts on consumers in rural areas. 21 In its initial
      RFA analysis, CFPB also must describe any projected increase in the
      cost of credit for small entities and any significant alternatives that
      would minimize such increases for small entities. 22
•     In addition to the protection of investors, SEC must consider whether
      a rule will promote efficiency, competition, and capital formation
      whenever it is engaged in rulemaking and is required to consider or
      determine whether an action is necessary or appropriate in the public
      interest. 23 SEC also must consider the impact that any rule
      promulgated under the Securities Exchange Act would have on
      competition. 24 This provision states that a rule should not be adopted
      if it would impose a burden on competition that is not necessary or
      appropriate to the act’s purposes.


20
    § 15(a), 42 Stat. 998 (1922) (codified, as amended, at 7 U.S.C. § 19(a).
21
    12 U.S.C. § 5481(6).
22
    5 U.S.C. §§ 603(d).
23
  Pub. L. No. 104-290, § 106(a), 110 Stat. 3416, 3424 (1996) (codified at 15 U.S.C. §
77b(b)). Conforming amendments to the Investment Advisers Act of 1940 were made in
section 224 of the Gramm Leach Bliley Act. Pub. L. No. 106-102, § 224, 113 Stat. 1338,
1402 (1999) (codified at 15 U.S.C. § 80b-2(c)).
24
    § 23(a)(2), 48 Stat. 881 (1934) (codified at 15 U.S.C. § 78w(a)(2)).




Page 11                                               GAO-13-101 Dodd-Frank Act Regulations
•     The Electronic Funds Transfer Act (EFTA), as amended by the Dodd-
      Frank Act, requires the Federal Reserve to prepare an analysis of the
      economic impact of a specific regulation that considers the costs and
      benefits to financial institutions, consumers, and other users of
      electronic fund transfers. 25 The analysis must address the extent to
      which additional paperwork would be required, the effect upon
      competition in the provision of electronic banking services among
      large and small financial institutions, and the availability of such
      services to different classes of consumers, particularly low-income
      consumers.

However, like PRA and RFA, none of these authorizing statutes prescribe
formal, comprehensive benefit and cost analyses that require the
identification and assessment of alternatives.

In contrast, Executive Order 12,866 (E.O. 12,866), supplemented by
Executive Order 13,563 (E.O. 13,563), requires covered federal agencies,
to the extent permitted by law and where applicable, to (1) assess
benefits and costs of available regulatory alternatives and (2) include both
quantifiable and qualitative measures of benefits and costs in their
analysis, recognizing that some benefits and costs are difficult to
quantify. 26 According to OMB, such analysis can enable an agency to
learn if the benefits of a rule are likely to justify the costs and discover
which of the possible alternatives would yield the greatest net benefit or
be the most cost-effective. In 2003, OMB issued Circular A-4 to provide
guidance to federal executive agencies on the development of regulatory




25
    15 U.S.C. § 1693b(a)(2).
26
  Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993). For significant rules
(those with an annual effect on the economy of $100 million or more, or that trigger one of
the other specified criteria), the order further requires agencies to prepare a detailed
regulatory (or economic) analysis of both the benefits and costs. More recently, E.O.
13,563 supplemented E.O. 12866, in part by incorporating its principles, structures, and
definitions. Exec. Order No. 13,563, 76 Fed. Reg. 3,821 (Jan. 18, 2011). E.O. 12,866
contains 12 principles of regulation that direct agencies to perform specific analyses to
identify the problem to be addressed, assess its significance, assess both the benefits and
costs of the intended regulation, design the regulation in the most cost-effective manner to
achieve the regulatory objective, and base decisions on the best reasonably obtained
information available.




Page 12                                            GAO-13-101 Dodd-Frank Act Regulations
analysis as required by E.O. 12,866. 27 The guidance defines good
regulatory analysis as including a statement of the need for the proposed
regulation, an assessment of alternatives, and an evaluation of the
benefits and costs of the proposed regulation and the alternatives. It also
standardizes the way benefits and costs of federal regulatory actions
should be measured and reported. Of the federal agencies included in our
review, only FSOC and Treasury are subject to E.O. 12,866. As
independent regulatory agencies, the federal financial regulators—CFPB,
CFTC, FDIC, the Federal Reserve, OCC, the National Credit Union
Administration (NCUA), and SEC—are not subject to E.O. 12,866 and
OMB’s Circular A-4. 28

Of the 66 Dodd-Frank Act rules within our scope, 54 regulations were
substantive—generally subject to public notice and comment under
APA—and required the agencies to conduct regulatory analysis. These
rules were issued individually or jointly by CFTC, FDIC, the Federal
Reserve, FSOC, NCUA, OCC, SEC, or Treasury. 29 (See app. II for a list
of the regulations within the scope of our review.) In examining the
regulatory analyses conducted for these 54 regulations, we found the
following.

•    Agencies conducted the required regulatory analyses. The
     agencies conducted regulatory analysis pursuant to PRA and RFA for
     all 54 regulations. Agencies also conducted the analyses required
     under their authorizing statutes. Specifically, CFTC and SEC
     individually or jointly issued 39 regulations and considered their
     potential impact, including their benefits and costs in light of each
     agency’s respective public interest considerations.
•    Agencies issued 19 major rules. Of the 54 regulations that were
     issued and became effective between July 21, 2011, and July 23,
     2012, the agencies identified 19 as being major rules—that is,


27
  OMB, Circular A-4: Regulatory Analysis, September 17, 2003. Circular A-4 refined
OMB’s “best practices” guidance issued in 1996 and 2000. Executive Order 13,579 (E.O.
13,579) encourages independent regulatory agencies to comply with E.O. 13563. Exec.
Order No. 13,579, 76 Fed. Reg. 41,587 (July 14, 2011).
28
  Independent regulatory agencies are those defined by 44 U.S.C. § 3502(5). This
statutory definition was revised by the Dodd-Frank Act to include OCC and other
agencies.
29
  CFPB issued three rules that came into effect during our scope period, but none of the
rules required public notice-and-comment rulemaking under APA.




Page 13                                           GAO-13-101 Dodd-Frank Act Regulations
      resulting in or likely to result in a $100 million annual impact on the
      economy. Specifically, CFTC issued 10 major rules; SEC issued 5
      major rules; CFTC and SEC jointly issued 2 major rules; the Federal
      Reserve issued 1 major rule; and Treasury issued 1 major rule. 30
•     One of the 19 major rules was subject to E.O. 12866 and its
      benefit-cost analysis requirement. Of the agencies that issued
      major rules, only Treasury is subject to E.O. 12,866, which requires a
      formal assessment of the benefits and costs of an economically
      significant rule. Thus, as required, Treasury analyzed the benefits
      and costs of its proposed major rule. 31
•     Agencies considered the benefits and/or costs in the majority of
      their rules, but did not generally quantify them. As part of their
      regulatory analyses or in response to public comments received on
      their proposed rules, the agencies frequently discussed the potential
      benefits and costs of their rules. For instance, CFTC and SEC asked
      for public comments and data on the benefits and costs in all of their
      proposed rules, and the other regulators generally asked for public
      comments on the costs and, in many cases, benefits of their proposed
      rules. For the 54 substantive Dodd-Frank Act regulations that we
      reviewed, 49 regulations included discussions of potential benefits or
      costs. The cost discussions primarily were qualitative except for the
      PRA analysis, which typically included quantitative data (such as
      hours or dollars spent to comply with paperwork-related
      requirements). Other potential costs, however, were less frequently
      quantified. In comparison, the benefit discussions largely were
      qualitative and framed in terms of the objectives of the rules.




30
  The agencies assess whether a rule is major using criteria in the Congressional Review
Act and submit their assessment for determination by OMB. As defined by the
Congressional Review Act, a major rule is a rule that OMB’s Office of Information and
Regulatory Affairs finds has resulted in or is likely to result in (1) an annual effect on the
economy of $100 million or more; (2) a major increase in costs or prices; or (3) significant
adverse effects on competition, employment, investment, productivity, or innovation. 5
U.S.C. § 804(2). This is similar, but not identical, to the definition of “significant regulatory
action” under E.O. 12866.
31
    77 Fed. Reg. 29,884 (May 21, 2012).




Page 14                                               GAO-13-101 Dodd-Frank Act Regulations
Regulators Generally                      Although independent federal financial regulators are not required to
Developed Selected Major                  follow OMB’s Circular A-4 when developing regulations, they told us that
Rules in Ways Consistent                  they try to follow this guidance in principle or spirit. As discussed in more
                                          detail below, we previously found that the policies and procedures of
with the Principles, but not              these agencies did not fully reflect OMB guidance and recommended that
Certain Key Elements, of                  they incorporate the guidance more fully in their rulemaking policies and
the OMB Guidance                          procedures. 32 To assess the extent to which the regulators follow Circular
                                          A-4, we examined four major rules (see table 2). Specifically, we
                                          examined whether the regulators (1) identified the problem to be
                                          addressed by the regulation and the significance of the problem; (2)
                                          considered alternatives reflecting the range of statutory discretion; and (3)
                                          assessed the benefits and costs of the regulation.

Table 2: Summary of Four Major Rules Reviewed

                                           Responsible
Rulemaking                                 regulator                          Rule synopsis
Real-Time Public Reporting of Swap         CFTC                               Provides standards for the method and timing of real-time public
Transaction Data                                                              reporting; swap transaction and pricing data to be publicly
                                                                              disseminated in real-time; and time delays for public
                                                                              dissemination of swap transaction and pricing data.
Debit Card Interchange Fees and Routing    Federal Reserve                    Provides standards for reasonable and proportional interchange
                                                                              transaction fees for electronic debit transactions, exemptions
                                                                              from the interchange transaction fee limitations, prohibitions on
                                                                              evasion and circumvention, prohibitions on payment card
                                                                              network exclusivity arrangements and routing restrictions for
                                                                              debit card transactions, and reporting requirements for debit
                                                                              card issuers and payment card networks.
Securities Whistleblower Incentives and    SEC                                Provides for payment of awards, subject to certain limitations
Protections                                                                   and conditions, to whistleblowers who voluntarily provide SEC
                                                                              with original information about a violation of the securities laws
                                                                              that leads to the successful enforcement of an action brought by
                                                                              SEC that results in monetary sanctions exceeding $1,000,000.
Assessment of Fees on Large Bank        Treasury                              Provides standards directing how Treasury will (a) determine
Holding Companies and Nonbank Financial                                       which companies will be subject to an assessment fee, (b)
Companies Supervised by the Federal                                           estimate the total expenses that are necessary to carry out the
Reserve Board to Cover the Expenses of                                        activities to be covered by the assessment, (c) determine the
the Financial Research Fund                                                   assessment fee for each of these companies, and (d) bill and
                                                                              collect the assessment fee from these companies.
                                          Source: GAO summary of information from the Federal Register.




                                          32
                                            See GAO-12-151.




                                          Page 15                                                         GAO-13-101 Dodd-Frank Act Regulations
                               While the regulators identified the problem to be addressed in their rule
                               proposals, CFTC, the Federal Reserve, and SEC did not present benefit-
                               cost information in ways consistent with certain key elements of OMB’s
                               Circular A-4. For example, CFTC and SEC did not evaluate the benefits
                               and costs of regulatory alternatives they considered for key provisions
                               compared to their chosen approach. Also, because of the lack of data and
                               for other reasons, the agencies generally did not quantitatively analyze
                               the benefits and, to a lesser degree, costs in their rules. Agencies’
                               approaches for calculating a baseline against which to compare benefits
                               and costs of regulatory alternatives in their analysis varied, and agency
                               staffs told us that the lack of data complicated such efforts.

Evaluation of Alternative      Two of the major rules we reviewed did not evaluate alternative
Approaches in Proposed Rules   approaches for key provisions in their rule proposals, but the final rule
                               releases did evaluate alternatives considered by the agencies. In
                               implementing the Dodd-Frank provisions, the agencies exercised
                               discretion in designing the various requirements that composed their
                               rules, such as defining key terms and determining who will be subject to
                               the regulations and how. In their rule proposals, CFTC and SEC identified
                               alternative approaches for key provisions of their rule proposals. For
                               example, CFTC identified the consolidated tape approach—which is used
                               in the U.S. securities markets to publicly report data on securities—as an
                               alternative method for distributing swap transaction data in real time.
                               SEC considered requiring potential whistleblowers to use in-house
                               complaint and reporting procedures before they make a whistleblower
                               submission to SEC. However, CFTC and SEC generally did not evaluate
                               the benefits and costs of their proposed rules’ requirements compared to
                               such alternative requirements. Instead, their rule proposals only
                               presented the proposed set of requirements composing their rules and
                               discussed the potential benefits and costs of their overall regulatory
                               approaches. As part of their proposed rules, CFTC and SEC asked the
                               public for comments on a number of questions, including about possible
                               alternatives to proposed requirements. 33 In their final rules, CFTC and
                               SEC noted that they considered alternatives provided by commenters on



                               33
                                 E.O. 12,866 requires that covered federal agencies assess the benefits and costs of
                               potentially effective and reasonably feasible alternatives to the planned regulation,
                               identified by the agencies or the public. See Exec. Order No. 12,866, Section
                               6(a)(3)(C)(iii). In addition, Circular A-4 states that covered federal agencies should
                               carefully consider all appropriate alternatives for the key attributes or provisions of the
                               rule. See Circular No. A-4, at 16.




                               Page 16                                              GAO-13-101 Dodd-Frank Act Regulations
the proposed rules and revised their rules, so as to reduce regulatory
burden or improve the effectiveness of the rules. This approach generally
is consistent with each agency’s guidance on regulatory analysis. 34
However, OMB guidance notes that good regulatory analysis is designed
to inform the public and other parts of the government of the effects of
alternative actions. Without information about the agency’s evaluation of
the benefits and costs of alternatives for key provisions, interested parties
may not have a clear understanding of the assumptions underlying the
rule’s requirements, which could hinder their ability to comment on
proposed rules.

One of the rules we reviewed identified the alternative approaches but did
not describe the reasons for choosing one alternative over another in its
rule proposal. The Federal Reserve identified several alternative
approaches for key provisions in the rule proposal for implementing the
interchange fee rule and some of their potential benefits and costs.
However, it did not determine which of the alternatives would produce
greater net benefits or be more cost-effective. Instead, the Federal
Reserve asked the public to comment on which alternatives might be
preferable to the others based on several factors, including benefits and
costs. Federal Reserve staff told us that they took this approach because
it was difficult to predict how market participants would respond to the
rule. They said that they had discussions with senior management about
alternative approaches and analyzed the costs and benefits of the
alternatives, including how alternatives could have different impacts on
different market participants, but this information was not contained in the
proposed rule. In the final rule, responding to public comments, the
Federal Reserve selected one alternative over the other alternatives and
provided reasons for the selection. Without information about the
rationale for selecting one alternative over another in the proposed rule,
interested parties may not know how to effectively gauge the magnitude
of the potential effects, which could hinder their ability to comment on the
proposed rule.




34
  CFTC’s real-time publication rule was promulgated early in the Dodd-Frank Act
implementation process, and CFTC staff stated that they have since made improvements
to their economic analyses. SEC has since revised its guidance for economic analysis to
include evaluation of the benefits and costs of alternative approaches, as discussed
below.




Page 17                                          GAO-13-101 Dodd-Frank Act Regulations
                              Only one rule that we reviewed identified and evaluated alternative
                              regulatory approaches. In its rule proposal, Treasury determined that the
                              fee assessment rule was a significant regulatory action under E.O. 12,866
                              and, thus, conducted a regulatory impact assessment. In its proposal,
                              Treasury identified, evaluated, and discussed several alternative
                              regulatory approaches. Treasury evaluated the impact of alternative
                              approaches on interested parties and selected the approach it viewed as
                              equitable and cost-effective, consistent with the OMB guidance.

Quantitative Analysis of      The regulators generally did not quantitatively analyze the benefits and, to
Benefits and Costs of Major   a lesser degree, costs of the rules we reviewed. CFTC, the Federal
Rules                         Reserve, and SEC did not quantitatively analyze the benefits of these
                              rules. CFTC and SEC monetized and quantified paperwork-related costs
                              under PRA, but did not quantify any other costs. Federal Reserve staff
                              told us that they monetized some of the direct costs of the debit card
                              interchange fee rule. Specifically, they conducted a survey to determine
                              an average debit card interchange fee in 2009 and used that data to help
                              establish the debit card interchange fee cap under the rule. However,
                              while the debit card interchange fee cap information was included in the
                              proposed rule, measures of revenue loss that could result from the rule
                              were not included. 35 In contrast to the other rules we reviewed, Treasury
                              monetized and quantified some costs of the rule beyond paperwork-
                              related costs. Specifically, Treasury provided a range of estimated
                              assessment amounts that described the approximate size of the transfer
                              from assessed companies to the government.

                              As we have reported, the difficulty of reliably estimating the costs of
                              regulations to the financial services industry and the nation has long been
                              recognized, and the benefits of regulation generally are regarded as even
                              more difficult to measure. Similarly, Circular A-4 recognizes that some
                              important benefits and costs may be inherently too difficult to quantify or
                              monetize given current data and methods and recommends a careful
                              evaluation of qualitative benefits and costs. All of the rules we reviewed
                              included qualitative descriptions of the potential benefits and costs
                              associated with the rules. The agencies also generally included
                              qualitative information on the nature, timing, likelihood, location, and
                              distribution of the benefits and costs. For instance, in discussing the


                              35
                                See http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm (accessed
                              Oct. 9, 2012) for the survey results and other releases related to the debit card
                              interchange fee rule.




                              Page 18                                       GAO-13-101 Dodd-Frank Act Regulations
                                benefits of the reporting and public dissemination requirements, CFTC
                                stated that it anticipates that the real-time reporting rule “will generate
                                several overarching, if presently unquantifiable, benefits to swaps market
                                participants and the public generally. These include: [i]mprovements in
                                market quality; price discovery; improved risk management; economies of
                                scale and greater efficiencies; and improved regulatory oversight.” 36
                                CFTC then went on to describe the ways in which these benefits might
                                accrue to market participants. However, some of the agencies did not
                                discuss the strengths and limitations of the qualitative information and did
                                not discuss key reasons why the benefits and costs could not be
                                quantified.

                                Also, the regulators did not consistently present analysis of any important
                                uncertainties connected with their regulatory decisions. For instance, the
                                Federal Reserve stated that the potential impacts of the debit card
                                interchange fee rule depended in large part on the reaction of certain
                                market actors to the rule. In contrast, we did not find a discussion of any
                                important uncertainties associated with SEC’s whistleblower rules, but
                                SEC staff told us that the inherent uncertainties in making predictions
                                about human behavior was a key reason why it was not possible to
                                engage in a quantitative analysis of the rule. However, we found that the
                                agencies generally based their analyses on the best reasonably available,
                                peer-reviewed economic information. Treasury described certain direct
                                costs associated with complying with the fee assessment rule. Treasury
                                used economic reasoning to identify some benefits or types of benefits
                                associated with the rule, particularly in considering the choice of
                                assessment methodology, which was the area of discretion left by
                                Congress to the agency.

Establishment of Baseline for   We also found the regulators’ approaches for calculating a baseline
Analysis                        against which to compare benefits and costs of regulatory approaches
                                varied. OMB’s Circular A-4 states that the baseline should be the best
                                assessment of the way the world would look absent the proposed action.
                                In cases where substantial portions of the rule may simply restate
                                statutory requirements that would be self-implementing, Circular A-4
                                provides for use of a prestatute baseline—that is, the baseline should
                                reflect the status quo before the statute was enacted. However, the
                                guidance further states that if the agency is able to determine where it



                                36
                                 77 Fed. Reg. 1182, 1234.




                                Page 19                                   GAO-13-101 Dodd-Frank Act Regulations
has discretion in implementing a statute, it can use a post-statute
baseline to evaluate the discretionary elements of the action. CFTC and
SEC both did not establish post-statute baselines and instead evaluated
the benefits and costs of the discretionary elements of their rules in terms
of statutory objectives. Specifically, CFTC evaluated each discretionary
element of the real-time reporting rule based on whether it met the
statutory objectives to reduce risk, increase transparency, and promote
market integrity. 37 Similarly, SEC evaluated each discretionary element
of the whistleblower protection rule according to four broad objectives
based on statutory goals and the nature of public comments. 38 We found
that the Federal Reserve generally took this approach in developing the
debit card interchange fee rule. In contrast, Treasury, which is subject to
E.O. 12,866, used a post-statute baseline to evaluate the discretionary
elements of the fee assessment rule. SEC staff said they would have
described the analysis somewhat differently under their new economic
analysis guidance (discussed below), which directs staff to consider the
overall economic impacts, including both those attributable to
congressional mandates and those that result from an exercise of
discretion. SEC’s guidance states that this approach often will allow for a
more complete picture of a rule’s economic effects, particularly because
there are many situations in which it is difficult to distinguish between the
mandatory and discretionary components of a rule.

Agency staffs told us developing a baseline from which to assess the
benefits and costs of what would have happened in the absence of a
regulation was complicated by the lack of reliable data to quantify the
benefits and costs. For example, CFTC staff told us that they were
challenged because little public data were available about the opaque
swaps market. Moreover, because the rule created a new regulatory
regime, CFTC did not have the data needed for the analysis. Instead,
CFTC had to rely on market participants to voluntarily provide it with
proprietary data. CFTC staff said that they did receive some proprietary
data but that they were incomplete. Similarly, for the whistleblower


37
     77 Fed. Reg. 1182, 1232, 1233.
38
  76 Fed. Reg. 34,300, 34,356. The four objectives were (i) encourage high quality
submissions and discourage frivolous submissions; (ii) encourage whistleblowers to
provide information early, rather than waiting to receive a request or inquiry from a
relevant authority; (iii) minimize unnecessary burdens on whistleblowers and establish fair,
transparent procedures; and (iv) promote the use of effective internal compliance
programs in appropriate circumstances.




Page 20                                            GAO-13-101 Dodd-Frank Act Regulations
                          protection rule, SEC staff said that they asked the public for data in their
                          draft rule but did not receive any. In the absence of data, SEC cited
                          related research in its rule release, but staff noted that they were reluctant
                          to weigh this research too heavily because the programs covered in the
                          research differed in important respects from SEC’s program. In addition,
                          Federal Reserve staff said that quantifying the effects of the debit card
                          interchange fee rule was a major challenge because of the lack of data.


Some Agencies’ Guidance   Although not subject to E.O. 12,866 and, in turn, OMB Circular A-4, most
on Regulatory Analysis    of the federal regulators told us that they try to follow Circular A-4 in
Continues to Omit Key     principle or spirit. 39 In our previous review, we found that the policies and
                          procedures of these regulators did not fully reflect OMB guidance and
Elements of OMB’s         recommended that they incorporate the guidance more fully in their
Regulatory Guidance       rulemaking policies and procedures. For example, each federal regulator
                          has issued guidance generally explaining how its staff should analyze the
                          benefits and costs of the regulatory approach selected, but unlike the
                          OMB guidance, such guidance generally does not encourage staff to
                          identify and analyze the benefits and costs of available alternative
                          approaches. Since we issued our report, OCC and SEC have revised
                          their guidance, but the other agencies have not yet done so. CFTC last
                          revised its guidance in May 2011, and in May 2012 it signed a
                          Memorandum of Understanding with OMB that allows OMB staff to
                          provide technical assistance to CFTC staff as they consider the benefits
                          and costs of proposed and final rules. 40

                          Issued in March 2012, SEC guidance on economic analysis for
                          rulemakings closely follows E.O. 12,866 and Circular A-4. 41 Specifically,
                          SEC’s guidance defines the basic elements of good regulatory economic
                          analysis in a manner that closely parallels the elements listed in Circular
                          A-4: (1) a statement of the need for the proposed action; (2) the definition
                          of a baseline against which to measure the likely economic
                          consequences of the proposed regulation; (3) the identification of
                          alternative regulatory approaches; and (4) an evaluation of the benefits


                          39
                           Treasury, as noted above, is subject to E.O. 12,866 and Circular A-4.
                          40
                            CFTC has separate guidance for proposed rules and final rules, issued in September
                          2010 and May 2011, respectively.
                          41
                            SEC’s guidance on economic analysis is available on the SEC website:
                          http://www.sec.gov/divisions/riskfin.shtml.




                          Page 21                                          GAO-13-101 Dodd-Frank Act Regulations
                      and costs—both quantitative and qualitative—of the proposed action and
                      the main alternatives. In addition, the guidance explains these elements
                      and describes the ways rulemaking teams can satisfy each of the
                      elements borrowing directly from Circular A-4. OCC guidance on
                      economic analysis defines the elements included in a full cost-benefit
                      analysis in a similar fashion and includes citations to specific sections of
                      Circular A-4 to guide staff through the application of each element.

                      For other federal financial regulators, by continuing to omit core elements
                      of OMB Circular A-4, their regulatory guidance may cause staff to
                      overlook or omit such best practices in their regulatory analysis. In turn,
                      the analyses produced may lack information that interested parties
                      (including consumers, investors, and other market participants) could use
                      to make more informed comments on proposed rules. For example, in
                      our review of four major rules, we found that most of the agencies did not
                      consistently discuss how they selected one regulatory alternative over
                      another or assess the potential benefits and costs of available
                      alternatives. Without information about the benefits and costs of
                      alternatives that agencies considered, interested parties may not know
                      which alternatives were considered and the effects of such alternatives,
                      which could hinder their ability to comment on proposed rules. More fully
                      incorporating OMB’s guidance into their rulemaking guidance, as we
                      previously recommended, could help agencies produce more robust and
                      transparent rulemakings.


                      Federal financial regulators have continued to coordinate on rulemakings
Regulators Continue   informally, but coordination may not eliminate the potential for differences
to Coordinate         in related rules. Regulators have coordinated on 19 of the 54 substantive
                      regulations that we reviewed, in some cases voluntarily coordinating their
Informally on         activities and also extending coordination internationally. According to
Rulemakings, but      agency staff, most interagency coordination during rulemaking largely
                      was informal and conducted at the staff level. Differences in rules could
Differences among     remain after interagency coordination, because the rules reflected
Related Rules Still   differences in factors such as regulatory jurisdiction or market or product
                      type. While a few regulators have made progress on developing guidance
Exist                 for interagency coordination during rulemaking, most have not.




                      Page 22                                    GAO-13-101 Dodd-Frank Act Regulations
Dodd-Frank Act and          Both the Dodd-Frank Act and the federal financial regulators whom we
Regulators Recognize the    interviewed recognize the importance of interagency coordination during
Importance of Interagency   the rulemaking process. In general, coordination during the rulemaking
                            process occurs when two or more regulators jointly engage in activities to
Coordination                reduce duplication and overlap in regulations. Effective coordination could
                            help regulators minimize or eliminate staff and industry burden,
                            administrative costs, conflicting regulations, unintended consequences,
                            and uncertainty among consumers and markets.

                            Recognizing the importance of coordination, the act imposes specific
                            interagency coordination and consultation requirements and
                            responsibilities on regulators or certain rules. For instance, section 171
                            (referred to as the Collins Amendment) requires that the appropriate
                            federal banking agencies establish a risk-based capital floor on a
                            consolidated basis. 42 In addition, while section 619 (referred to as the
                            Volcker Rule) does not require the federal banking agencies (FDIC, the
                            Federal Reserve, and OCC) to issue a joint rule together with CFTC and
                            SEC, it requires that they consult and coordinate with each other, in part
                            to better ensure that their regulations are comparable. 43 Further, the act
                            broadly requires some regulators to coordinate when promulgating rules
                            for a particular regulatory area. For example, under Title VII, SEC and
                            CFTC must coordinate and consult with each other and prudential
                            regulators before starting rulemaking or issuing an order on swaps or
                            swap-related subjects—for the express purpose of assuring regulatory
                            consistency and comparability across the rules or orders. The act also
                            includes specific requirements for CFPB. Title X requires CFPB to consult
                            with the appropriate prudential regulators or other federal agencies, both
                            before proposing a rule and during the comment process, regarding
                            consistency with prudential, market, or systemic objectives administered
                            by such agencies.

                            Federal financial regulators also have highlighted the importance of
                            coordination during the rulemaking process. For example, in testifying


                            42
                              Pub. L. No. 111-203, § 171 (codified at 12 U.S.C. § 5371). The final rule promulgated
                            under § 171 can be found at 76 Fed. Reg. 37,620 (June 28, 2011).
                            43
                              Section 619 of the Dodd-Frank Act prohibits banking entities, including insured
                            depository institutions (other than certain limited purpose trust companies), and their
                            affiliates, which benefit from federal insurance on customer deposits or access to the
                            discount window, from engaging in proprietary trading or investing in or sponsoring hedge
                            funds or private equity funds, subject to certain exceptions. 12 U.S.C. § 1851.




                            Page 23                                           GAO-13-101 Dodd-Frank Act Regulations
                            about the need to coordinate agency rulemakings, FSOC’s chairperson
                            commented on the importance of coordinating both domestically and
                            internationally to prevent risks from migrating to regulatory gaps—as they
                            did before the 2007-2009 financial crisis—and to reduce U.S. vulnerability
                            to another financial crisis. 44 At the same time, we noted in a recent report
                            that the FSOC chairperson has recognized the challenges of coordinating
                            on the Dodd-Frank Act rulemakings assigned to specific FSOC
                            members. 45 He noted that the coordination in the rulemaking process
                            represented a challenge because the Dodd-Frank Act left in place a
                            financial system with multiple, independent agencies with overlapping
                            jurisdictions and different responsibilities. However, the chairperson also
                            noted that certain agencies were working much more closely together
                            than they did before the creation of FSOC. This observation has been
                            repeated by other regulators, whose staffs have told us that interagency
                            coordination in rulemaking has increased since the passage of the Dodd-
                            Frank Act.


Regulators Coordinated as   We found documentation of coordination among the rulemaking agency
Required, and Such          and other domestic or international regulators for 19 of the 54 substantive
Coordination Involved       regulations that were issued and became effective between July 21,
                            2011, and July 23, 2012. The act required coordination in 16 of the 19
Around One-Third of Their   rulemakings. Specifically, 6 of the 19 regulations were jointly issued by
Dodd-Frank Regulations      two or more regulators and, thus, inherently required interagency
                            coordination (see table 3). The act stipulated coordination for 10 other
                            regulations. In the Federal Register rule releases, we found evidence
                            documenting the coordination required by the act as well as voluntary
                            coordination with additional regulators. For example, FDIC’s regulation on
                            “Certain Orderly Liquidation Authority Provisions” described voluntary
                            coordination with the Federal Reserve. 46 Similarly, CFTC was required to
                            coordinate with SEC on six swaps regulations it issued, but the agency
                            also coordinated with other regulators on two of those regulations.
                            Further, CFTC coordinated with foreign regulators on all six swaps
                            regulations. The act did not require coordination for the other three


                            44
                              The Annual Report of the Financial Stability Oversight Council, Before the Committee on
                            Financial Services, 112th Cong. 5 (Oct. 6, 2011) (statement of Timothy F. Geithner,
                            Secretary of the Treasury).
                            45
                             See GAO-12-886.
                            46
                             76 Fed. Reg. 41,626, 41,628 (July 15, 2011).




                            Page 24                                          GAO-13-101 Dodd-Frank Act Regulations
                                               regulations for which we found documentation of coordination, indicating
                                               that the agencies voluntarily coordinated. For the remaining 35
                                               regulations that we reviewed, which did not require interagency
                                               coordination, we did not find any documentation of coordination among
                                               the agencies. 47

Table 3: Documentation of Coordination in Releases of Dodd-Frank Regulations, July 21, 2011 through July 23, 2012

                                                Responsible        Coordination                                       Voluntary
                                                                                                                                  a
Rulemaking                                      regulator          requirement Nature of coordination                 coordination
                                                                                                                            b
Risk-Based Capital Standards: Advanced          FDIC, Federal      Yes             Jointly issued rule                Yes
Capital Adequacy Framework—Basel II;            Reserve, OCC
Establishment of a Risk-Based Capital Floor
Fair Credit Reporting Risk-Based Pricing        Federal            Yes             Jointly issued rule                N/A
Regulations                                     Reserve,
                                                Federal Trade
                                                Commission
Certain Orderly Liquidation Authority           FDIC               Yes             Act directs FDIC to consult with   Yes
Provisions under Title II of the Dodd- Frank                                       FSOC. FDIC also consulted
Wall Street Reform and Consumer                                                    with the Federal Reserve.
Protection Act
Business Affiliate Marketing and Disposal of    CFTC               Yes             Act directs CFTC to consult with   N/A
Consumer Information                                                               numerous other regulators.
Provisions Common to Registered Entities        CFTC               No              CFTC consulted with prudential     Yes
                                                                                   regulators
Debit Card Interchange Fees and Routing         Federal Reserve Yes                Act directs the Federal Reserve    N/A
                                                                                   to consult, as appropriate, with
                                                                                   numerous other regulators.
Whistleblower Incentives and Protection         CFTC               No              CFTC consulted with SEC to         Yes
                                                                                   harmonize the agencies’
                                                                                   whistleblower rules.
Swap Data Repositories: Registration            CFTC               Yes             Act directs CFTC to coordinate     N/A
Standards, Duties and Core Principles                                              with SEC and other prudential
                                                                                   regulators, and foreign
                                                                                   regulators as appropriate.




                                               47
                                                 We primarily relied on Federal Register notices to determine whether coordination took
                                               place for the rules we reviewed, as the rule releases are supposed to contain the key
                                               steps agencies took to formulate the rules. Therefore, rules that may have involved
                                               interagency coordination but did not mention coordination in the Federal Register notices
                                               are not included in this table. For example, CFTC and SEC issued similar whistleblower
                                               protection rules; however, only CFTC mentioned interagency coordination in the rule
                                               release. SEC told us that they had consulted with CFTC on this rulemaking, but did not
                                               include a discussion of consultation in their rule release because CFTC’s rule had not yet
                                               been issued. Therefore, only the CFTC rule is included in this table.




                                               Page 25                                            GAO-13-101 Dodd-Frank Act Regulations
                                                Responsible                Coordination                                                Voluntary
                                                                                                                                                   a
Rulemaking                                      regulator                  requirement Nature of coordination                          coordination
Resolution Plans Required                       FDIC, Federal              Yes                    Jointly issued rule                  N/A
                                                Reserve
Derivatives Clearing Organization General       CFTC                       Yes                    Act directs CFTC to coordinate       N/A
Provisions and Core Principles                                                                    with SEC and other prudential
                                                                                                  regulators, and foreign
                                                                                                  regulators as appropriate.
Real-Time Public Reporting of Swap              CFTC                       Yes                    Act directs CFTC to coordinate       N/A
Transaction Data                                                                                  with SEC and other prudential
                                                                                                  regulators, and foreign
                                                                                                  regulators as appropriate.
Swap Data Recordkeeping and Reporting           CFTC                       Yes                    Act directs CFTC to coordinate    Yes
Requirements                                                                                      with SEC and other prudential
                                                                                                  regulators, and foreign
                                                                                                  regulators as appropriate. CFTC
                                                                                                  also consulted with the Office of
                                                                                                  Financial Research (OFR) and
                                                                                                  the Department of the Treasury.
Reporting by Investment Advisers to Private     CFTC, SEC                  Yes                    Jointly issued rule                  N/A
Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors
on Form PF
Business Conduct Standards for Swap             CFTC                       Yes                    Act directs CFTC to coordinate  Yes
Dealers and Major Swap Participants With                                                          with SEC and other prudential
Counterparties                                                                                    regulators, and foreign
                                                                                                  regulators as appropriate. CFTC
                                                                                                  also consulted with the
                                                                                                  Department of Labor and
                                                                                                  Internal Revenue Service.
Mutual Insurance Holding Company Treated FDIC                              Yes                    Act directs FDIC to consult with     N/A
as Insurance Company                                                                              FSOC in developing this rule.
Swap Dealer and Major Swap Participant          CFTC                       Yes                    Act directs CFTC to coordinate       N/A
Recordkeeping, Reporting, and Duties                                                              with SEC and other prudential
Rules; Futures Commission Merchant and                                                            regulators, and foreign
Introducing Broker Conflicts of Interest                                                          regulators as appropriate.
Rules; and Chief Compliance Officer Rules
for Swap Dealers, Major Swap Participants,
and Futures Commission Merchants
Alternatives to the Use of External Credit      OCC                        No                     OCC consulted with FDIC              Yes
Ratings in the Regulations of the OCC
Further Definition of ‘‘Swap Dealer,’’          CFTC, SEC                  Yes                    Jointly issued rule                  N/A
‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security- Based
Swap Participant’’ and ‘‘Eligible Contract
Participant’’
Calculation of Maximum Obligation               FDIC, Treasury             Yes                    Jointly issued rule, in              N/A
Limitation                                                                                        consultation with FSOC
                                              Source: GAO analysis of the Dodd-Frank Act and the Federal Register.

                                              Note: The rules are ordered by the date that each rule became effective.




                                              Page 26                                                                GAO-13-101 Dodd-Frank Act Regulations
                                              a
                                               Some regulators coordinated with domestic and/or international regulators beyond what was
                                              required under the Dodd-Frank Act and, in some cases, where coordination was not required. For
                                              rules marked “not applicable” (N/A), the agencies did not coordinate with any agencies beyond what
                                              was required.
                                              b
                                               While section 171 of the Dodd-Frank Act did not mandate that the rule establishing a risk-based
                                              capital floor be jointly issued, it did require that the floor be issued on a consolidated basis. To
                                              address this provision of the act, the federal banking agencies decided to issue a joint rule




Review of Select Major                        Of the 19 regulations that we identified as having interagency
Rules Highlights                              coordination, we selected three regulations to review in depth and sought
Similarities and                              to cover as many regulators as possible that were required to coordinate
                                              under the Dodd-Frank Act (see table 4). We examined when, how, and
Differences in Interagency                    the extent to which federal financial regulators coordinated. We also
Coordination and the                          examined efforts undertaken by the regulators to avoid conflicts in the
Potential for Related Rules                   rulemakings.
to Differ Despite
Coordination


Table 4: Summary of Three Major Rules Reviewed

Rulemaking                                                     Description of coordination
Risk-Based Capital Standards: Advanced Capital                 The act requires the appropriate federal banking agencies (i.e., FDIC, OCC
Adequacy Framework—Basel II; Establishment of a                and the Federal Reserve) to establish minimum risk-based capital
Risk-Based Capital Floor                                       requirements on a consolidated basis for insured depository institutions,
                                                               depository institution holding companies, and nonbank financial companies
                                                               supervised by the Federal Reserve.
Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based        The act directs CFTC and SEC, in consultation with the Federal Reserve,
Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major             jointly to further define the terms ‘‘Swap Dealer,’’ ‘‘Security-Based Swap
Security- Based Swap Participant’’ and ‘‘Eligible              Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security- Based Swap
Contract Participant’’                                         Participant,’’ and ‘‘Eligible Contract Participant.’’
Real-Time Public Reporting of Swap Transaction Data            The act directs CFTC to promulgate rules providing for the public availability
                                                               of swap data in real-time to enhance price discovery. The rule introduces
                                                               definitions, processes, entities, and other items relevant to the real-time
                                                               public reporting of swap transaction data.
                                              Source: GAO analysis of information from the Dodd-Frank Act and the Federal Register.



Most Coordination for the                     The regulators held some formal interagency meetings early on in the
Rulemakings Occurred Early in                 rulemaking process; however, coordination was mostly informal and
the Process and Was Informal                  conducted through e-mail, telephone conversations, and one-on-one
                                              conversations between staff. For example, at the initiation stage of the
                                              risk-based capital rulemaking, FDIC, OCC, and the Federal Reserve held
                                              a principal-level meeting to discuss the major issues relating to the
                                              interpretation of the statutory requirement. After this meeting, staffs



                                              Page 27                                                                  GAO-13-101 Dodd-Frank Act Regulations
                                  formed an interagency working group, comprised of staff from each
                                  agency who, according to Federal Reserve staff, continually have worked
                                  together on numerous capital rules and therefore have a very close
                                  working relationship. Likewise, agency staffs said that after the initial
                                  formal meetings on the other rulemakings that we reviewed, coordination
                                  revolved around informal staff-level discussions. Coordination during the
                                  proposed rule drafting stage typically was characterized by staff-level
                                  conversations primarily through telephone calls or e-mails and some face-
                                  to-face meetings. Staffs would contact each other as issues arose to work
                                  out conflicts or differences in agency viewpoints. When issues could not
                                  be resolved at the staff level, they were escalated to senior management,
                                  but most issues were resolved and most coordination occurred at the staff
                                  level throughout the drafting of the proposed rules, according to agency
                                  staffs. For all three rulemakings reviewed, agency staffs coordinated at
                                  least weekly through the proposal stage with the frequency of
                                  coordination escalating as the proposed rule neared issuance.

                                  After receiving public comments and while preparing the final rule, agency
                                  staffs told us that they continued to coordinate with each other, but the
                                  need for and level of interagency coordination varied by rule. For
                                  instance, OCC, Federal Reserve, and FDIC staffs said that by the time
                                  they reached the stage of drafting the final risk-based capital rule,
                                  meetings were less frequent because the group already had worked out
                                  most of the details. Coordination between CFTC and SEC also decreased
                                  during this stage of the real-time reporting rulemaking. Conversely, CFTC
                                  and SEC staffs said that interagency coordination continued to be
                                  frequent while drafting the final swaps entities rule because after the
                                  proposed rule was issued some differences in underlying definitions
                                  remained, such as the definition for “highly leveraged.” The commissions
                                  used public comments to the proposed rule to help them interpret and
                                  come to consensus on the definitions. CFTC and SEC staffs met regularly
                                  in this period to refine drafts, resolve issues, and convene an industry
                                  roundtable.

Coordination with International   The extent to which agencies coordinated with international regulators
Regulators on the Three           varied in the three rulemakings that we reviewed. For example, CFTC
Rulemakings Varied                and SEC coordinated with international regulators on swap rulemakings.
                                  For the real-time reporting rule, CFTC coordinated with foreign regulators,
                                  such as the Financial Services Authority and the European Commission,
                                  which provided ideas on data reporting. On the swap entities rule, CFTC
                                  and SEC staffs said that they participated in numerous conference calls
                                  and meetings with various international regulators.



                                  Page 28                                   GAO-13-101 Dodd-Frank Act Regulations
                                 In contrast, the banking regulators did not meet with any international
                                 regulators on the risk-based capital rule. The agency staffs said that they
                                 were implementing a straightforward statutory provision that required little
                                 interpretation and little amendment to the existing rules; therefore, staffs
                                 said they did not need to seek input from international regulators as to
                                 how to implement U.S. law. Staffs said that for less narrowly scoped
                                 rules, where regulators have more discretion, they are more proactive in
                                 reaching out to international regulators. FDIC staff cited, as an example,
                                 the risk retention rule, for which they reached out to the European Union
                                 to understand their approach. 48

Regulators Worked to Resolve     Regulators who were responsible for the three rulemakings that we
Conflicts but Some Differences   reviewed said that they tried to identify potential areas of duplication or
Remained                         conflict involving the rules. For the risk-based capital rule, the banking
                                 regulators held discussions on regulatory conflict and duplication and
                                 concluded that none would be created by this rule. For the swap entity
                                 rule and the real-time reporting rule, CFTC and SEC identified potential
                                 areas of conflict, which they were able to address through coordination.
                                 For example, when developing the real-time reporting rule, CFTC and
                                 SEC initially had different approaches about what type of entity would be
                                 in charge of disseminating swap transaction data. SEC proposed that
                                 only swap data repositories would be required to disseminate real-time
                                 data, and CFTC initially proposed to require several different entities to do
                                 so. 49 When CFTC issued its final rule, it changed its approach to mirror
                                 SEC’s proposal, deciding that only swap data repositories would be
                                 required to disseminate real-time swap data. Agency staffs said that this
                                 harmonization should help to minimize the compliance cost burden
                                 placed on market participants and allow for more efficient operation of
                                 systems for the public dissemination of swap and security-based swap
                                 market data.



                                 48
                                    Risk retention rulemaking is being conducted by FDIC, OCC, the Federal Reserve, SEC,
                                 the U.S. Department of Housing and Urban Development, and the Federal Housing
                                 Finance Agency, as required by section 941 of the Dodd-Frank Act, but has not yet been
                                 finalized. Pub. L. No. 111-203, § 941, 124 Stat. 1890 (2010) (codified at 15 U.S.C. § 78o-
                                 11).
                                 49
                                   Swap data repositories are new entities created by the Dodd-Frank Act in order to
                                 provide a central facility for swap data reporting and recordkeeping. Under the act, all
                                 swaps, whether cleared or uncleared, are required to be reported to registered swap data
                                 repositories. Pub. L. No. 111-203, § 727, 124 Stat. 1696 (2010) (codified at 7 U.S.C.
                                 2(a)(13)(G)).




                                 Page 29                                           GAO-13-101 Dodd-Frank Act Regulations
In some areas, differences in rules remained after interagency
coordination, due to differences in regulatory jurisdiction. In particular,
while CFTC and SEC reached consensus on the text for the jointly issued
swap entities rule, the regulators outlined different approaches in certain
parts of the rule as a result of their regulatory jurisdiction over different
product sets. For example, some of the language of the definitions for
“major swap participant” and “major security-based swap participant”
differs because the agencies each have jurisdiction over different
products and some of these products have different histories, markets,
and market sizes, according to CFTC and SEC staff. Also, in the real-time
reporting rule, CFTC, in its final rule, defined specific data fields to be
reported, while SEC, in its proposed rule, outlined broad data categories
and required swap data repositories to develop specific reporting
protocols. Agency staffs stated that while the approaches were different,
they were not inconsistent. The key factors the regulators considered
were whether the rules achieved the policy objectives and whether the
regulated entities could comply with both agencies’ rules given their
differences. It was determined that swap data repositories could develop
data reporting protocols that would comply with both agencies’ rules.

To document and communicate preliminary staff views on certain issues
to senior management, regulators use term sheets throughout the
rulemaking process. Although term sheets are primarily internal
documents, they were shared with staff at other regulators to
communicate views and elicit comments. These term sheets serve as a
formal mechanism to help initiate discussions of differences in the
regulators’ positions. Term sheets generally are drafted internally by staff
at each agency, shared between or among agency staff, and shared with
agency principals or senior management. CFTC and SEC created term
sheets for both the swap entities rule and the real-time reporting rule.
Conversely, for the risk-based capital rule, the banking regulators did not
create a term sheet because, according to OCC staff, the statutory
requirements for this rule were explicit and therefore a term sheet was not
required. However, staff noted that this was different from a standard
rulemaking where they typically would draft and share a term sheet.




Page 30                                    GAO-13-101 Dodd-Frank Act Regulations
Most Agencies Continue to   While a few agencies have made progress on developing policies for
Lack Formal Policies and    interagency coordination for their rulemaking, most have not. In
Procedures to Guide         November 2011, we reported that most of the federal financial agencies
                            lacked formal policies or procedures to guide their interagency
Interagency Coordination    coordination in the rulemaking process. 50 Federal financial regulators
                            informally coordinated on some of the final rules that we reviewed, but
                            most of the agencies lacked written policies and procedures to guide their
                            interagency coordination. Specifically, seven of nine agencies did not
                            have written policies and procedures to facilitate coordination on
                            rulemaking. 51 The written policies and procedures that existed were
                            limited in their scope or applicability. The remaining two regulators, FDIC
                            and OCC, had rulemaking policies that include guidance on developing
                            interagency rules. As we previously reported, documented policies can
                            help ensure that adequate coordination takes place, help to improve
                            interagency relationships, and prevent the duplication of efforts at a time
                            when resources are extremely limited.

                            Since our November 2011 report, we found that OCC and CFPB have
                            further developed guidance on interagency coordination, but the other
                            agencies have not. CFPB has developed guidance that outlines the
                            agency’s approach to interagency consultation in rulemaking. The
                            document generally describes two rounds of consultation when drafting
                            the proposed rule and two rounds when addressing comments and
                            drafting the final rule. The guidance highlights the points in a rulemaking
                            at which staff should reach out to other regulators, the purpose of
                            consultation, and the length of time to allow for responses from
                            regulators. Similarly, OCC updated its rulemaking policy to include more
                            detail on what steps should be taken in coordination and who should be
                            involved.

                            In our November 2011 report, we recommended that FSOC work with the
                            federal financial regulators to establish formal coordination policies for
                            rulemaking that clarify issues, such as when coordination should occur,


                            50
                             See GAO-12-151.
                            51
                              The seven agencies that did not have written policies and procedures were CFPB,
                            CFTC, the Federal Reserve, FSOC, NCUA, OFR, and SEC. However, in our November
                            2011 report we noted that SEC and CFTC have a memorandum of understanding that
                            establishes a permanent regulatory liaison between them and contains procedures to
                            facilitate the discussion and coordination of regulatory action on issues of common
                            regulatory interest.




                            Page 31                                         GAO-13-101 Dodd-Frank Act Regulations
                         the process that will be used to solicit and address comments, and what
                         role FSOC should play in facilitating coordination. While FSOC has not
                         implemented this recommendation, staff told us that they have developed
                         coordination processes around specific areas of the Dodd-Frank Act. For
                         example, FSOC staff said that they have coordinated closely with FDIC
                         on all rulemakings under Title II. In addition, FSOC developed written
                         guidance for coordination on rulemakings for enhanced prudential
                         standards for bank holding companies with $50 billion or more in total
                         consolidated assets and nonbank financial companies designated by
                         FSOC for Federal Reserve supervision under sections 165 and 166 of the
                         act. However, in a September 2012 report, we noted that a number of
                         industry representatives questioned why FSOC could not play a greater
                         role in coordinating member agencies’ rulemaking efforts. 52 In that report,
                         we further noted that the FSOC chairperson, in consultation with the other
                         FSOC members, is responsible for regular consultation with the financial
                         regulatory entities and other appropriate organizations of foreign
                         governments or international organizations. We also reiterated our
                         previous recommendation by stating that FSOC should establish formal
                         collaboration and coordination policies for rulemaking.


                         The full impact of the Dodd-Frank Act remains uncertain. Although federal
Impacts of the Dodd-     agencies continue to implement the act through rulemakings, much work
Frank Act Have Not       remains. For example, according to one estimate, regulators have
                         finalized less than half of the total rules that may be needed to implement
Yet Fully Materialized   the act. 53 Furthermore, sufficient time has not elapsed to measure the
and Remain Uncertain     impact of those rules that are final and effective. As we previously noted,
                         even when the act’s reforms are fully implemented, it will take time for the
                         financial services industry to comply with the array of new regulations. 54
                         The evolving nature of implementation makes isolating the effects of the
                         Dodd-Frank Act on the U.S. financial marketplace difficult. This task is
                         made more difficult by the many factors that can affect the financial
                         marketplace, including factors that could have an even greater impact
                         than the act.



                         52
                          See GAO-12-886.
                         53
                            For example, the law firm Davis Polk & Wardwell LLP estimates that federal agencies
                         will need to issue 398 rules to implement the Dodd-Frank Act but found the agencies had
                         finalized 127 of the rules, or nearly 32 percent, as of October 1, 2012.
                         54
                          See GAO-12-151.




                         Page 32                                          GAO-13-101 Dodd-Frank Act Regulations
                            Recognizing these limitations and difficulties, we developed a
                            multipronged approach to analyze current data and trends that might be
                            indicative of some of the Dodd-Frank Act’s initial impacts, as institutions
                            react to issued and expected rules. First, the act contains provisions that
                            serve to enhance the resilience of certain bank and nonbank financial
                            companies and reduce the potential for financial distress in any one of
                            these companies to affect the financial system and economy. Specifically,
                            the Dodd-Frank Act requires the Federal Reserve to impose enhanced
                            prudential standards and oversight on bank holding companies with $50
                            billion or more in total consolidated assets and nonbank financial
                            companies designated by FSOC. 55 We developed indicators to monitor
                            changes in certain SIFI characteristics. Although the indicators may be
                            suggestive of the act’s impact, our indicators do not identify causal links
                            between their changes and the act. Further, many other factors can affect
                            SIFIs and, thus, the indicators. As new data become available, we expect
                            to update and, as warranted, revise our indicators and create additional
                            ones to cover other provisions. Second, we used difference-in-difference
                            analysis to infer the act’s impact on the provision of credit by and the
                            safety and soundness of bank SIFIs. The analysis is subject to limitations,
                            in part because factors other than the act could be affecting these
                            entities. Third, we analyzed the impact of several major rules that were
                            issued pursuant to the Dodd-Frank Act and have been final for around a
                            year or more.


Indicators Suggest          The 2007-2009 financial crisis demonstrated that some financial
Increased SIFI Resiliency   institutions, including some nonbank financial companies (e.g., AIG), had
and Provide Baselines for   grown so large, interconnected, complex, and leveraged, that their failure
                            could threaten the stability of the U.S. financial system and the global
Future Analysis             economy. Financial institutions, markets, and infrastructure that make up
                            the U.S. financial system provide services to the U.S. and global
                            economies, such as helping to allocate funds, allowing households and
                            businesses to manage their risks, and facilitating financial transactions


                            55
                               The Dodd-Frank Act does not use the term “systemically important financial institution”
                            (SIFI). This term is commonly used by academics and other experts to refer to bank
                            holding companies with $50 billion or more in total consolidated assets and nonbank
                            financial companies designated by FSOC for Federal Reserve supervision and enhanced
                            prudential standards under the Dodd-Frank Act. For purposes of this report, we refer to
                            these bank and nonbank financial companies as bank systemically important financial
                            institutions (bank SIFI) and nonbank systemically important financial institutions (nonbank
                            SIFI), respectively, or collectively as SIFIs.




                            Page 33                                            GAO-13-101 Dodd-Frank Act Regulations
that support economic activity. The sudden collapses and near-collapses
of major financial institutions, including major nonbank financial
institutions, were among the most destabilizing events of the 2007-2009
financial crisis. In addition, large, complex financial institutions that are
perceived to be “too big to fail” can increase uncertainty in periods of
market turmoil and reinforce destabilizing reactions within the financial
system.

According to its legislative history, the Dodd-Frank Act contains
provisions intended to reduce the risk of failure of a large, complex
financial institution and the damage that such a failure could do to the
economy. 56 Such provisions include (1) establishing FSOC to identify and
respond to emerging threats to the stability of the U.S. financial system;
(2) authorizing FSOC to designate a nonbank financial company for
Federal Reserve supervision if FSOC determines it could pose a threat to
the financial stability of the United States based on the company’s size,
leverage, interconnectedness, or other factors; and (3) directing the
Federal Reserve to impose enhanced prudential standards and oversight
on bank holding companies with $50 billion or more in total consolidated
assets (referred to as bank SIFIs in this report) and nonbank financial
companies designated by FSOC (referred to as nonbank SIFIs in this
report). The Dodd-Frank Act also is intended to reduce market
expectations of future federal rescues of large, interconnected, and
complex firms using taxpayer dollars. 57 Under the act, bank holding
companies with $50 billion or more in total consolidated assets and
nonbank financial companies designated by FSOC for Federal Reserve
supervision are required to develop plans for their rapid and orderly
resolution. Additionally, FDIC is given new orderly liquidation authority to
act as a receiver of a troubled financial firm whose failure could threaten
financial stability so as to protect the U.S. financial system and the wider
economy.

Some Dodd-Frank Act provisions may result in adjustments to SIFIs’ size,
interconnectedness, complexity, leverage, or liquidity over time. 58 We
developed indicators to monitor changes in some of these SIFI


56
 S. REP. No. 111-176 (2010).
57
 S. REP. No. 111-176 (2010).
58
  See appendix III for the rulemaking status and summary of SIFI-related provisions
included in this section.




Page 34                                           GAO-13-101 Dodd-Frank Act Regulations
characteristics. 59 The size and complexity indicators reflect the potential
for a single company’s financial distress to affect the financial system and
economy. The leverage and liquidity indicators reflect a SIFI’s resilience
to shocks or its vulnerability to financial distress. FSOC has not yet
designated any nonbank financial firms for Federal Reserve
supervision. 60 As a result, we focus our analysis on U.S. bank SIFIs. 61
Our indicators have limitations. For example, the indicators do not identify
causal links between changes in SIFI characteristics and the act. Rather,
the indicators track or begin to track changes in the size, complexity,
leverage, and liquidity of SIFIs over the period since the Dodd-Frank Act
was passed to examine whether the changes are consistent with the act.
However, other factors—including the economic downturn, international
banking standards agreed upon by the Basel Committee on Banking
Supervision (Basel Committee), European debt crisis, and monetary
policy actions—also affect bank holding companies and, thus, the
indicators. 62 These factors may have a greater effect than the Dodd-Frank
Act on SIFIs. In addition, some rules implementing SIFI-related provisions
have not yet been proposed or finalized. Thus, trends in our indicators


59
  We developed indicators for size, complexity, leverage, and liquidity of SIFIs. However,
we did not develop indicators for interconnectedness in this report, but plan to do so in
future reports as we and others learn more about potential ways that financial instability
can spread across the financial system.
60
  As of October 31, 2012, FSOC had issued a final rule and interpretative guidance on the
methodology it is using to designate nonbank financial companies for enhanced regulation
and supervision by the Federal Reserve. According to Treasury officials, a number of firms
are actively being considered pursuant to the designation process as described in those
documents. Officials noted that at meetings on September 28 and October 18, 2012,
FSOC voted to approve the advancement of initial subsets of nonbank financial
companies to Stage 3, the final stage of evaluation before a proposed determination of
designation is considered.
61
  Our analyses of bank SIFIs include U.S. bank holding companies with total consolidated
assets of $50 billion or more and foreign bank organizations’ U.S.-based bank holding
company subsidiaries that on their own have total consolidated assets of $50 billion or
more. The Federal Reserve’s proposed regulations on enhanced prudential standards do
not apply to foreign banking organizations, and the Federal Reserve expects to issue a
separate proposal that would apply the enhanced standards of sections 165 and 166 of
the act to foreign banking organizations. 77 Fed. Reg. 594 (Jan. 5, 2012).
62
  The Basel Committee has agreed on a new set of risk-based capital, leverage, liquidity,
and other requirements for banking institutions (Basel III requirements). Additionally, the
Financial Stability Board and the Basel Committee have agreed on new capital and other
requirements applicable to designated globally systemically important banks (G-SIB
requirements). U.S. banking regulators are in the process of implementing these
requirements.




Page 35                                            GAO-13-101 Dodd-Frank Act Regulations
                                               include the effects of these rules only insofar as SIFIs have changed their
                                               behavior in response to issued rules and in anticipation of expected rules.
                                               In this sense, our indicators provide a baseline against which to compare
                                               future trends.

                                               Table 5 summarizes the changes in our bank SIFI indicators. The size
                                               indicators do not provide a clear trend between the third quarter of 2010
                                               and the second quarter of 2012. Additionally, we have only one data point
                                               in the complexity indicator, but our data suggest that the largest bank
                                               SIFIs generally were more complex organizationally than other bank
                                               SIFIs. Lastly, the indicators suggest that bank SIFIs, on average, have
                                               become less leveraged since the third quarter of 2010, and their liquidity
                                               also appears to have improved. Trends in our leverage and liquidity
                                               indicators appear to be consistent with an improvement in SIFIs’
                                               resilience to shocks.

Table 5: Summary of Trends in Indicators for U.S. Bank SIFIs, from Third Quarter 2010 through Second Quarter 2012

                                                                                                          Consistent with decreased,
                                                                                                          no change, or increased
                                                                                                          spillover effects or
Characteristic                                      Indicator (italicized) and description of trend       resilience?
Size – Size captures the amount of financial        The number of large bank SIFIs remained the           Consistent with no change in
services or financial intermediation that a bank    same, and the number of other bank SIFIs              spillover effects
                                                                       a
holding company provides.                           decreased slightly.
                                                    Median assets for large bank SIFIs and median
                                                                                                   a, b
                                                    assets for other bank SIFIs increased slightly.
                                                    The median market share (measured in assets)
                                                                                                b
                                                    for bank SIFIs remained relatively constant.
                                                         c
Interconnectedness – Interconnectedness             None                                                  N/A
captures direct or indirect linkages between
financial institutions that may transmit distress
from one institution to another.
Complexity – Operational complexity may reflect The number of legal entities of large bank SIFIs     N/A
an institution’s diverse lines of business and  was large relative to other bank SIFIs as of
                                                               a
locations in which the institution operates.    October 2012.
                                                Almost all large bank SIFIs have a high number
                                                or percentage of legal entities located outside of
                                                the United States, and the number of countries
                                                where the foreign entities are located is also high.




                                               Page 36                                            GAO-13-101 Dodd-Frank Act Regulations
                                                                                                                                 Consistent with decreased,
                                                                                                                                 no change, or increased
                                                                                                                                 spillover effects or
Characteristic                                          Indicator (italicized) and description of trend                          resilience?
Leverage – Leverage can be defined broadly as           The median tangible common equity as a percent Consistent with increased
                                                                                                          b
the ratio between some measure of risk exposure         of total assets for bank SIFIs increased slightly.  resilience
and capital that can be used to absorb                  The median tangible common equity as a percent
unexpected losses from the exposure.                    of risk-weighted assets for bank SIFIs increased
Traditionally, it has referred to the use of debt,      slightly.
                                                                 b
instead of equity, to fund an asset and been
measured by the ratio of total assets to equity on
the balance sheet.
Liquidity – Liquidity represents the ability of an      The median short-term liabilities as a percent of                        Consistent with increased
                                                                                                   b
institution to fund its assets and meet its             total liabilities for bank SIFIs decreased.                              resilience
obligations as they become due.                         The median liquid assets as a percent of short-
                                                                                                  b
                                                        term liabilities for bank SIFIs increased.
                                               Sources: GAO analysis of SNL Financial data and Federal Reserve Board data from the National Information Center.
                                               a
                                                 Large bank SIFIs are those with $500 billion or more in assets. Other bank SIFIs are those with
                                               assets between $50 billion and $500 billion.
                                               b
                                                 To calculate the median measures, we calculated the relevant indicator measure for each bank
                                               holding company, and then reported the median for large bank SIFIs, the median for other bank
                                               SIFIs, the median for non-SIFI banks, or the median for the entire group.
                                               c
                                                 We plan to develop indicators for interconnectedness in future reports.


SIFI Size                                      The three size indicators generally did not show a clear change in the
                                               size of U.S. bank SIFIs between 2010 and 2012. In 2009, the Federal
                                               Reserve chairman noted that regulators have strong incentives in a crisis
                                               to prevent the failure of a large, highly interconnected financial firm
                                               because of the risks such a failure would pose to the financial system and
                                               the broader economy. 63 He also noted that market participants’ belief that
                                               a particular firm is considered too big to fail has many undesirable effects,
                                               such as reducing market discipline and providing an artificial incentive for
                                               firms to grow to be perceived as too big to fail. The Dodd-Frank Act
                                               contains provisions that may discourage or inhibit large financial
                                               institutions (including those we refer to as SIFIs) from increasing their
                                               size. For example, the act’s $50 billion-asset threshold for determining
                                               which bank holding companies are subject to enhanced regulation by the
                                               Federal Reserve may discourage certain institutions from increasing or
                                               encourage others to reduce their assets to avoid such regulation. Also,
                                               some provisions and related rules allow or require regulators to limit, in
                                               certain circumstances, the size of a SIFI by imposing restrictions on its
                                               growth, activities, or operations. Although implicit or explicit limits on the


                                               63
                                                 Ben S. Bernanke, “Financial Reform to Address Systemic Risk,” (Speech to the Council
                                               on Foreign Relations, Washington, D.C., Mar. 10, 2009).




                                               Page 37                                                                 GAO-13-101 Dodd-Frank Act Regulations
size of a financial institution may prevent the institution from growing so
large that it is perceived by the market as too big to fail, such limits also
may prevent the institution from achieving economies of scale and
benefiting from diversification. 64

We developed three indicators of size. The first indicator tracks the
number of bank SIFIs. The second indicator measures a SIFI’s size
based on the total assets on its balance sheet. The third indicator
measures the extent to which industry assets are concentrated among
the individual SIFIs, reflecting a SIFI’s size relative to the size of the
industry. A limitation of these indicators is that they do not include an
institution’s off-balance sheet activities and thus may understate the
amount of financial services or intermediation an institution provides.
Furthermore, asset size alone is not an accurate determinant of systemic
risk, as an institution’s systemic risk significance also depends on other
factors, such as its complexity and interconnectedness.

As shown in figure 1, seven U.S. bank SIFIs had more than $500 billion in
total consolidated assets (referred to as large bank SIFIs in this report) in
the third quarter of 2010 and in the second quarter of 2012. 65 The large
bank SIFIs were considerably larger than the other bank SIFIs.




64
  See, for example, Chairperson of the FSOC, Study of the Effects of Size and Complexity
of Financial Institutions on Capital Market Efficiency and Economic Growth Pursuant to
Section 123 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Washington, D.C.: January 2011).
65
  In figure 1, bank SIFIs are bank holding companies with $50 billion or more in total
consolidated assets as of the second quarter of 2012. Figure 1 shows assets for these
bank SIFIs as of the third quarter of 2010 and the second quarter of 2012.




Page 38                                           GAO-13-101 Dodd-Frank Act Regulations
Figure 1: Total Assets of U.S. Bank SIFIs, as of the Third Quarter of 2010 and Second Quarter of 2012




                                          Note: Bank SIFIs are U.S. bank holding companies with $50 billion or more in total consolidated
                                          assets. Bank SIFIs are ranked by assets as of the second quarter of 2012, with 1 being the bank SIFI
                                          with the most assets and 34 being the bank SIFI with the least assets. The figure shows assets for
                                          these bank SIFIs as of the third quarter of 2010 and the second quarter of 2012 adjusted for inflation
                                          and measured in billions of constant 2012 Q2 dollars.




                                          Page 39                                                  GAO-13-101 Dodd-Frank Act Regulations
                                        The three indicators show that the number and size of U.S. bank SIFIs
                                        have remained largely the same over the past 2 years and that several
                                        SIFIs dominate the market.

                                        •     Table 6 shows that the total number of large U.S. bank SIFIs has
                                              remained at 7 and the total number of other bank SIFIs decreased
                                              from 29 to 27 between 2010 and the second quarter of 2012. Over the
                                              same period, the median assets for large bank SIFIs and other bank
                                              SIFIs increased slightly.

Table 6: Number and Median Size of U.S. Bank Holding Companies and U.S. Bank SIFIs, at the End of Calendar Year Unless
Otherwise Noted (Assets in Billions of 2012 Q2 Dollars)

                                                                                              2010                  2011         2012 Q2
Total bank holding companies            Number                                                1,006                1,014             1,028
                                        Median assets                                          $1.0                  $0.9             $0.9
Total SIFIs                             Number                                                   36                    34               34
                                        Median assets                                       $155.7                $177.3           $162.6
Large SIFIs                             Number                                                     7                    7                 7
                                        Median assets                                     $1,294.3              $1,325.5         $1,336.2
Other SIFIs                             Number                                                   29                    27               27
                                        Median assets                                       $114.2                $128.2           $117.5
Non-SIFIs                               Number                                                  970                   980              994
                                        Median assets                                          $0.9                  $0.9             $0.9
                                        Source: GAO analysis of SNL Financial data.

                                        Note: Median assets are adjusted for inflation and are measured in billions of constant 2012 Q2
                                        dollars. We define large bank SIFIs are those with assets of $500 billion or more. Other bank SIFIs
                                        are those with assets between $50 billion and $500 billion. Non-SIFI bank holding companies are
                                        those with assets less than $50 billion but greater than $500 million.

                                        •     Figure 2 shows that the median market share for large bank SIFIs
                                              was about 7.7 percent of the industry’s total assets at the end of the
                                              second quarter of 2012, roughly the same market share as in the third
                                              quarter of 2010. The median market share for other bank SIFIs
                                              hovered between 0.7 percent and 0.8 percent of the industry’s total
                                              assets during that time frame.




                                        Page 40                                                  GAO-13-101 Dodd-Frank Act Regulations
Figure 2: Median Market Share for U.S. Bank Holding Companies by Size, from First Quarter of 2006 through Second Quarter
of 2012




                                        Note: To calculate the median market shares, we calculated the market share for each bank holding
                                        company, and then reported the median market share for large bank SIFIs, the median for other bank
                                        SIFIs, and the median for non-SIFI banks.


Complexity of SIFIs                     Our complexity measure indicates that large U.S. bank SIFIs are likely
                                        relatively more complex than other U.S. bank SIFIs. Interconnectedness
                                        and complexity of operations or organizational structure are related
                                        concepts. Interconnectedness refers to linkages among financial
                                        companies that may transmit distress from one company to another.
                                        Operational complexity, which reflects a company’s diverse lines of
                                        business and locations of operation, may make interconnected firms
                                        harder to resolve in case they fail. According to FSOC, in the years
                                        preceding the crisis, the structure of many financial institutions had
                                        become complex and interconnections among financial institutions were
                                        poorly understood. The belief that highly interconnected and complex
                                        companies were more likely to receive government support during a
                                        financial crisis promoted moral hazard problems for such institutions. 66


                                        66
                                         FSOC, 2011 Annual Report (Washington D.C.: July, 2011), and FSOC, 2012 Annual
                                        Report, (Washington, D.C.: July, 2012).




                                        Page 41                                                GAO-13-101 Dodd-Frank Act Regulations
Some Dodd-Frank Act provisions may result in increased transparency
regarding the interconnectedness and complexity of SIFIs or in reductions
in their interconnections and complexity. For example, Title II provides
FDIC with new authority to resolve nonviable financial firms that pose a
significant threat to U.S. financial stability. Moreover, section 165 of the
act requires bank holding companies with $50 billion or more in total
consolidated assets and nonbank financial companies designated by
FSOC for Federal Reserve supervision to submit to regulators periodic
resolution plans that describe a company's strategy for rapid and orderly
resolution in the event of material stress or failure. 67 FSOC has
recommended that firms use the development of the plans as an
opportunity to reduce organizational complexity, and some regulators and
experts have noted that the development of the resolution plans may lead
some SIFIs to simplify their operations. 68

Our indicators of complexity are the number of legal entities of bank
SIFIs, the percentage of foreign legal entities of large SIFIs, and the
number of countries where they are located. An institution’s operational
complexity may reflect an institution’s diverse lines of business and
locations in which the institution operates, which are reflected partly
through its various legal structures. Consequently, a SIFI with a large
number of legal entities—particularly foreign ones operating in different
countries under different regulatory regimes—may be more difficult to
resolve than a SIFI with fewer legal entities in fewer countries. One
limitation of our indicator is that it does not provide information on the
relative complexity of SIFIs resulting directly from their various lines of
business. Additionally, changes in the operational complexity of a SIFI
may be reflected in our indicators only insofar as they result in a change
in the number of legal entities.




67
  Pub. L. No. 111-203, § 165 (codified at 12 U.S.C. § 5365). The Federal Reserve and
FDIC’s final rule requiring resolution plans can be found at 76 Fed. Reg. 67,323 (Nov. 1,
2011). Additionally, FDIC issued a related final rule requiring resolution plans from insured
depository institutions with $50 billion or more in total assets. While this rule does not
implement a Dodd-Frank provision, FDIC intends to use these plans to evaluate potential
loss severity at these institutions and enable the agency to perform its resolution functions
most efficiently. 77 Fed. Reg. 3075 (Jan. 23, 2012).
68
  If the regulators find a SIFI’s resolution plan to be deficient, they may place restrictions
on the growth, activities, or operations of the SIFI and ultimately require the SIFI to divest
certain assets or operations to facilitate an orderly resolution.




Page 42                                              GAO-13-101 Dodd-Frank Act Regulations
The complexity indicators show that large U.S. bank SIFIs have a
relatively large number of legal entities compared with other U.S. bank
SIFIs and that they operate in various countries, suggesting that they may
be more complex.

•   Figure 3 shows that 6 of 7 large bank SIFIs had more than 2,300 legal
    entities, with two of them having almost 7,000 and 11,000. The
    median number of legal entities for large SIFIs was 4,160, while the
    median for the remaining 27 bank SIFIs was 109. Within this group,
    the maximum number of legal entities for a bank holding company
    was 787, but 21 of the 27 bank holding companies had less than 200
    legal entities.




Page 43                                  GAO-13-101 Dodd-Frank Act Regulations
Figure 3: Total Legal Entities of U.S. Bank SIFIs, as of October 23, 2012




                                           Note: Bank SIFIs are ranked by assets as of the second quarter of 2012, with 1 being the bank SIFI
                                           with the most assets and 34 being the bank SIFI with the least assets.

                                           •    Table 7 shows that almost all large U.S. bank SIFIs have a high
                                                number or percentage of legal entities located outside of the United
                                                States and that these legal entities operate in numerous different


                                           Page 44                                                 GAO-13-101 Dodd-Frank Act Regulations
                                                countries. For example, bank SIFI 3, 5, and 7 all have thousands of
                                                foreign legal entities operating in 81, 60, and 55 different countries,
                                                respectively.

Table 7: Foreign Legal Entities of Large U.S. Bank SIFIs, as of October 22, 2012

                                  Total number                                  Number and percent                               Number of countries where
Bank SIFI ranking               of legal entities                            of foreign legal entities                           foreign entities are located
Bank SIFI 1                                4,144                                                  777 (19%)                                               51
Bank SIFI 2                                2,559                                                  656 (26%)                                               47
Bank SIFI 3                                2,308                                               1,239 (54%)                                                81
Bank SIFI 4                                4,666                                                   227 (5%)                                               27
Bank SIFI 5                              10,974                                                5,697 (52%)                                                60
Bank SIFI 6                                    232                                                188 (81%)                                               37
Bank SIFI 7                                7,039                                               3,927 (56%)                                                55
                                          Source: GAO analysis of National Information Center data maintained by the Federal Reserve.

                                          Note: Large bank SIFIs are those with assets of $500 billion or more. Bank SIFIs are ranked by
                                          assets as of the second quarter of 2012, with 1 being the bank SIFI with the most assets.


                                          Unlike size, leverage, or liquidity measures, interconnectedness
                                          measures are a relatively new concept, and academics are developing
                                          ways to capture the various types of interconnectedness that may lead to
                                          financial instability. 69 For this report, we did not develop indicators for
                                          interconnectedness but expect to do so in the future. The Financial
                                          Stability Board (FSB), with the help of the Basel Committee, has
                                          designated eight U.S bank holding companies, including the largest
                                          seven bank SIFIs, as globally systemically important banks (G-SIB),
                                          largely based on its assessment of the companies’ interconnectedness




                                          69
                                           Treasury’s Office of Financial Research (OFR) is required to develop and maintain
                                          metrics and reporting systems for risks to financial stability. 12 U.S.C. § 5344(c)(1)(A).
                                          OFR has begun to catalogue and analyze these measures. See Office of Financial
                                          Research, 2012 Annual Report (Washington, D.C.: July 2012).




                                          Page 45                                                                  GAO-13-101 Dodd-Frank Act Regulations
                and complexity. 70 The Basel Committee’s G-SIB designation process
                uses a variety of quantitative indicators to rate each global bank holding
                company on its size, interconnectedness, global cross-jurisdictional
                activity, complexity, and availability of substitutes or financial institution
                infrastructures for the services produced. As we work to develop
                interconnectedness indicators, we will monitor the status of the G-SIB
                designation process. 71

SIFI Leverage   Our leverage indicators show that U.S. bank SIFIs have decreased their
                leverage between 2010 and the second quarter of 2012, which may
                suggest that the average U.S. bank SIFI, all else equal, has become
                more resilient to shocks since 2010. Leverage generally refers to the use
                of debt, instead of equity, to fund an asset, but can be defined more
                broadly as the ratio between some measure of risk exposure and capital
                that can be used to absorb unexpected losses from the exposure.
                According to federal regulators, the recent financial crisis exposed
                significant weaknesses in the regulatory capital requirements for large
                banking companies. Specifically, the amount and quality of capital held by
                many large, complex banking companies during the crisis proved
                inadequate to cover the companies’ risks.

                To address weaknesses in capital requirements, federal banking
                regulators are implementing reforms under the Dodd-Frank Act and the
                Basel Committee that require better capitalization; that is, less leverage




                70
                   G-SIBs are banks considered by the Financial Stability Board (FSB) to be of such size,
                market importance, and global interconnectedness that their distress or failure would
                cause significant dislocation in the global financial system and adverse economic
                consequences across a range of countries. FSB was established in April 2009 to
                coordinate at the international level the work of national financial authorities and
                international standard setting bodies and to develop and promote the implementation of
                effective regulatory, supervisory and other financial sector policies in the interest of
                financial stability. In 2010, FSB proposed a policy framework for addressing the systemic
                and moral hazard risks associated with global SIFIs, which includes requirements for
                resolution planning and additional loss absorption (i.e., capital surcharges) for global
                SIFIs.
                71
                  In November 2011, FSB identified 29 G-SIBs and indicated it would update this list
                annually each November. FSB updated this list on November 1, 2012. The updated list
                contains 28 G-SIBs; the same eight U.S. bank SIFIs were designated as G-SIBs in 2011
                and 2012. Additionally, on November 1, 2012, FSB allocated each G-SIB into a bucket
                corresponding to its different levels of capital surcharge. FSB has not yet identified any
                nonbank G-SIFIs.




                Page 46                                            GAO-13-101 Dodd-Frank Act Regulations
and higher quality capital. 72 These reforms may cause SIFIs to reduce
their leverage. 73 For example, as part of its proposed enhanced prudential
standards for bank holding companies with $50 billion or more in total
consolidated assets and nonbank financial companies designated by
FSOC, the Federal Reserve would require all of these companies to
submit annual capital plans, conduct stress tests, and hold sufficient
capital to better ensure that the firms can survive during periods of
stress. 74 In addition, the Federal Reserve plans to propose a risk-based
capital surcharge on at least some SIFIs that is based on the capital
surcharge for G-SIBs. 75

Although there are many ways to measure leverage, we use two
measures: (1) tangible common equity as a percent of total assets, and
(2) tangible common equity as a percent of risk-weighted assets. 76 The
two indicators differ, in part because total risk-weighted assets reflect
some of an institution’s off-balance sheet activity but total assets do not.
We focus on tangible common equity, because it most closely
approximates the amount of capital available to absorb losses in asset
values in the short term. A limitation of both indicators is that they may not
fully reflect an institution’s exposure to risk. Total assets do not reflect an
institution’s risk exposure from off-balance sheet activities and generally



72
  As mentioned earlier, the Basel Committee has agreed on a new set of risk-based
capital, leverage, liquidity, and other requirements for banking institutions (Basel III
requirements). Additionally, the Financial Stability Board and the Basel Committee have
agreed on new capital and other requirements applicable to designated globally
systemically important banks (G-SIB requirements). U.S. banking regulators are in the
process of implementing these requirements.
73
  For example, some of the proposed Basel III reforms are expected to impose tighter or,
in some cases, new capital and leverage requirements on U.S. banking institutions.
74
  77 Fed. Reg. 594 (Jan. 5, 2012). The proposed regulations require all SIFIs to comply
with any regulations adopted by the Federal Reserve relating to capital plans and stress
tests. The proposal would apply existing capital plan requirements for large bank holding
companies to nonbank SIFIs. Final regulations adopted by the Federal Reserve require
banks with more than $50 billion in total assets to develop and submit annual capital
plans. 12 C.F.R. § 225.8.
75
 77 Fed. Reg. 594 (Jan. 5, 2012). Also see, Basel Committee on Banking Supervision,
Global Systemically Important Banks: Assessment Methodology and the Additional Loss
Absorbency Requirement (Basel, Switzerland, November 2011).
76
  Tangible common equity subtracts intangible assets, goodwill, and preferred stock
equity from a company’s total equity. Risk-weighted assets are on- and off-balance sheet
assets adjusted for certain characteristics that may be associated with risk.




Page 47                                           GAO-13-101 Dodd-Frank Act Regulations
                                        treat all assets as equally risky. The calculation of risk-weighted assets is
                                        designed to reflect differences in risk, but the weights assigned to the
                                        assets may not fully reflect the risk exposure associated with those
                                        assets, for example, because assets in broad categories of loans all
                                        receive the same risk weight.

                                        Both indicators show that U.S. bank SIFIs are less leveraged:

                                        •   Figure 4 shows that SIFIs’ median tangible common equity as a
                                            percent of total assets has increased from the third quarter of 2010 to
                                            the second quarter of 2012, continuing an upward trend since the
                                            beginning of 2009.

Figure 4: Median Tangible Common Equity as a Percent of Total Assets for U.S. Bank Holding Companies by Size, from First
Quarter of 2006 through Second Quarter of 2012




                                        Note: To calculate median tangible common equity as a percent of assets, we calculated this
                                        percentage for each bank holding company, and then reported the median for large bank SIFIs, the
                                        median for other bank SIFIs, and the median for non-SIFI banks.

                                        •   Figure 5 shows that SIFIs’ median tangible common equity as a
                                            percent of risk-weighted assets, which include off-balance sheet
                                            activity, has also increased from the third quarter of 2010 to the
                                            second quarter of 2012, continuing an upward trend since the middle
                                            of 2009.



                                        Page 48                                                GAO-13-101 Dodd-Frank Act Regulations
Figure 5: Median Tangible Common Equity as a Percent of Risk-Weighted Assets for U.S. Bank Holding Companies by Size,
from First Quarter of 2006 through Second Quarter of 2012




                                       Note: To calculate median tangible common equity as a percent of risk-weighted assets, we
                                       calculated this percentage for each bank holding company, and then reported the median for large
                                       bank SIFIs, the median for other bank SIFIs, and the median for non-SIFI banks.


SIFI Liquidity                         Our indicators suggest that U.S. bank SIFIs have improved their liquidity,
                                       which may indicate that they, on average, have become more resilient to
                                       shocks since 2010. Liquidity represents the ability of a financial institution
                                       to fund its assets and meet its obligations as they become due. Liquidity
                                       risk is the risk of not being able to obtain funds at a reasonable price
                                       within a reasonable time period to meet obligations as they become due.
                                       According to Federal Reserve staff, the 2007-2009 financial crisis
                                       illustrated that under strained market conditions, sources of liquidity can
                                       quickly disappear, and firms may be unable to meet their obligations,
                                       potentially leading to insolvency. As with capital and leverage
                                       requirements, the Dodd-Frank Act and Basel III contain reforms that
                                       address liquidity risk and may result in improvements in the liquidity of




                                       Page 49                                                GAO-13-101 Dodd-Frank Act Regulations
SIFIs. 77 For example, as part of the enhanced prudential standards for
bank holding companies with $50 billion or more in total consolidated
assets and nonbank financial companies designated by FSOC for Federal
Reserve supervision, the Federal Reserve has proposed imposing
liquidity risk management standards that require company-run liquidity
stress tests and a contingency funding plan. 78 The proposed regulations
also require a liquidity buffer to meet projected cash outflows. In addition,
the Federal Reserve plans to propose liquidity requirements on at least
some SIFIs based on Basel III’s liquidity requirements, as implemented in
the United States. 79

We developed two indicators to analyze changes in SIFI liquidity: (1)
short-term liabilities as a percent of total liabilities and (2) liquid assets as
a percent of short-term liabilities. 80 Short-term liabilities are balance sheet
obligations due within 1 year; an institution’s short-term liabilities as a


77
  As mentioned earlier, the Basel Committee has agreed on a new set of risk-based
capital, leverage, liquidity, and other requirements for banking institutions (Basel III
requirements). Additionally, the Financial Stability Board and the Basel Committee have
agreed on new capital and other requirements applicable to designated globally
systemically important banks (G-SIB requirements). U.S. banking regulators are in the
process of implementing these requirements.
78
  77 Fed. Reg. 594 (Jan. 5, 2012). Liquidity risk management standards would, among
other things, require a SIFI to project cash flow needs over various time horizons, stress
test the projections at least monthly, and maintain a contingency funding plan that
identifies potential sources of liquidity strain and alternative sources of funding. The size of
the required liquidity buffer is based on cash flow projections and liquidity stress testing
and would require a SIFI to continuously maintain a liquidity buffer sufficient to meet
projected net cash outflows for 30 days over a range of liquidity stress scenarios.
79
  77 Fed. Reg. 594 (Jan. 5, 2012). The Basel III liquidity requirements include the liquidity
coverage ratio and the net stable funding ratio. The liquidity coverage ratio would impose
a liquidity buffer to meet expected 30-day net cash outflows under various stress
scenarios. The net stable funding ratio would establish a floor for stable funding over a 1
year horizon to ensure that long-term assets are funded with at least a minimum amount
of stable liabilities. See Basel Committee on Banking Supervision, Basel III: International
Framework for Liquidity Risk Measurement, Standards, and Monitoring (Basel,
Switzerland, December 2010).
80
  We measure short-term liabilities as the sum of federal funds purchased and repurchase
agreements, trading liabilities (less derivatives with negative fair value), other borrowed
funds, deposits held in foreign offices, and large time deposits held in domestic offices,
where large time deposits are defined as time deposits greater than $100,000 prior to
March 2010 and as time deposits greater than $250,000 in and after March 2010. We
measure liquid assets as the sum of cash and balances due from depository institutions,
securities (less pledged securities), federal funds sold and reverse repurchases, and
trading assets.




Page 50                                              GAO-13-101 Dodd-Frank Act Regulations
percent of total liabilities are a measure of its need for liquidity. Liquid
assets can easily be sold without affecting their price and, thus, can be
easily converted to cash to cover debts that come due. Accordingly, liquid
assets as a percent of an institution’s short-term liabilities are a measure
of access to liquidity. For example, if this percentage is under 100
percent, the institution does not have sufficient access to liquidity and is
unlikely to have enough liquid assets to cover its short-term debt. A
limitation of both of these indicators is that they do not include off-balance
sheet liabilities, such as callable derivatives or potential derivatives-
related obligations. The second indicator also does not include off-
balance sheet liquid assets, such as short-term income from derivative
contracts. 81

Both liquidity indicators suggest that U.S. bank SIFIs have improved their
liquidity since the third quarter of 2010. The figures also show that large
bank SIFIs held relatively more short-term liabilities but also relatively
more liquid assets to cover such liabilities than other bank SIFIs.

•    Figure 6 shows that median short-term liabilities as a percent of total
     liabilities declined from the third quarter of 2010 through the second
     quarter of 2012 for both large and other SIFIs.




81
  Because these limitations affect both the numerator and the denominator of our
indicators, we cannot determine whether the exclusion of off-balance sheet items results
in an under- or an overstatement of an institution’s liquidity need and access.




Page 51                                           GAO-13-101 Dodd-Frank Act Regulations
Figure 6: Median Short-Term Liabilities as a Percent of Total Liabilities for U.S. Bank Holding Companies by Size, from First
Quarter of 2006 through Second Quarter of 2012




                                          Note: To calculate median short-term liabilities as a percent of total liabilities, we calculated this
                                          percentage for each bank holding company, and then reported the median for large bank SIFIs, the
                                          median for other bank SIFIs, and the median for non-SIFI banks.

                                          •    Figure 7 shows that median short-term (or liquid) assets as a percent
                                               of short-term liabilities increased for both large and other SIFIs during
                                               the same period.




                                          Page 52                                                   GAO-13-101 Dodd-Frank Act Regulations
Figure 7: Median Liquid Assets as a Percent of Short-term Liabilities for U.S. Bank Holding Companies by Size, from First
Quarter of 2006 through Second Quarter of 2012




                                         Note: To calculate median liquid assets as a percent of short-term liabilities, we calculated this
                                         percentage for each bank holding company, and then reported the median for large bank SIFIs, the
                                         median for other bank SIFIs, and the median for non-SIFI banks.



New Requirements for                     According to our regression analysis, the Dodd-Frank Act has been
Bank SIFIs Initially Appear              associated with minimal increases in the cost of credit provided by U.S.
to Have Affected Minimally               bank SIFIs and an increase in the safety and soundness of the SIFIs. 82
                                         As we have noted, the Dodd-Frank Act requires the Federal Reserve to
the Cost of SIFI-Provided                impose a variety of regulatory reforms on SIFIs, including enhanced risk-
Credit and Enhanced                      based capital, leverage, and liquidity requirements. These reforms may
SIFIs’ Safety and                        affect not only the safety and soundness of bank SIFIs but also the cost
Soundness                                and availability of credit provided by bank SIFIs. Although capital and
                                         leverage requirements may help reduce the probability of a firm failing



                                         82
                                           See appendix IV for more information on our econometric analysis.




                                         Page 53                                                 GAO-13-101 Dodd-Frank Act Regulations
and promote financial stability, they could cause firms to raise lending
rates and also limit firms’ ability to provide credit, especially during a
crisis. Similarly, while stricter liquidity requirements may help reduce the
probability of a firm failing and promote financial stability, companies
could respond to these requirements by increasing lending spreads to
offset lower yields on assets or longer maturities on liabilities. To the
extent that they increase the cost and reduce the availability of credit,
these reforms may lead to reduced output and economic growth. 83

As mentioned earlier, the Dodd-Frank Act subjects some bank holding
companies to enhanced oversight and regulation but not other bank
holding companies. Specifically, the act requires the Federal Reserve to
impose a number of enhanced prudential standards on bank holding
companies with total consolidated assets of $50 billion or more. These
prudential standards must include enhanced risk-based capital and
leverage requirements, enhanced liquidity requirements, enhanced risk-
management and risk committee requirements, single-counterparty credit
limits, stress tests, and a debt-to-equity limit for bank holding companies
that FSOC has determined pose a grave threat to the stability of the
financial system if the imposition of such a limit is necessary to mitigate
the risk. 84 The Federal Reserve published proposed rules to implement
these requirements on January 5, 2012. 85 Under the proposed rules,
bank holding companies with $50 billion or more in total consolidated
assets would be subject to the enhanced prudential standards beginning
on the first day of the fifth quarter following the effective date of a final
rule. On the other hand, bank holding companies with less than $50
billion in total consolidated assets are not subject to the Board’s
enhanced prudential standards. As a result, we can compare funding
costs, capital adequacy, asset quality, earnings, and liquidity for bank
SIFIs and non-SIFI bank holding companies before and after the
implementation of the enhanced prudential requirements. All else being


83
  See, for example, Basel Committee on Banking Supervision, An Assessment of the
Long Term Economic Impact of Stronger Capital and Liquidity Requirements (Basel,
Switzerland, August 2010), and Basel Committee on Banking Supervision and Financial
Stability Board, Assessing the Macroeconomic Impact of the Transition to Stronger Capital
and Liquidity Requirements (Basel, Switzerland, August 2010). In a forthcoming report,
we broadly discuss potential benefits and costs of the Dodd-Frank Act, including
provisions related to stricter capital and leverage requirements.
84
 For more information on these and other provisions affecting SIFIs see appendix III.
85
 77 Fed. Reg. 594 (Jan. 5, 2012).




Page 54                                          GAO-13-101 Dodd-Frank Act Regulations
equal, the difference in the comparative differences is the inferred effect
of the Dodd-Frank Act on bank SIFIs. While many of the SIFI-related
rulemakings have yet to be implemented, our estimates are suggestive of
the initial effects of the Dodd-Frank Act on bank SIFIs and provide a
baseline against which to compare future results. 86

Our estimates suggest that the Dodd-Frank Act is associated with an
increase in U.S. bank SIFIs’ funding costs in the second quarter of 2012,
but it is not associated with either an increase or decrease in other
quarters (table 8). From the third quarter of 2010 to the second quarter of
2012, bank SIFIs’ funding cost ranged from about 0.02 percentage points
lower to about 0.05 percentage points higher than it otherwise would have
been since the Dodd-Frank Act was enacted. However, the estimates are
not individually statistically significant for quarters other than the second
quarter of 2012. These estimates suggest that the act’s new requirements
for SIFIs have had little effect on U.S. bank SIFIs’ funding costs, at least
until recently. To the extent that the cost of credit provided by bank SIFIs
is a function of their funding costs, the new requirements for SIFIs are
likely to have had little effect on the cost of credit to date.




86
  Bank SIFIs are currently required to comply with some of the enhanced prudential
standards proposed on January 5, 2012 by the Federal Reserve. For example, the
January 5, 2012 proposal would have nonbank financial companies designated by FSOC
for Federal Reserve supervision be subject to the Federal Reserve’s capital plan rule,
which became effective for bank SIFIs on December 30, 2011. 76 Fed. Reg. 74,631 (Dec.
1, 2011). Additionally, on November 1, 2011, the Federal Reserve and FDIC finalized a
rule implementing section 165(d) of the act which requires resolution plans from bank
holding companies with $50 billion or more in total assets and nonbank financial
companies designated by FSOC for Federal Reserve supervision. 76 Fed. Reg. 67,323
(Nov. 1, 2011). Bank SIFIs with $250 billion or more in total nonbank assets were required
to submit these plans on July 1, 2012. See appendix III for more information on the status
of the enhanced prudential standards required under the Dodd-Frank Act.




Page 55                                           GAO-13-101 Dodd-Frank Act Regulations
Table 8: Estimated Changes in U.S. Bank SIFIs’ Funding Cost and Measures of Safety and Soundness Associated with the
Dodd-Frank Act, from Third Quarter 2010 through Second Quarter 2012

                                                                                          Range of statistically
                                                                                          significant estimated                  Quarters estimated
                                                                                          changes (percentage                    changes are statistically
Variable                          Measured as                                             points)                                significant
Cost of credit indicator
Funding cost                      Interest expense as a percent of                        0.05                                   2012 Q2
                                  interest-bearing liabilities
Safety and soundness indicators
Capital adequacy                  Tangible common equity as a percent of 1.16 to 1.66                                            2010 Q3-2012 Q2
                                  total assets
                                  Tangible common equity as a percent of 1.70 to 2.24                                            2010 Q3-2012 Q2
                                  risk-weighted assets
Asset quality                     Performing assets as a percent of total                 1.04 to 1.32                           2010 Q3-2012 Q2
                                  assets
Earnings                          Earnings as a percent of total assets                   0.10 to 0.24                           2010 Q3-2011 Q3
Liquidity                         Liquid assets as a percent of volatile                  No statistically significant           None
                                  liabilities                                             estimated changes
                                  Stable liabilities as a percent of total                2.82 to 5.67                           2010 Q3-2012 Q2
                                  liabilities
                                            Source: GAO analysis of data from the Federal Reserve and SNL Financial.

                                            Notes: We analyzed data for bank holding companies from the first quarter of 2006 through the
                                            second quarter of 2012. We estimated the effects of the new SIFI requirements on bank SIFIs by
                                            regressing the variables listed in the table on indicators for each bank holding company, indicators for
                                            each quarter, indicators for whether a bank holding company is a SIFI for each quarter from the third
                                            in 2010 through the second in 2012, and other variables controlling for size, foreign exposure,
                                            securitization income, other nontraditional income, and participation in the Troubled Asset Relief
                                            Program. Estimated changes are the coefficients on the indicators for whether a bank holding
                                            company is a SIFI in each quarter from the third in 2010 through the second in 2012. We used t-tests
                                            to assess whether the coefficient on the SIFI indicator for a specific quarter was significant at the 5
                                            percent level. For more information on our methodology, see appendix IV.


                                            Table 8 also shows that the Dodd-Frank Act is associated with
                                            improvements in most measures of U.S. bank SIFIs’ safety and
                                            soundness. Bank SIFIs appear to be holding more capital than they
                                            otherwise would have held in every quarter since the Dodd-Frank Act was
                                            enacted. The quality of assets on the balance sheets of bank SIFIs also
                                            seems to have improved since the Dodd-Frank Act was enacted. The act
                                            is associated with higher earnings for bank SIFIs in the first four quarters
                                            after the act’s enactment. It is also associated with improved liquidity as
                                            measured by the extent to which a bank holding company is using stable
                                            sources of funding. The only measure that has not clearly improved since
                                            the act’s enactment was liquidity as measured by the capacity of a bank
                                            holding company’s liquid assets to cover its volatile liabilities. Thus, the



                                            Page 56                                                                    GAO-13-101 Dodd-Frank Act Regulations
                              Dodd-Frank Act appears to be broadly associated with improvements in
                              most indicators of safety and soundness for U.S. bank SIFIs.

                              Our approach allows us to partially differentiate changes in funding costs,
                              capital adequacy, asset quality, earnings, and liquidity associated with the
                              Dodd-Frank Act from changes due to other factors. However, several
                              factors make isolating and measuring the impact of the Dodd-Frank Act’s
                              new requirements for SIFIs challenging. The effects of the act cannot be
                              differentiated from the effects of simultaneous changes in economic
                              conditions, such as the pace of the recovery from the recent recession, or
                              regulations, such as those stemming from Basel III, or other changes,
                              such as in credit ratings that differentially may affect bank SIFIs and other
                              bank holding companies. In addition, many of the new requirements for
                              SIFIs have yet to be implemented. For example, the Federal Reserve
                              plans to impose a capital surcharge and liquidity ratios on at least some
                              SIFIs, but the exact form and scope of these requirements are not yet
                              known. 87 Nevertheless, our estimates are suggestive of the initial effects
                              of the Dodd-Frank Act on bank SIFIs and provide a baseline against
                              which to compare future trends.


Analysis of Select Major      We analyzed the impact of four major rules that were issued separately
Rules Identifies Some         by the Federal Reserve and SEC pursuant to the Dodd-Frank Act and
                              have been final for around a year or more. 88 In contrast to the Dodd-Frank
Initial Impacts, but the
                              Act’s SIFI-related provisions and rules, these major rules implement
Markets Have Not Yet          provisions that serve specific investor or consumer protection purposes.
Fully Adjusted to the Rules   These impact analyses are limited in scope and preliminary in nature, in
                              part, because of the limited time the rules have been effective and limited
                              data available on their impact. In addition, as discussed below, financial
                              and other firms subject to the rules and other market participants still are
                              reacting to the rules.

                              We reviewed the following four major rules: (1) the Federal Reserve’s
                              Regulation II (Debit Card Interchange Fees and Routing), (2) SEC’s
                              Issuer Review of Assets in Offerings of Asset-Backed Securities rule, (3)
                              SEC’s Disclosure for Asset-Backed Securities Required by Section 943 of


                              87
                               77 Fed. Reg. 594 (Jan. 5, 2012).
                              88
                                We analyzed four rules that were final as of July 21, 2011. See appendix I for more
                              details on our rule selection.




                              Page 57                                           GAO-13-101 Dodd-Frank Act Regulations
                               the Dodd-Frank Wall Street Reform and Consumer Protection Act rule,
                               and (4) SEC’s Shareholder Approval of Executive Compensation and
                               Golden Parachute Compensation rules. We selected these rules
                               because they were major rules and some data were available about their
                               impact. 89 Appendix V includes a more complete discussion of our impact
                               analysis on the Federal Reserve’s Regulation II.

The Federal Reserve’s          Section 1075 of the Dodd-Frank Act amends the Electronic Fund Transfer
Regulation II (Debit           Act (EFTA) by adding a new section 920 on interchange transaction fees
Interchange Fees and Routing   and rules for payment card transactions. As required by EFTA section
Rule)                          920, the Federal Reserve’s Regulation II establishes standards for
                               assessing whether debit card interchange fees received by issuers are
                               reasonable and proportional to the costs incurred by issuers for electronic
                               debit transactions. The rule sets a cap on the maximum permissible
                               interchange fee that an issuer may receive for an electronic debit
                               transaction at $0.21 per transaction, plus 5 basis points multiplied by the
                               transaction’s value. 90 An issuer bank that complies with Regulation II’s
                               fraud-prevention standards may receive no more than an additional 1
                               cent per transaction. 91 The fee cap became effective on October 1, 2011.
                               However, as required by EFTA section 920, the rule exempts from the fee
                               cap issuers that have, together with their affiliates, less than $10 billion in
                               assets, and transactions made using debit cards issued pursuant to
                               government-administered payment programs or certain reloadable
                               prepaid cards.




                               89
                                  As defined by the Congressional Review Act, a major rule is a rule that the Administrator
                               of the Office of Information and Regulatory Affairs within OMB finds has resulted in or is
                               likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major
                               increase in costs or prices; or (3) significant adverse effects on competition, employment,
                               investment, productivity, or innovation. 5 U.S.C. § 804(2).
                               90
                                    76 Fed. Reg. 43,394 (Jul. 20, 2011).
                               91
                                 77 Fed. Reg. 46,258 (Aug. 3. 2012). EFTA Section 920 permits the Federal Reserve to
                               allow for an adjustment to an interchange transaction fee that is reasonably necessary to
                               make allowance for costs incurred by the issuer in preventing fraud in relation to electronic
                               debit transactions, provided the issuer complies with standards established by the Federal
                               Reserve relating to fraud prevention.




                               Page 58                                             GAO-13-101 Dodd-Frank Act Regulations
Regulation II’s fee cap generally has reduced debit card interchange
fees. 92 However, debit card issuers, payment card networks, and
merchants are continuing to react to the rule; thus, the rule’s impact has
not yet been fully realized. Large banks that issue debit cards initially
have experienced a decline in their debit interchange fees as a result of
the rule, but small banks generally have not. 93 Data published by the
Federal Reserve show that 15 of 16 card networks provided a lower
interchange fee, on average, to issuers subject to the fee cap (covered
issuers) after the rule took effect. 94 Specifically, the data show that the
average interchange fee received by covered issuers declined 52
percent, from $0.50 in the first three quarters of 2011 to $0.24 in the
fourth quarter. During the same period, the interchange fee as a
percentage of the average transaction value for covered issuers declined
from 1.29 percent to 0.60 percent. Our regression analysis also suggests
that the fee cap is associated with reduced interchange fee income for
covered banks. 95 Our estimates suggest that interchange fees collected
by covered banks, as a percent of their assets, were about 0.007 to 0.008
percentage points lower than they otherwise would have been in the
absence of the fee cap. For a bank with assets of $50 billion, this
amounts to $3.5 million to $4 million in reduced interchange fee income
per quarter. 96

The reduction in debit interchange fees following the adoption of
Regulation II likely has resulted or will result in savings for merchants.
According to the Federal Reserve and industry experts, the merchant


92
  The parties involved in an electronic debit card transaction are (1) the customer, or debit
cardholder, (2) the bank that issued the debit card to the customer (issuer bank); (3) the
merchant; (4) the merchant’s bank (called the acquirer bank), and (5) the payment card
network that processes the transaction between the merchant acquirer bank and the
issuer bank. In a debit transaction, the merchant receives the amount of the purchase
minus a fee that it must pay to its acquirer bank. This fee includes the debit interchange
fee that the acquirer bank pays to the issuer.
93
 See GAO-12-881 for a discussion of the rule’s impact on small issuers.
94
  The Federal Reserve published data on interchange fees for 16 card networks from
January 1, 2011 to December 31, 2011. According to Federal Reserve staff, totals
published include data from 2 additional networks.
95
 See appendix VI for a more detailed discussion of our regression analysis.
96
  Our regression analysis suggests that covered banks have recovered some of their lost
interchange fee revenue, such as through increased revenue from service charges on
deposit accounts. See appendix VI for more details on our regression analysis.




Page 59                                             GAO-13-101 Dodd-Frank Act Regulations
acquirer market is competitive. Thus, the decrease in interchange fees
likely has translated or will translate into lower merchant acquirer fees. 97
However, merchants that have a high volume of small value transactions
may be worse off after the adoption of the rule, because their debit card
interchange fees might have increased due to the fee cap. 98

In addition to the fee cap, Regulation II prohibits issuers and card
networks from restricting the number of networks over which electronic
debit transactions may be processed to less than two unaffiliated
networks. 99 This prohibition became effective on April 1, 2012. The rule
further prohibits issuers and networks from inhibiting a merchant from
directing the routing of an electronic debit transaction over any network
allowed by the issuer. 100 This prohibition became effective October 1,
2011.

Regulation II’s prohibitions may have a limited impact on increasing
competition and, in turn, lowering interchange fees, because issuers
largely control which networks may process their debit card transactions.
Merchants likely continue to have only one network routing option for




97
  Competition in the supply of acquirer services is expected to cause acquirer banks to
adjust the fees they charge to merchants and pass on any savings to avoid losing
merchant business.
98
  Interchange fees generally combine an ad-valorem component, which depends on the
amount of the transaction, and a fixed-fee component. Before Regulation II was
implemented, fees more widely varied based on, among other things, the type of
merchant. In some cases, the interchange fee for small-ticket transactions, or transactions
that are generally under $15, were below the fee cap before Regulation II became
effective. Since then, payment card networks have generally set their interchange fees at
the level of the cap for covered issuers, so interchange fees for small-ticket transactions
using cards issued by covered issuers have likely increased.
99
  EFTA section 920 also requires the Federal Reserve to prescribe rules that prohibit
issuers and payment card networks from restricting the number of networks on which an
electronic debit transaction may be processed to one such network or two or more
networks operated by affiliated persons.
100
   EFTA section 920 also requires the Federal Reserve to prescribe rules prohibiting
issuers and networks from inhibiting the ability of any person that accepts debit cards from
directing the routing of electronic debit transactions over any network that may process
such transactions.




Page 60                                            GAO-13-101 Dodd-Frank Act Regulations
transactions completed by signature. 101 Additionally, issuers can comply
by having an unaffiliated signature network and personal identification
number (PIN) network, which means that there may only be one network
routing choice once the customer decides to use her signature or her PIN.
Therefore, even though Regulation II provides merchants with the
authority to choose the network over which to route debit card
transactions, merchants may not have a choice about which network to
route a debit card transaction. Going forward, issuers may be able to act
strategically to limit competition over debit card interchange fees through
their control over which networks may process their debit card
transactions.

In response to Regulation II, VISA is undertaking strategies intended to
attract merchant routing. VISA recently imposed a new monthly fixed
acquirer fee that merchants must pay to accept VISA debit and credit
cards. VISA also plans to reduce merchants’ variable fees so that
merchants’ total fees associated with VISA transactions likely would be
lower after the new fee structure’s implementation. 102 In addition,
according to VISA representatives, VISA’s signature network also is able
to process PIN transactions, in essence automatically offering an
additional PIN routing choice to merchants for cards that carry VISA
signature. 103 For example, in the past, a debit card that carried the VISA



101
   Consumers authenticate and complete electronic debit card transactions by entering a
personal identification number (PIN) or their signature. In its rule proposal, the Federal
Reserve considered requiring issuers to allow at least two unaffiliated signature networks
and two unaffiliated PIN networks to process their debit card transactions. However,
according to the final rule, networks and issuers stated it would be too costly to
reconfigure cards and merchant equipment to enable the processing of two signature
networks associated with one card. 75 Fed. Reg. 81,722 (Dec. 28, 2010).
102
   VISA representatives have explained publicly that this new fee structure is a strategic
response to Regulation II. They said that VISA’s PIN network, Interlink, lost significant
transaction volume due to Regulation II, and the new fee structure is one of the company’s
strategies to regain some of the lost market share. VISA representatives stated that on
March 13, 2012, the Department of Justice Antitrust Division issued a civil investigative
demand requesting additional information about the company’s debit strategies, including
this fixed acquirer fee.
103
   Representatives from VISA said this move was a strategic response to their loss of
market share associated with Regulation II. VISA representatives stated that on March 13,
2012, the Department of Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit strategies, including
information about the VISA signature debit network’s ability to authenticate PIN
transactions.




Page 61                                            GAO-13-101 Dodd-Frank Act Regulations
                              signature and two other PIN networks usually would process a PIN
                              transaction through one of the PIN networks. Now, the VISA check card
                              signature network can continue to be the only option for routing signature
                              debit transactions on that card but also become a third option for routing
                              PIN debit transactions. The extent to which such strategies may lower
                              debit card interchange fees is unknown.

SEC’s Rules on Asset-Backed   Section 945 of the Dodd-Frank Act requires SEC to issue a rule relating
Securities Disclosures and    to the registration statement required to be filed by issuers of asset-
Reviews                       backed securities (ABS). To implement section 945, SEC adopted a new
                              rule under the Securities Act of 1933 and amending Regulation AB. 104
                              The rule requires an issuer of registered offerings of ABS to perform a
                              review of the assets underlying the securities that “must be designed and
                              effected to provide reasonable assurance that the disclosure in the
                              prospectus regarding the assets is accurate in all material respects.” 105
                              The rule requires disclosure regarding: “[t]he nature of the review of
                              assets conducted by an ABS issuer;” “[t]he findings and conclusions of a
                              review of assets conducted by an ABS issuer or third party;” “[d]isclosure
                              regarding assets in the pool that do not meet the underwriting standards;”
                              and “[d]isclosure regarding which entity determined that the assets should
                              be included in the pool . . . .” 106 This rule became effective on March 28,
                              2011.

                              Section 943 of the Dodd-Frank Act requires SEC to prescribe regulations
                              on the use of representations and warranties in the market for ABS. The
                              new rules promulgated under section 943 require ABS securitizers to



                              104
                                 76 Fed. Reg. 4231 (Jan. 25, 2011). The initial proposed rule also included
                              “consideration of rules to implement Section 15E(s)(4)(A) of the Exchange Act, which
                              requires issuers or underwriters of any asset-backed security to make publicly available
                              the findings and conclusions of any third-party due diligence report the issuer or
                              underwriter obtains.” 75 Fed. Reg. 64,182 (Oct. 19, 2010). The final adoption has been
                              delayed based on the suggestion by several commentators that the new Exchange Act
                              Section 15E(s)(4) should be read as a whole.
                              105
                                 76 Fed. Reg. 4231 (Jan. 25, 2011). According to SEC staff, most ABS that comprise
                              residential mortgage-backed securities are issued or guaranteed by a government
                              sponsored agency, such as the Federal National Mortgage Association (Fannie Mae), the
                              Federal Home Loan Mortgage Corporation (Freddie Mac), or the Government National
                              Mortgage Association (Ginnie Mae), and are exempt from registration under the Securities
                              Act and reporting under the Exchange act.
                              106
                                76 Fed. Reg. 4231 (Jan. 25, 2011).




                              Page 62                                            GAO-13-101 Dodd-Frank Act Regulations
disclose fulfilled and unfulfilled repurchase requests. 107 Specifically, ABS
securitizers must disclose demand, repurchase, and replacement history
for an initial 3-year look back period ending December 31, 2011, and
going forward on a quarterly basis. Further, the rules conform disclosure
requirements for prospectuses and ongoing reports for ABS sold in
registered transactions. The rule also requires nationally recognized
statistical rating organizations to disclose in any report accompanying a
credit rating for an ABS transaction, the representations, warranties, and
enforcement mechanisms available to investors and how they differ from
the representations, warranties and enforcement mechanisms in
issuances of similar securities. This rule became effective on March 28,
2011.

The two SEC ABS rules may increase issuer securitization costs but also
investor demand by improving investor confidence in the market for ABS.
The effect of the rules on the revitalization of the ABS markets is unclear.
Isolating and estimating the effects of the SEC rules on the ABS market is
challenging, but data on ABS issuances are available. However, factors
other than the SEC rules likely impact ABS issuance trends much more
significantly. For example, the ABS markets compete with other capital
markets for investor dollars, so yields or potential returns to investments
in competing markets may be an important determinant of ABS activity.
Additionally, ABS are backed by residential mortgage, commercial
mortgage, equipment, student, auto, credit card, and other loans, which
means that the health of those underlying markets also may determine
the extent to which financial institutions may be able and willing to
securitize the loans and investors may be willing to invest in ABS.

Since 2010, ABS issuances of agency mortgage-related assets declined
slightly but appear to be stabilizing, while total issuances for other types
of ABS continue to be at historically low levels. Figure 8 shows that ABS



107
   76 Fed. Reg. 4489 (Jan. 26, 2011). According to SEC, ABS sponsors or originators
typically make representations and warranties about the quality of the underlying assets in
an ABS. If the assets do not comply with the representations or warranties, a sponsor
usually must repurchase or replace the assets. For example, in the case of residential
mortgage backed securities, one representation and warranty is that each of the loans has
complied with applicable federal, state, and local laws, including truth-in-lending,
consumer credit protection, laws that protect against predatory and abusive practices, and
disclosure laws. Another representation is that no fraud has taken place in connection with
the origination of the assets on the part of the originator or any party involved in the
origination of the assets.




Page 63                                            GAO-13-101 Dodd-Frank Act Regulations
issuances in total historically have been dominated by agency mortgage-
related ABS. At the height of market issuances in 2003, agency
mortgage-related ABS made up about 76 percent (or $3.4 trillion) of the
almost $4.5 trillion dollars in total issuances, and between 2008 and
2011, they comprised about 91 percent of annual ABS issuances. 108
Agency mortgage-related ABS issuances declined to 2004 levels in 2011,
but the data for the first two quarters of 2012 indicate that this recent
downward trend may be stabilizing.




108
   According to the Securities Industry and Financial Markets Association (SIFMA),
agency mortgage-related ABS include Ginnie Mae, Fannie Mae, and Freddie Mac
mortgage-backed securities and collateralized mortgage obligations (single and
multifamily), as well as FDIC and NCUA structured transactions. The latter are backed by
assets of failed banks and credit unions, respectively, and may include non-mortgage
related collateral. Dollar amounts are adjusted for inflation and are expressed in constant
2012 Q2 dollars.




Page 64                                            GAO-13-101 Dodd-Frank Act Regulations
Figure 8: Annual and Quarterly U.S. ABS Issuance, from 2000 through Second Quarter of 2012




                                        Note: Dollar amounts are adjusted for inflation and are expressed in billions of 2012 Q2 dollars.


                                        Figure 9 shows that issuances of other U.S. ABS have not rebounded
                                        from the sharp declines experienced after 2006. 109 From 2006 to 2008,
                                        annual issuances of other U.S. ABS (i.e. total U.S. ABS excluding agency
                                        mortgage-related ABS) fell by approximately 90 percent from over $1.8
                                        trillion to less than $187 billion, due primarily to 59 and 32 percent drops
                                        in non-agency mortgage-related and home equity ABS issuances,
                                        respectively. 110 Between 2008 and 2010, issuances of other ABS



                                        109
                                           Other ABS include home equity, auto, credit card, equipment, manufactured housing,
                                        student loan, non-agency mortgage-related, and other ABS.
                                        110
                                           Dollar amounts are adjusted for inflation and are expressed in constant 2012 Q2
                                        dollars.




                                        Page 65                                                   GAO-13-101 Dodd-Frank Act Regulations
                                       continued to decline slightly to just over $147 billion. As shown in figure
                                       9’s insert, other ABS issuances have experienced modest increases
                                       since 2010, primarily because of the growth in credit card, auto, and
                                       student loans ABS.

Figure 9: Annual and Quarterly U.S. ABS Issuance Excluding Agency Mortgage-Related ABS, from 2000 through Second
Quarter of 2012




                                       Note: Figure 9 does not include agency mortgage-related ABS data. Data on equipment,
                                       manufactured housing, and other ABS are not separately plotted but are included in the total. Dollar
                                       amounts are adjusted for inflation and are expressed in billions of 2012 Q2 dollars.


SEC’s Rules on Shareholder             Section 951 of the Dodd-Frank Act amends the Securities Exchange Act
Approval of Executive                  of 1934, requiring public companies subject to the proxy rules to conduct
Compensation and Golden                a separate shareholder advisory vote on compensation for executives at
Parachute Compensation                 least every 3 years and a shareholder advisory vote on the frequency of
Arrangements                           these votes at least every 6 years. The amendment also requires a




                                       Page 66                                                  GAO-13-101 Dodd-Frank Act Regulations
shareholder advisory vote on whether to approve certain so-called
“golden parachute” compensation arrangements in connection with a
business merger or acquisition transaction. 111 The rule promulgated
under section 951 requires a separate shareholder vote on compensation
of executives and a vote on the frequency of these votes for the first
annual or other meeting of shareholders at which directors will be elected
and for which SEC’s rules require executive compensation disclosure
pursuant to item 402 of Regulation 5-K occurring on or after January 21,
2011. 112 The rule became effective on April 4, 2011. However, SEC
adopted a temporary exemption for smaller reporting companies that
does not require them to conduct shareholder advisory votes on
executive compensation and their frequency until after January 21,
2013. 113

Two proxy seasons have passed since SEC’s say-on-pay rule became
effective for larger reporting firms, and most companies have received
majority shareholder approval of their executive compensation
packages. 114 Table 9 shows historical data on companies’ proposals on
executive compensation subject to shareholder vote (say-on-pay
proposals). 115 The data show that nearly 3,200 companies provided


111
   Section 951 requires disclosure of any agreements or understandings that the person
making a proxy or consent solicitation has with named executive officers of the acquiring
issuer concerning any type of compensation that is based on or relates to the acquisition,
merger, consolidation, sale, or other disposition of all or substantially all of the assets of
the issuer and the aggregate total of all such compensation that may be paid or become
payable to or on behalf of such executive officer. 15 U.S.C. § 78n-1.
112
  76 Fed. Reg. 6010 (Feb. 2, 2011).
113
   Section 951 provides that SEC may exempt an issuer from the advisory voting
requirements. In determining whether to make an exemption, SEC is to take into account,
among other considerations, whether the requirements disproportionately burden small
issuers. A “smaller reporting company” is defined in rule 12b-2 under the Exchange Act,
and includes companies that had a public float of less than $75 million as of the last
business day of the issuer’s most recently completed second fiscal quarter.
114
  A proxy season is the period of the year during which many companies hold their
annual shareholder meetings, which is typically between March and June.
115
   A shareholder can choose to vote “for” or “against” a say-on-pay proposal. She can
also choose to take a neutral stance and submit an “abstain” vote. If a shareholder fails to
provide instructions to her broker, the corresponding votes are categorized as “broker
non-votes.” Institutional Shareholder Services (ISS) measured failed proposals as those
where the “against” votes outnumber the “for” votes. According to market experts, some
companies define failed proposals as those where more than 50 percent of the sum of
“for,” “against,” and “abstain” votes are votes “against” the proposal.




Page 67                                              GAO-13-101 Dodd-Frank Act Regulations
shareholders with say-on-pay proposals in 2011. In that year, 2,809
Russell 3000 companies had say-on-pay proposals and around 99
percent of the proposals were approved. 116 A study by the Council of
Institutional Investors found that the most frequently cited reason for
shareholder opposition for failed proposals conducted between January 1
and July 1, 2011, was a disconnect between pay and performance. 117
Table 9 also shows that in 2012 (as of June 25, 2012), 1,842 companies
in the index had say-on-pay proposals and around 97 percent of the
proposals were approved. 118 According to SEC, around 1,200 smaller
reporting companies are required to hold say-on-pay proposals in 2013.
In addition, according to the Institutional Shareholder Services (ISS), a
large proxy advisory firm, investors overwhelmingly have supported that
future say-on-pay votes be done annually. 119




116
   Russell 3000 companies are those included in the Russell 3000 Index, which
comprises the largest 3,000 U.S. public companies and, according to Russell Investments,
represents about 98 percent of the U.S. equity market.
117
   Although the percentage of failed votes was low in 2011, the report states that the
actual number of failed votes was relatively high “compared with the track record of say on
pay in other countries and the expectations of corporate government professionals.”
According to the report, shareholders defined the disconnect between pay and
performance to mean that (1) the performance of a firm was below the peer group median
(as measured by total absolute shareholder return (TSR) over 1, 3, or 5 years); or (2)
absolute performance based on other financial measures. Council of Institutional
Investors, Say-On-Pay: Identifying Investor Concerns (September 2011).
118
   A report from Semler Brossy, an executive compensation consulting firm, indicated that
about 90 percent of firms have received at least 70 percent shareholder approval on say-
on-pay proposals in 2011 and 2012. According to the report, 91 percent and 93 percent of
companies received at least 70 percent of shareholder approval for their say-on-pay
proposals in 2012 and 2011, respectively. See Semler Brossy, 2012 Say on Pay Results:
Russell 3000 Shareholder Voting (Sept. 5, 2012).
119
   According to ISS, as of September 1, 2011, annual votes received majority support at
80.1 percent of companies in the Russell 3000 index, as compared to triennial votes,
which received majority support at 18.5 percent of companies. See ISS, 2011 U.S.
Postseason Report (Sept. 29, 2011).




Page 68                                            GAO-13-101 Dodd-Frank Act Regulations
Table 9: Public Companies’ Say-on-Pay Proposals, from 2007 through June 25, 2012

                                              U.S. Total                                                  Russell 3000 Companies
                                                                                                                           Failed say-on-pay proposals
                                                                                                                                                       a
Year                                   Say-on-pay proposals                           Say-on-pay proposals                             (percent failed)
2007                                                                  6                                                2                         0 (0%)
2008                                                                13                                                 8                         0 (0%)
2009                                                               331                                              154                          0 (0%)
2010                                                               326                                              154                          3 (2%)
2011                                                            3,188                                              2,809                        41 (1%)
                          b
Jan. 1, 2012- June 25, 2012                                     2,203                                              1,842                        49 (3%)
                                       Source: GAO summary of data from Institutional Shareholder Services, Inc.
                                       a
                                        A shareholder can choose to vote “for” or “against” a say-on-pay proposal. She can also choose to
                                       take a neutral stance and submit an “abstain” vote. If a shareholder fails to provide instructions to her
                                       broker, the corresponding votes are categorized as “broker non-votes.” ISS defined failed proposals
                                       as those where the “against” votes outnumber the “for” votes.
                                       b
                                        ISS data for 2012 include say-on-pay proposals as of June 25, 2012, which likely capture most of the
                                       2012 proposals, because votes usually take place between March and June.
                                       Note: Companies that held say-on-pay votes on executive compensation proposals before 2011
                                       include companies that have received financial assistance under the Troubled Asset Relief Program
                                       (TARP). These companies have been required to hold annual say-on-pay votes until they pay back all
                                       the money they borrowed from the government, at which time they will become subject to the say-on-
                                       pay rules applicable to other public companies.


                                       Although it is not clear how companies will react to the results of
                                       shareholder say-on-pay votes in the future, according to two experts,
                                       some failed votes have led to, among other actions, shareholder lawsuits
                                       and changes in pay practices. For example, according to the law firm
                                       Davis Polk & Wardwell LLP corporate governance blog, as of September
                                       5, 2012, shareholders at a number of public companies that had failed
                                       votes have brought lawsuits against the boards of directors, but the courts
                                       largely have ruled in favor of the public companies. In its study, Semler
                                       Brossy also found that 26 out of 30 companies that had failed say-on-pay
                                       proposals in 2011 had passed their 2012 proposals (as of September
                                       2012) due, in part, to changes in pay practices. 120 Additionally, the study
                                       noted that companies that received modest shareholder approval of say-



                                       120
                                          Semler Brossy, 2012 Say on Pay Results: Russell 3000 Shareholder Voting (Sept. 5,
                                       2012). An earlier study by the firm stated that potential reasons behind the increase in
                                       shareholder say-on-pay approval from 2011 to 2012 included increased weighting of
                                       performance‐based equity tied to specific performance measures in long-term incentive
                                       programs, significant shareholder outreach efforts, and a reduction in problematic pay
                                       practices. Semler Brossy, Say on Pay Behind the Numbers: How Have Companies
                                       Responded to Failed 2011 Say on Pay Votes? (May 18, 2012).




                                       Page 69                                                                     GAO-13-101 Dodd-Frank Act Regulations
                     on-pay proposals in 2011 also have improved their records. According to
                     the study, 93 of 125 companies that received from 50 percent to 70
                     percent shareholder approval of say-on-pay proposals in 2011 received
                     more support in 2012.


                     We provided a draft of this report to CFPB, CFTC, FDIC, the Federal
Agency Comments      Reserve Board, FSOC, NCUA, OCC, OFR, SEC, and Treasury for review
and Our Evaluation   and comment. SEC and Treasury provided written comments that we
                     have reprinted in appendixes VII and VIII, respectively. All of the
                     agencies also provided technical comments, which we have incorporated,
                     as appropriate.

                     In their comments, the agencies neither agreed nor disagreed with the
                     report’s findings. In its letter, Treasury noted that FSOC agrees that
                     successful implementation of the Dodd-Frank Act rulemakings will require
                     member agencies to work together, even if such coordination is not
                     specifically required under the Dodd-Frank Act. Treasury also noted that
                     FSOC has served as a forum for discussion among members and
                     member agencies, through various FSOC meetings, committee meetings,
                     and subcommittee meetings. Finally, the letter describes FSOC’s effort to
                     continue monitor potential risks to the financial stability and implement
                     other statutory requirements.

                     In its letter, SEC noted that it revised its guidance on economic analysis
                     in March 2012, in part in response to a recommendation in our 2011
                     report that federal financial regulators more fully incorporate OMB’s
                     regulatory analysis guidance into their rulemaking policies. SEC’s letter
                     stated that the revised guidance already has improved the quality of
                     economic analysis in its rulemakings and internal rule-writing processes.
                     SEC also noted that FSOC has fostered a healthy and positive sense of
                     collaboration among the financial regulators. SEC remains amenable to
                     working with FSOC on formal coordination policies, as GAO previously
                     recommended, but noted that FSOC's efforts should fully respect the
                     independence of the respective member agencies regarding the
                     substance of the rules for which they are responsible and the mission of
                     FSOC itself.

                     We are sending copies of this report to CFPB, CFTC, FDIC, the Federal
                     Reserve Board, FSOC, NCUA, OCC, OFR, SEC, Treasury, interested
                     congressional committees, members, and others. This report will also be
                     available at no charge on our website at http://www.gao.gov.



                     Page 70                                   GAO-13-101 Dodd-Frank Act Regulations
Should you or your staff have questions concerning this report, please
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are listed in
appendix IX.




A. Nicole Clowers
Director
Financial Markets
and Community Investment




Page 71                                     GAO-13-101 Dodd-Frank Act Regulations
List of Addressees

The Honorable Harry Reid
Majority Leader
The Honorable Mitch McConnell
Minority Leader
United States Senate

The Honorable John Boehner
Speaker
The Honorable Nancy Pelosi
Minority Leader
House of Representatives

The Honorable Debbie Stabenow
Chairwoman
The Honorable Pat Roberts
Ranking Member
Committee on Agriculture, Nutrition and Forestry
United States Senate

The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable John D. Rockefeller IV
Chairman
The Honorable Kay Bailey Hutchison
Ranking Member
Committee on Commerce, Science, and Transportation
United States Senate




Page 72                                  GAO-13-101 Dodd-Frank Act Regulations
The Honorable Frank D. Lucas
Chairman
The Honorable Collin C. Peterson
Ranking Member
Committee on Agriculture
House of Representatives

The Honorable Hal Rogers
Chairman
The Honorable Norm Dicks
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Fred Upton
Chairman
The Honorable Henry A. Waxman
Ranking Member
Committee on Energy and Commerce
House of Representatives

The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives




Page 73                            GAO-13-101 Dodd-Frank Act Regulations
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             Our objectives in this report were to examine (1) the regulatory analyses,
             including benefit-cost analyses, federal financial regulators have
             performed to assess the potential impact of selected final rules issued
             pursuant to the Dodd-Frank Act; (2) how federal financial regulators
             consulted with each other in implementing selected final rules issued
             pursuant to the Dodd-Frank Act to avoid duplication or conflicts; and (3)
             what is known about the impact of the final Dodd-Frank Act regulations on
             the financial markets.

             To address the first two objectives, we limited our analysis to the final
             rules issued pursuant to the Dodd-Frank Act that were effective between
             July 21, 2011, and July 23, 2012, a total of 66 rules (see app. II). To
             identify these rules, we used a website maintained by the Federal
             Reserve Bank of St. Louis that tracks Dodd-Frank Act regulations. We
             corroborated the data with information on Dodd-Frank Act rulemaking
             compiled by the law firm Davis Polk & Wardwell LLP.

             To address our first objective, we reviewed statutes, regulations, GAO
             studies, and other documentation to identify the benefit-cost or similar
             analyses federal financial regulators are required to conduct in
             conjunction with rulemaking. For each of the 66 rules within our scope,
             we prepared individual summaries using a data collection instrument
             (DCI). The criteria used in the DCI were generally developed based on
             the regulatory analyses required of federal financial regulators and Office
             of Management and Budget (OMB) Circular A-4, which is considered best
             practice for regulatory analysis. We used the completed summaries to
             develop a table showing the extent to which the federal financial
             regulators addressed the criteria for each of the Dodd-Frank Act
             regulations. We selected 4 of the 66 rules for in-depth review, comparing
             the benefit-cost or similar analyses to specific principles in OMB Circular
             A-4. We selected the rules for in-depth review based on whether the rule
             was deemed a major rule (i.e., whether it is anticipated to have an annual
             effect on the economy of $100 million or more) by the responsible agency
             and OMB. We generally found that the financial regulators do not state in
             the Federal Register notice whether the rule is major. However, we
             learned that regulators are required to submit major rules to GAO under
             the Congressional Review Act (CRA) for the purpose of ensuring that the
             regulators followed certain requirements in conducting the rulemaking,
             and GAO maintains a database of major rules. Our search of the CRA
             database showed that federal financial regulators issued 19 major Dodd-
             Frank Act rules within our scope. To further narrow the list of rules for in-
             depth review, we determined to include at least one rule from each of the
             federal financial regulators. We identified major rules issued by only


             Page 74                                    GAO-13-101 Dodd-Frank Act Regulations
Appendix I: Scope and Methodology




three financial regulators: the Commodity Futures Trading Commission
(CFTC), the Board of Governors of the Federal Reserve (Federal
Reserve), and the Securities and Exchange Commission (SEC). In
addition, the Department of the Treasury (Treasury) issued a major rule
during the scope period. The Federal Reserve and Treasury each issued
only one major rule during our scope period—the Debit Card Interchange
Fee rule and the Assessment of Fees on Large Bank Holding Companies
to Cover the Expenses of the Financial Research Fund, respectively.
SEC and CFTC issued multiple major rules during the period. To further
narrow the list of rules for in-depth review, we determined to include only
rules implementing a new regulatory authority rather than amending a
preexisting regulatory authority. For SEC, only one rule met this
criterion—the Securities Whistleblower Incentives and Protections rule.
CFTC issued several major rules that met this criterion so to further
narrow the list of rules for in-depth review, we consulted with a former
CFTC economist and solicited his opinion whether it would be appropriate
for GAO to assess the Real-Time Public Reporting of Swap Transaction
Data rule, and he agreed. To compare these rules to the principles in
Circular A-4, we developed a DCI with the principles and applied the DCI
to all four rules. In conducting each individual analysis, we reviewed the
Federal Register notices prepared by the agencies during the course of
the rulemaking. We also interviewed officials from CFTC, the Federal
Reserve, SEC, and Treasury to determine the extent to which benefit-cost
or similar analyses were conducted.

To address our second objective, we reviewed the Dodd-Frank Act,
regulations, and studies, including GAO reports, to identify the
coordination and consultation requirements federal financial regulators
are required to conduct in conjunction with rulemaking. For each of the 66
rules in our scope, we reviewed the rule releases to determine the rules
on which agencies coordinated with other federal financial regulators and
international financial regulators. From our review of the rule releases, we
developed a table that shows the rules that involved coordination,
agencies involved, nature of coordination, whether coordination was
required or voluntary, and whether the agencies coordinated with
international regulators. Rules that may have involved interagency
coordination in the rulemaking but did not expressly mention such
coordination in the rule release are not included in this table. Of the 19
rules that we determined involved interagency coordination, we selected
3 rules to review in depth to assess how and the extent to which federal
financial regulators coordinated, focusing on actions they took to avoid
conflict and duplication in rulemakings. In selecting rules to review in
depth, we sought to include at least one rule that was jointly issued and


Page 75                                   GAO-13-101 Dodd-Frank Act Regulations
Appendix I: Scope and Methodology




therefore implicitly required coordination and at least one rule that was
issued by a single agency and involved coordination with another agency.
We also sought broad coverage of agencies issuing substantive Dodd-
Frank Act rules. We ultimately selected two joint rules and one rule issued
by a single agency, including rules issued by FDIC, OCC, Federal
Reserve, CFTC, and SEC. In reviewing each rule, we reviewed the
Federal Register notices for each rule, and we interviewed officials from
each agency to determine how and the extent to which coordination took
place to avoid duplication and conflict. We also interviewed officials at
FSOC and CFPB to get an understanding of their role in interagency
coordination for Dodd-Frank Act rulemakings.

To address our third objective, we took a multipronged approach to
analyze what is known about the impact of the Dodd-Frank Act on the
financial marketplace. First, the act contains provisions that serve to
enhance the resilience of certain bank and nonbank financial companies
and reduce the potential for any one of these companies to affect the
financial system and economy. Specifically, the Dodd-Frank Act requires
the Federal Reserve to impose enhanced prudential standards and
oversight on bank holding companies with $50 billion or more in total
consolidated assets and nonbank financial companies designated by
FSOC. For purposes of this report, we refer to these bank and nonbank
financial companies as bank systemically important financial institutions
(bank SIFI) and nonbank systemically important financial institutions
(nonbank SIFI), respectively, or collectively as SIFIs. We developed
indicators to monitor changes in certain characteristics of SIFIs that may
be suggestive of the impact of these reforms. FSOC has not yet
designated any nonbank financial firms for Federal Reserve enhanced
supervision. As a result, we focus our analysis on U.S. bank SIFIs. 1 To
understand the rationale behind the act’s focus on enhanced SIFI
regulation and oversight, we reviewed the legislative history of the act, the
act itself, related regulations, academic studies, GAO and agency reports,
and other relevant documentation. To inform our choice of indicators, we
analyzed the provisions and related rulemakings most relevant to bank
SIFIs. Our analysis and indicators for this report focus on bank SIFIs’
asset size, interconnectedness, complexity, leverage, and liquidity. We


1
 Our analyses of bank SIFIs include U.S. bank holding companies with total consolidated
assets of $50 billion or more and foreign bank organizations’ U.S.-based bank holding
company subsidiaries that on their own have total consolidated assets of $50 billion or
more.




Page 76                                          GAO-13-101 Dodd-Frank Act Regulations
Appendix I: Scope and Methodology




developed our indicators of bank SIFIs’ size, leverage, and liquidity using
quarterly data for bank holding companies from SNL Financial and
quarterly data on the gross domestic product (GDP) deflator from the
Bureau of Economic Analysis, both for the period from 2006 quarter 1 to
2012 quarter 2. 2 We developed our indicators of bank SIFIs’ complexity
using data from the Federal Reserve Board’s National Information Center
as of October 2012. 3 As new data become available, we expect to update
and, as warranted, revise our indicators and create additional indicators
to cover other provisions. 4

Second, we use difference-in-difference regression analysis to infer the
act’s impact on the provision of credit by and the safety and soundness of
U.S. bank SIFIs. The key element of our analysis is that the Dodd-Frank
Act subjects some bank holding companies to enhanced oversight and
regulation but not other bank holding companies. Specifically, the act
requires the Federal Reserve to impose a number of enhanced prudential
standards on bank holding companies with total consolidated assets of
$50 billion or more (bank SIFI) , while bank holding companies with
assets less than $50 billion (non-SIFI banks) are not subject to such
enhanced oversight and regulation. As a result, we were able to compare
funding costs, capital adequacy, asset quality, earnings, and liquidity for
bank SIFIs and non-SIFI banks before and after the Dodd-Frank Act. All
else being equal, the difference in the differences is the inferred effect of
the Dodd-Frank Act on bank SIFIs. For our analysis, we used quarterly
data on bank holding companies from SNL Financial and quarterly data
on commercial banks and savings banks from FDIC and the Federal
Financial Institutions Examinations Council, all for the period from 2006
quarter 1 to 2012 quarter 2 (see app. IV for details). Lastly, for all of our
indicators, we obtained and addressed high-level comments and
suggestions from FSOC staff and two other market experts.




2
 SNL Financial reports data for bank holding companies based on forms FR Y-9C
submitted to the Federal Reserve.
3
 The National Information Center is a central repository of data about banks and other
institutions for which the Federal Reserve has a supervisory, regulatory, or research
interest, including both domestic and foreign banking organizations operating in the United
States.
4
 For this report, we did not develop indicators for interconnectedness, but expect to do so
in the future.




Page 77                                            GAO-13-101 Dodd-Frank Act Regulations
Appendix I: Scope and Methodology




Third, we analyze the impact of several major rules that were issued
pursuant to the Dodd-Frank Act and have been final for around a year or
more. There were 44 final rules as of July 21, 2011, 7 of which were
major rules. We judgmentally selected 4 out of those 7 rules for impact
analyses, based largely on data availability. Our selected rules implement
provisions that serve specific investor or consumer protection purposes.
We first analyzed the Federal Reserve’s Debit Interchange Fees and
Routing Rule (Regulation II). As part of that work, we reviewed selected
statutes and regulations, analyzed available data and documents from the
Federal Reserve, GAO, and market participants and experts, and
interviewed agency officials and market experts. Additionally, we
analyzed two SEC rules on asset-backed securities (ABS): Issuer Review
of Assets in Offerings of ABS and Disclosure for ABS Required by
Section 945 and 943 of the Act, respectively. To do this, we reviewed
selected statutes and regulations and analyzed data on ABS issuances
obtained from the Securities Industry and Financial Markets Association
(SIFMA). Lastly, we analyzed SEC’s rule on Shareholder Approval of
Executive Compensation and Golden Parachute Compensation. As part
of that analysis, we reviewed selected regulations and analyzed available
data on shareholder votes on executive compensation that we obtained
from Institutional Shareholder Services, Inc., a proxy advisory firm that
advises institutional investors on how to vote proxies and provides
consulting services to corporations seeking to improve their corporate
governance. For all of the data described above, we assessed the
reliability of the data and found it to be reliable for our purposes.

We conducted this performance audit from December 2011 to December
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 78                                  GAO-13-101 Dodd-Frank Act Regulations
Appendix II: Tables Listing Dodd-Frank Act
                                               Appendix II: Tables Listing Dodd-Frank Act
                                               Rules Effective as of July 23, 2012



Rules Effective as of July 23, 2012

                                               The following table lists the Dodd-Frank Act rules that we identified as
                                               final and effective during the scope period for this review—July 21, 2011,
                                               and July 23, 2012

Table 10: Dodd-Frank Act Rules Effective between July 21, 2011, and July 23, 2012

                                                               Did regulator
                                                               identify the
                                                               rule as         Did regulator    Did                            Did regulator
                                                               having          quantify costs   regulator     Did regulator    qualitatively
                                                               significant     of final rule    quantify      qualitatively    identify
                              Responsible                      economic        other than       benefits of   identify costs   benefits of
Rulemaking                    regulator       Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Risk-Based Capital            FDIC, Federal   07/28/11         No              Noa              No            Yes              Yes
Standards: Advanced           Reserve, and
Capital Adequacy              OCC
Framework—Basel II;
Establishment of a Risk-
Based Capital Floor
Securities Whistleblower      SEC             08/12/11         Yes             No               No            Yes              Yes
Incentives and Protections
Prohibition on the            CFTC            08/15/11         No              No               No            Yes              Yes
Employment, or Attempted
Employment, of
Manipulative and Deceptive
Devices and Prohibition on
Price Manipulation
Fair Credit Reporting Risk-   Federal         08/15/11         No              No               No            Yes              Yes
Based Pricing Regulations     Reserve and
                              Federal Trade
                              Commission
Equal Credit Opportunity      Federal         08/15/11         No              No               No            Yes              Yes
                              Reserve
Certain Orderly Liquidation   FDIC            08/15/11         No              No               No            No               Yes
Authority Provisions under
Title II of the Dodd-Frank
Wall Street Reform and
Consumer Protection Act
Public Company Accounting     SEC             08/18/11         N/A             N/A              N/A           N/A              N/A
Oversight Board; Order
Approving Proposed Board
Funding Final Rules for
Allocation of the Board’s
Accounting Support Fee
Among Issuers, Brokers,
and Dealers, and Other
Amendments to the Board’s
Funding Rules




                                               Page 79                                                GAO-13-101 Dodd-Frank Act Regulations
                                              Appendix II: Tables Listing Dodd-Frank Act
                                              Rules Effective as of July 23, 2012




                                                              Did regulator
                                                              identify the
                                                              rule as         Did regulator    Did                            Did regulator
                                                              having          quantify costs   regulator     Did regulator    qualitatively
                                                              significant     of final rule    quantify      qualitatively    identify
                               Responsible                    economic        other than       benefits of   identify costs   benefits of
Rulemaking                     regulator     Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Authority to Designate         FSOC          08/26/11         No              No               No            Yes              Yes
Financial Market Utilities
(FMU) as Systemically
Important
Family Offices                 SEC           08/29/11         Yes             Yes              Yes           Yes              Yes
Security Ratings               SEC           09/02/11;        No              No               No            Yes              Yes
                                             12/31/12
Agricultural Commodity         CFTC          09/12/11         No              No               No            Yes              Yes
Definition
Retail Foreign Exchange        CFTC          09/12/11         No              No               No            Yes              Yes
Transactions; Conforming
Changes to Existing
Regulations in Response to
the Dodd-Frank Wall Street
Reform and Consumer
Protection Act
Rules Implementing             SEC           07/21/11;09/19/11 Yes            Yes              Yes           Yes              Yes
Amendments to the
Investment Advisers Act of
1940
Privacy of Consumer            CFTC          09/20/11         No              No               No            Yes              Yes
Financial Information;
Conforming Amendments
Under Dodd-Frank Act
Large Trader Reporting for     CFTC          09/20/11         No              No               No            Yes              Yes
Physical Commodity Swaps
Business Affiliate Marketing   CFTC          09/20/11b        No              No               No            Yes              Yes
and Disposal of Consumer
Information Rules
Suspension of the duty to      SEC           09/22/11         No              No               No            Yes              Yes
file reports for classes of
asset-backed securities
Removing Any Reference to      CFTC          09/23/11         No              No               No            Yes              Yes
or Reliance on Credit
Ratings in Commission
Regulations; Proposing
Alternatives to the Use of
Credit Ratings
Process for Review of          CFTC          09/26/11         No              No               No            Yes              Yes
Swaps for Mandatory
Clearing




                                              Page 80                                                GAO-13-101 Dodd-Frank Act Regulations
                                             Appendix II: Tables Listing Dodd-Frank Act
                                             Rules Effective as of July 23, 2012




                                                             Did regulator
                                                             identify the
                                                             rule as         Did regulator    Did                            Did regulator
                                                             having          quantify costs   regulator     Did regulator    qualitatively
                                                             significant     of final rule    quantify      qualitatively    identify
                              Responsible                    economic        other than       benefits of   identify costs   benefits of
Rulemaking                    regulator     Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Provisions Common to          CFTC          09/26/11         No              No               No            Yes              Yes
Registered Entities
Debit Card Interchange        Federal       10/01/11b        Yes             No               No            Yes              Yes
Fees and Routing              Reserve
Whistleblower Incentives      CFTC          10/24/11         Yes             No               No            Yes              Yes
and Protection
Swap Data Repositories:       CFTC          10/31/11         Yes             Yes              No            Yes              Yes
Registration Standards,
Duties and Core Principles
Disclosure of Information;    FDIC          11/14/11         N/A             N/A              N/A           N/A              N/A
Privacy Act Regulations;
Notice and Amendments
Resolution Plans Required     Federal       11/30/11         No              No               No            Yes              Yes
                              Reserve and
                              FDIC
Remittance Transfers          NCUA          11/30/11         No              No               No            No               No
Amendment to July 14, 2011 CFTC             12/23/11         No              No               No            No               Yes
Order for Swap Regulation
Capital Plans                 Federal       12/30/11         No              No               No            Yes              No
                              Reserve
Agricultural Swaps Rule       CFTC          12/31/11         No              No               No            Yes              Yes
Derivatives Clearing          CFTC          01/09/12         Yes             Yes              No            Yes              Yes
Organization General
Provisions and Core
Principles
Position Limits for Futures   CFTC          01/17/12         Yes             Yes              No            Yes              Yes
and Swaps
Performance of Registration CFTC            01/19/12         N/A             N/A              N/A           N/A              N/A
Functions by National
Futures Association with
Respect to Swap Dealers
and Major Swap Participants
Mine Safety Disclosure        SEC           01/27/12         No              No               No            Yes              Yes
Reporting Line for the        SEC           02/14/12         N/A             N/A              N/A           N/A              N/A
Commission’s Inspector
General
Investment of Customer      CFTC            02/17/12         Yes             No               No            Yes              Yes
Funds and Funds Held in an
Account for Foreign Futures
and Foreign Options
Transactions




                                             Page 81                                                GAO-13-101 Dodd-Frank Act Regulations
                                               Appendix II: Tables Listing Dodd-Frank Act
                                               Rules Effective as of July 23, 2012




                                                               Did regulator
                                                               identify the
                                                               rule as         Did regulator    Did                            Did regulator
                                                               having          quantify costs   regulator     Did regulator    qualitatively
                                                               significant     of final rule    quantify      qualitatively    identify
                                Responsible                    economic        other than       benefits of   identify costs   benefits of
Rulemaking                      regulator     Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Registration of Foreign         CFTC          02/21/12         No              Yes              No            Yes              Yes
Boards of Trade
Net Worth Standard for          SEC           02/27/12         Yes             No               No            Yes              Yes
Accredited Investors
Real-Time Reporting of          CFTC          03/09/12         Yes             No               No            Yes              Yes
Swap Transaction Data
Swap Data Recordkeeping    CFTC               03/13/12         Yes             No               No            Yes              Yes
and Reporting Requirements
Registration of Swap            CFTC          03/19/12         No              Yes              No            Yes              Yes
Dealers and Major Swap
Participants
Reporting by Investment    SEC and CFTC 03/31/12               Yes             No               No            Yes              Yes
Advisers to Private Funds
and Certain Commodity Pool
Operators and Commodity
Trading Advisors on Form
PF
Resolution Plans Required       FDIC          04/01/12         No              No               No            Yes              Yes
for Insured Depository
Institutions With $50 Billion
or More in Total Assets
Protection of Cleared Swaps CFTC              04/09/12         Yes             No               No            Yes              Yes
Customer Contracts and
Collateral; Conforming
Amendments to the
Commodity Broker
Bankruptcy Provisions
Exemptions for Security-        SEC           04/16/12         No              No               No            Yes              Yes
Based Swaps Issued by
Certain Clearing Agencies
Business Conduct            CFTC              04/17/12         Yes             No               No            Yes              Yes
Standards for Swap Dealers
and Major Swap Participants
Commodity Pool Operators        CFTC          04/24/12;        No              Yes              No            Yes              Yes
and Commodity Trading                         07/02/12
Advisers: Compliance
Obligations
Authority To Require            FSOC          05/11/12         No              No               No            No               Yes
Supervision and Regulation
of Certain Nonbank
Financial Companies




                                               Page 82                                               GAO-13-101 Dodd-Frank Act Regulations
                                             Appendix II: Tables Listing Dodd-Frank Act
                                             Rules Effective as of July 23, 2012




                                                             Did regulator
                                                             identify the
                                                             rule as         Did regulator    Did                            Did regulator
                                                             having          quantify costs   regulator     Did regulator    qualitatively
                                                             significant     of final rule    quantify      qualitatively    identify
                              Responsible                    economic        other than       benefits of   identify costs   benefits of
Rulemaking                    regulator     Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Implementation of the         FSOC          05/11/12         No              No               No            Yes              No
Freedom of Information Act
Investment Advisor            SEC           05/22/12         Yes             Yes              Yes           Yes              Yes
Performance Compensation
Rule
Mutual Insurance Holding      FDIC          05/30/12         No              No               No            No               No
Company Treated as
Insurance Company
Swap Dealer and Major        CFTC           06/04/12         Yes             Yes              No            Yes              Yes
Swap Participant
Recordkeeping, Reporting,
and Duties Rules; Futures
Commission Merchant and
Introducing Broker Conflicts
of Interest Rules; and Chief
Compliance Officer Rules for
Swap Dealers, Major Swap
Participants, and Futures
Commission Merchants
Statement of Policy         Federal         06/08/12         N/A             N/A              N/A           N/A              N/A
Regarding the Conformance Reserve
Period for Entities Engaged
in Prohibited Proprietary
Trading or Private Equity
Fund or Hedge Fund
Activities
Commodity Options             CFTC          06/26/12         No              No               No            Yes              Yes
State Official Notification   CFPB          06/29/12         N/A             N/A              N/A           N/A              N/A
Rule
Rules Relating to             CFPB          06/29/12         N/A             N/A              N/A           N/A              N/A
Investigations
Rules of Practice for         CFPB          06/29/12         N/A             N/A              N/A           N/A              N/A
Adjudication Proceedings
Collection of Checks and      Federal       07/12/12         No              No               No            Yes              Yes
Other Items by Federal        Reserve
Reserve Banks and Funds
Transfers Through Fedwire:
Elimination of ‘‘As-of
Adjustments’’ and Other
Clarifications




                                             Page 83                                                GAO-13-101 Dodd-Frank Act Regulations
                                               Appendix II: Tables Listing Dodd-Frank Act
                                               Rules Effective as of July 23, 2012




                                                               Did regulator
                                                               identify the
                                                               rule as         Did regulator    Did                            Did regulator
                                                               having          quantify costs   regulator     Did regulator    qualitatively
                                                               significant     of final rule    quantify      qualitatively    identify
                              Responsible                      economic        other than       benefits of   identify costs   benefits of
Rulemaking                    regulator       Effective date   impact?         PRA costs?       final rule?   of final rule?   final rule?
Assessment of Fees on      Treasury           07/20/12         Yes             Yes              No            Yes              Yes
Large Bank Holding
Companies and Nonbank
Financial Companies
Supervised by the Federal
Reserve Board To Cover the
Expenses of the Financial
Research Fund
Supervised Securities         Federal         07/20/12         No              No               No            No               No
Holding Company               Reserve
Registration
Alternatives to the Use of    OCC             07/21/12;        No              Noa              No            No               No
External Credit Ratings in                    01/01/13
the Regulations of the OCC
Permissible Investments for   FDIC            07/21/12         No              No               No            Yes              No
Federal and State Savings
Associations: Corporate
Debt Securities
Guidance on Due Diligence     FDIC            07/21/12         N/A             N/A              N/A           N/A              N/A
Requirements for Savings
Associations in Determining
Whether a Corporate Debt
Security Is Eligible for
Investment
Guidance on Due Diligence     OCC             01/01/13c        N/A             N/A              N/A           N/A              N/A
Requirements in
Determining Whether
Securities Are Eligible for
Investment
Supervisory Guidance on       FDIC, Federal   07/23/12         N/A             N/Aa             N/A           N/A              N/A
Stress Testing for Banking    Reserve, and
Organizations With More       OCC
Than $10 Billion in Total
Consolidated Assets
Calculation of Maximum        FDIC and        07/23/12         No              No               No            No               No
Obligation Limitation         Treasury
Further Definition of "Swap    CFTC and SEC 07/23/12;          Yes             Yes              No            Yes              Yes
Dealer," "Security-Based                    12/31/12
Swap Dealer," "Major Swap
Participant," "Major Security-
Based Swap Participant,"
and "Eligible Contract
Participant"




                                               Page 84                                                GAO-13-101 Dodd-Frank Act Regulations
                                                 Appendix II: Tables Listing Dodd-Frank Act
                                                 Rules Effective as of July 23, 2012




                                                 Source: GAO summary of information from the Federal Register, the Federal Reserve Bank of St. Louis
                                                 (http://www.stlouisfed.org/regreformrules/final.aspx) and Davis Polk & Wardwell LLP.

                                                 Note: N/A refers to those rulemakings related to interpretive rules, general statements of policy, and
                                                 rules that deal with agency organization, procedure, or practice, and thus not subject to
                                                 Administrative Procedure Act (APA) requirements.
                                                 a
                                                   OCC undertook an assessment of these rules, which included quantified total cost estimates, but the
                                                 assessments were not published in the Federal Register notices.
                                                 b
                                                   Compliance dates vary.
                                                 c
                                                   OCC’s guidance is included in this review, even though the effective date is outside our scope
                                                 period, because the accompanying rule and similar FDIC guidance are included in this review.


                                                 The following table lists the Dodd-Frank Act rules that we identified as
                                                 final and effective during the scope period for our first review—July 21,
                                                 2010, and July 21, 2011.

Table 11: Dodd-Frank Act Rules Effective as of July 21, 2011

                                                                                                                                 Did the regulator
                                                                                                                                 identify the rule
                                                                                                                                 as having
                                                                                                              Did the regulator  significant
                                                              Responsible                                     have some level of economic
Rulemaking                                                    regulator                        Effective date discretion?        impact?
Deposit Insurance Regulations; Permanent Increase in          FDIC                             8/13/2010              No                               No
Standard Coverage Amount; Advertisement of
Membership; International Banking; Foreign Banks (75
Fed. Reg. 49,363)
Display of Official Sign; Permanent Increase in Standard      NCUA                             9/2/2010               No                               No
Maximum Share (75 Fed. Reg. 53,841)
Internal Controls over Financial Reporting in Exchange Act SEC                                 9/21/2010              No                               No
Periodic Reports (75 Fed. Reg. 57,385)
Commission Guidance Regarding Auditing, Attestation,          SEC                              10/1/2010              n/a                              n/a
and Related Professional Practice Standards Related to
Brokers and Dealers (75 Fed. Reg. 60,616)
Removal from Regulation FD of the Exemption for Credit        SEC                              10/4/2010              No                               No
Rating Agencies (75 Fed. Reg. 61,050)
Regulation of Off-Exchange Retail Foreign Exchange            CFTC                             10/18/2010             Yes                              No
Transactions and Intermediaries (75 Fed. Reg. 55,410)
Deposit Insurance Regulations: Unlimited Coverage for         FDIC                             12/31/2010             No                               No
Noninterest-Bearing Transaction Accounts (75 Fed. Reg.
69,577)
Designated Reserve Ratio (75 Fed. Reg. 79,286)                FDIC                             1/1/2011               Yes                              No
Rules of Practice – Handling of Proposed Rule Changes         SEC                              1/24/2011              n/a                              n/a
Submitted by Self-Regulatory Organizations (76 Fed. Reg.
4066)
Deposit Insurance Regulations; Unlimited Coverage for         FDIC                             1/27/2011              No                               No
Noninterest-Bearing Transaction Accounts; Inclusion of
Interest on Lawyers Trust Accounts (76 Fed. Reg. 4813)




                                                 Page 85                                                                 GAO-13-101 Dodd-Frank Act Regulations
                                                  Appendix II: Tables Listing Dodd-Frank Act
                                                  Rules Effective as of July 23, 2012




                                                                                                                    Did the regulator
                                                                                                                    identify the rule
                                                                                                                    as having
                                                                                                 Did the regulator  significant
                                                            Responsible                          have some level of economic
Rulemaking                                                  regulator             Effective date discretion?        impact?
Issuer Review of Assets in Offerings of Asset-Back          SEC                   3/28/2011     Yes                 Yes
Securities (76 Fed. Reg. 4231)
Disclosure for Asset-Backed Securities Required by          SEC                   3/28/2011     Yes                 Yes
Section 943 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (76 Fed. Reg. 4489)
Conformance Period for Entities Engaged in Prohibited       Federal Reserve       4/1/2011      Yes                 No
Proprietary Trading or Private Equity Fund or Hedge Fund
Activities (76 Fed. Reg. 8265)
Assessments, Large Bank Pricing (76 Fed. Reg. 10,672)       FDIC                  4/1/2011      Yes                 No
Higher Rate Threshold for Escrow Requirements (76 Fed.      Federal Reserve       4/1/2011      No                  No
Reg. 11,319)
Shareholder Approval of Executive Compensation and          SEC                   4/4/2011      Yes                 Yes
Golden Parachute Compensation (76 Fed. Reg. 6010)
Establishment of the FDIC Systemic Resolution Advisory      FDIC                  4/28/2011     n/a                 n/a
Committee (76 Fed. Reg. 25,352)
Order Directing Funding for the Governmental Accounting     SEC                   5/16/2011     n/a                 n/a
Standards Board (76 Fed. Reg. 28,247)
Share Insurance and Appendix (76 Fed. Reg. 30,250)          NCUA                  6/24/2011     No                  No
Modification of Treasury Regulations Pursuant to Section    Treasury              7/6/2011      No                  No
939A of the Dodd- Frank Wall Street Reform and
Consumer Protection Act (76 Fed. Reg. 39,278)
Retail Foreign Exchange Transactions (76 Fed. Reg.          FDIC                  7/15/2011     Yes                 No
40,779)
Retail Foreign Exchange Transactions (76 Fed. Reg.          OCC                   7/15/2011     Yes                 No
41,375)
Beneficial Ownership Reporting Requirements and             SEC                   7/16/2011     Yes                 No
Security-Based Swaps (76 Fed. Reg. 34,579)
Prohibition Against Payment of Interest on Demand           Federal Reserve       7/21/2011     No                  No
Deposits (76 Fed. Reg. 42,015)
List of OTS Regulations to be Enforced by the OCC and       OCC/FDIC              7/21/2011     n/a                 n/a
FDIC Pursuant to the Dodd-Frank Act (76 Fed. Reg.
39,246)
Office of Thrift Supervision Integration; Dodd-Frank Act    OCC                   7/21/2011     n/a                 n/a
Implementation (76 Fed. Reg. 43,549)
Exemptions for Advisers to Venture Capital Funds, Private   SEC                   7/21/2011     Yes                 No
Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers (76
Fed. Reg. 39,646)
Consumer Transfer Protection Date (75 Fed. Reg. 57,252)     CFPB                  7/21/2011     n/a                 n/a




                                                  Page 86                                         GAO-13-101 Dodd-Frank Act Regulations
                                                 Appendix II: Tables Listing Dodd-Frank Act
                                                 Rules Effective as of July 23, 2012




                                                                                                                                Did the regulator
                                                                                                                                identify the rule
                                                                                                                                as having
                                                                                                             Did the regulator  significant
                                                              Responsible                                    have some level of economic
Rulemaking                                                    regulator                       Effective date discretion?        impact?
Identification of Enforceable Rules and Orders (76 Fed.       CFPB                            7/21/2011              n/a                              n/a
Reg. 43,569)
Consumer Leasing – Exempt Consumer Credit under               Federal Reserve                 7/21/2011              No                               No
Regulation M (75 Fed. Reg. 18,349)
Truth in Lending – Exempt Consumer Credit under               Federal Reserve                 7/21/2011              No                               No
Regulation Z (76 Fed. Reg. 18,354)
Interest on Deposits; Deposit Insurance Coverage (76 Fed. FDIC                                7/21/2011              No                               No
Reg. 41,392)
                                                 Source: GAO summary of information from the Federal Register and Federal Reserve Bank of St. Louis
                                                 (http://www.stlouisfed.org/regreformrules/final.aspx).

                                                 Note: N/A refers to those rulemakings related to interpretive rules, general statements of policy, and
                                                 rules that deal with agency organization, procedure, or practice, and thus not subject to APA
                                                 requirements. In some instances, we found that an agency had discretion to implement the statute,
                                                 even though the discretion was limited, because the exercise of discretion was important to
                                                 implementation.




                                                 Page 87                                                                 GAO-13-101 Dodd-Frank Act Regulations
Appendix III: Summary of Rulemakings RelatedAppendix III: Summary of Rulemakings Related
                                            to the Dodd-Frank Act Provisions Applicable to
                                            Systemically Important Financial Institutions

to the Dodd-Frank Act Provisions Applicable to
Systemically Important Financial Institutions

                                            The Dodd-Frank Act contains several provisions that apply to nonbank
                                            financial companies designated by the Financial Stability Oversight
                                            Council for Federal Reserve supervision and enhanced prudential
                                            standards (nonbank SIFI) and bank holding companies with $50 billion or
                                            more in total consolidated assets (bank SIFI). Table 12 summarizes those
                                            provisions and the rulemakings, including their status, to implement those
                                            provisions.

Table 12: Rulemakings Implementing the Dodd-Frank Act Provisions Applicable to Systemically Important Financial
Institutions and Their Status as of October 12, 2012

Dodd-Frank Act provision                                                                             Rulemaking status
FSOC designation of Nonbanks for Federal Reserve supervision—Section 113 authorizes                  FSOC final rule 77 Fed. Reg.
FSOC to determine that a nonbank financial company shall be subject to enhanced prudential           21,637(Apr. 11, 2012)
standards and supervision by the Federal Reserve if FSOC determines that the company could
pose a threat to the financial stability of the U.S.
FSOC’s final rule describes the manner in which FSOC intends to apply the statutory standards        FSOC has not yet designated
(for size, interconnectedness, complexity, leverage, and liquidity), and the procedures FSOC         any nonbank financial companies
intends to follow when making a determination to designate a nonbank financial institution for       for Federal Reserve supervision
Federal Reserve supervision under section 113 of the act.
Enhanced supervision and prudential standards—Sections 165 and 166 require the Federal               Federal Reserve proposed rule
                                                                                                                                    b
Reserve to impose enhanced prudential standards and early remediation requirements on bank           77 Fed. Reg. 594 (Jan. 5, 2012)
holding companies with $50 billion or more in total consolidated assets and nonbank financial
                                                                                      a
companies designated by FSOC to prevent or mitigate risks to U.S. financial stability.
    Enhanced risk-based capital and leverage requirements required under section                      proposal included in Jan. 5,
    165(b)(1)(A)(i)—capital plans: Bank holding companies with $50 billion or more in total           2012 proposed rule
    consolidated assets and nonbank financial companies designated by FSOC would be subject
    to the Federal Reserve’s capital plan rule, which requires companies to submit an annual
    capital plan to the Board for review that, together with the proposed stress tests (below), would
    demonstrate to the Board that the company has robust, forward-looking capital planning
    processes that account for their unique risks and permit continued operations during times of
           c
    stress.
    Enhanced risk-based capital and leverage requirements required under section                 intention included in Jan. 5, 2012
    165(b)(1)(A)(i)—capital surcharges: The Federal Reserve intends to issue a proposal imposing proposed rule
    a quantitative risk-based capital surcharge for all or a subgroup of bank holding companies
    with $50 billion or more in total consolidated assets and nonbank financial companies
    designated by FSOC based on the Basel capital surcharge for Globally Systemically Important
                      d
    Banks (G-SIBs).
    Enhanced liquidity requirements required under section 165(b)(1)(A)(ii)—liquidity risk           proposal included in Jan. 5, 2012
    management standards: Bank holding companies with $50 billion or more in total consolidated proposed rule
    assets and nonbank financial companies designated by FSOC would be subject to liquidity
    risk management standards that require the companies, among other things, to project cash
    flow needs over various time horizons, stress test the projections at least monthly, determine a
    liquidity buffer, and maintain a contingency funding plan that identifies potential sources of
    liquidity strain and alternative sources of funding.




                                            Page 88                                            GAO-13-101 Dodd-Frank Act Regulations
                                            Appendix III: Summary of Rulemakings Related
                                            to the Dodd-Frank Act Provisions Applicable to
                                            Systemically Important Financial Institutions




Dodd-Frank Act provision                                                                              Rulemaking status
   Enhanced liquidity requirements required under Section 165(b)(1)(A)(ii)—Basel liquidity ratios: intention included in Jan. 5, 2012
   The Federal Reserve intends to issue a proposal imposing quantitative liquidity requirements    proposed rule
   on all or a subgroup of bank holding companies with $50 billion or more in total consolidated
   assets and nonbank financial companies designated by FSOC based on Basel III liquidity
   ratios.
   Credit exposure reports required under section 165(d)(2): Section 165 also requires the            Federal Reserve and FDIC
   Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to impose credit              proposed rule 76 Fed. Reg.
   exposure reporting requirements on bank holding companies with $50 billion or more in total        22,648 (Apr. 22, 2011)
   consolidated assets and nonbank financial companies designated by FSOC. The joint
   proposed rule would require the companies to report significant exposures to other covered
   companies and significant exposures that other covered companies have to that company
   Concentration limits required under section 165(e): As required by the act, the Federal            proposal included in January 5,
   Reserve would prohibit a bank holding company with $50 billion or more in total consolidated       2012 proposed rule
   assets or a nonbank financial company designated by FSOC from having credit exposure to
   any unaffiliated company that exceeds 25 percent of the company’s capital stock and surplus.
   The Federal Reserve proposed a more stringent credit exposure limit of 10 percent between
   the largest, more complex financial institutions.
   Stress Tests required under section 165(i): Bank holding companies with $50 billion or more in Federal Reserve final rule 77
   total consolidated assets and nonbank financial companies designated by FSOC are required Fed. Reg. 62,378 (Oct. 12, 2012)
   by the act to conduct semi-annual company-run stress tests, and the Federal Reserve is
                                                                     e
   required to conduct an annual stress test on each of the companies
   The final rule builds on the stress tests required under the capital plans that large, complex
   bank holding companies submitted to the Federal Reserve for supervision under the
   Supervisory Capital Assessment Program (SCAP) in 2009, the subsequent Comprehensive
   Capital and Analysis Review (CCAR) in 2011, and the capital plan rule effective Dec. 30,
   2011.
   Resolution plans required under section 165(d)(1): Section 165 also requires the Federal           Federal Reserve and FDIC final
   Reserve and the Federal Deposit Insurance Corporation (FDIC) to require resolution plans           rule 76 Fed. Reg. 67,323 (Nov.
   from bank holding companies with $50 billion or more in total consolidated assets and              1, 2011)
   nonbank financial companies designated by FSOC.
   The joint final rule requires each plan to include, among other things, information about the
   company’s ownership structure, core business lines, and critical operations, and a strategic
   analysis of how the SIFI can be resolved under the U.S. Bankruptcy Code in a way that would
                                                   f
   not pose systemic risk to the financial system
   Debt-to-Equity Limits under section 165(j): Section 165(j) provides that the Federal Reserve     proposal included in Jan. 5, 2012
   must require a bank holding company with $50 billion or more in total consolidated assets or a proposed rule
   nonbank financial company designated by FSOC to maintain a debt-to-equity ratio of no more
   than 15-to-1, upon a determination by the Council that (i) such company poses a grave threat
   to the financial stability of the United States and (ii) the imposition of such a requirement is
   necessary to mitigate the risk that the company poses to U.S. financial stability
   Early remediation requirements under section 166: Section 166 requires the Federal Reserve,        proposal included in Jan. 5, 2012
   in consultation with FSOC and FDIC, to prescribe regulations to provide for the early              proposed rule
   remediation of financial distress of bank holding companies with $50 billion or more in total
   consolidated assets and nonbank financial companies designated by FSOC.
   The proposed requirements would include a number of triggers for remediation, including
   capital levels, stress test results, and risk management weaknesses. In certain situations, the
   Federal Reserve would impose restrictions on growth, assets, acquisitions, capital distributions
   and executive compensation, and other activities that the Federal Reserve deems appropriate.




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                                             Appendix III: Summary of Rulemakings Related
                                             to the Dodd-Frank Act Provisions Applicable to
                                             Systemically Important Financial Institutions




Dodd-Frank Act provision                                                                                                    Rulemaking status
FDIC Orderly Liquidation Authority—Title II gives the FDIC new orderly liquidation authority to                             FDIC final rule 76 Fed. Reg.
act as a receiver of troubled nonbank financial companies designated by FSOC.                                               41,626 (July 15, 2011)
The FDIC has issued and expects to issue a number of rules to exercise this new authority. The
FDIC indicated that the July 15, 2011 rule represents the culmination of the initial phase of such
rulemaking.
Federal Reserve authority to impose mitigatory actions on certain companies determined to No rules issued
pose a grave threat to financial stability—Section 121(a) allows the Federal Reserve, with a
two-thirds vote by FSOC, to impose certain additional restrictions on bank holding companies with
$50 billion or more in total consolidated assets and nonbank financial companies designated by
FSOC determined to pose a grave threat to the financial stability of the United States, including
limiting mergers and acquisitions, requiring the company to terminate activities, or requiring the
company to sell or transfer assets or off-balance-sheet items to unaffiliated entities.
Collins Amendment—Section 171(b) requires the appropriate federal banking agencies to              Federal Reserve, FDIC, and
establish permanent minimum risk-based capital and leverage floors on insured depository           OCC final rule
institutions, depository institution holding companies, and nonbank financial companies designated
by FSOC.
Under the final rule, these institutions must calculate their floors using the minimum risk-based                           76 Fed. Reg. 37,620 (June 28,
capital and leverage requirements under the prompt corrective action framework implementing                                 2011)
section 38 of the Federal Deposit Insurance Act, which currently are Basel I’s general risk-based
capital rules.
Concentration Limit/ liability cap on large financial institutions—Section 622 establishes,         No rules issued
subject to recommendations by FSOC, a financial sector concentration limit that generally prohibits
a financial company from merging or consolidating with, acquiring all or substantially all of the
assets of, or otherwise acquiring control of, another company if the resulting company’s
consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all
                       g
financial companies.
                                             Source: Dodd-Frank Act, Federal Register, and other documents from regulators and FSOC.
                                             a
                                               Section 165 also directs the Federal Reserve to impose enhanced prudential standards for bank
                                             holding companies with $50 billion or more in total consolidated assets and nonbank financial
                                             companies designated by FSOC regarding overall risk management, which also were proposed in the
                                             January 5, 2012, rule. Additionally, section 115 also authorizes FSOC to recommend additional
                                             enhanced prudential standards for bank holding companies with $50 billion or more in total
                                             consolidated assets and nonbank financial companies designated by FSOC to the Federal Reserve.
                                             b
                                               In this January 5, 2012, proposed rule, the Federal Reserve proposed rules to implement certain but
                                             not all of the requirements of sections 165 and 166 of the Dodd-Frank Act.
                                             c
                                               Bank SIFIs are already required to comply with the capital plan rule. The Federal Reserve issued its
                                             final capital plans rule on December 1, 2011 (76 Fed. Reg. 74,631).
                                             d
                                               In November 2011, the Financial Stability Board (FSB) identified 29 G-SIBs and indicated it would
                                             update this list annually each November. FSB updated this list on November 1, 2012. The updated
                                             list contains 28 G-SIBs; the same eight U.S. bank SIFIs were designated as G-SIBs in 2011 and
                                             2012. Additionally, on November 1, 2012, FSB allocated each G-SIB into a bucket corresponding to
                                             its different levels of capital surcharge.
                                             e
                                               Section 165(i)(2) of the Act requires that any financial company with more than $10 billion in total
                                             consolidated assets and that is regulated by a federal financial regulatory agency also be subject to
                                             company-run stress tests. The Federal Reserve issued a separate rule to implement this requirement.
                                             77 Fed. Reg. 62,396 (Oct. 12, 2012).
                                             f
                                               Bank SIFIs with at least $250 billion in total nonbank assets were required to submit their first
                                             resolution plans by July 1, 2012.
                                             g
                                               FSOC finalized a report and issued recommendations on implementing this provision. FSOC asked
                                             for comments on its recommendations. Financial Stability Oversight Council, Study &
                                             Recommendations Regarding Concentration Limits on Large Financial Companies (Washington,
                                             D.C.: January 2011).




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Appendix IV: Econometric Analyses of the
              Appendix IV: Econometric Analyses of the
              Impact of Enhanced Regulation and Oversight
              on SIFIs


Impact of Enhanced Regulation and
Oversight on SIFIs
              We conducted an econometric analysis to assess the impact of the Dodd-
Methodology   Frank Act’s new requirements for bank SIFIs on (1) the cost of credit they
              provide and (2) their safety and soundness. Our multivariate econometric
              model used a difference-in-difference design that exploits the fact that the
              Dodd-Frank Act subjects bank holding companies with total consolidated
              assets of $50 billion or more to enhanced regulation by the Federal
              Reserve but not others, so we can view bank holding companies with
              total consolidated assets of $50 billion or more (bank SIFIs) as the
              treatment group and other bank holding companies as the control group.
              We compared the changes in the characteristics of U.S. bank SIFIs over
              time to changes in the characteristics of other U.S. bank holding
              companies over time. All else being equal, the difference in the
              differences is the impact of new requirements for bank SIFIs primarily tied
              to enhanced regulation and oversight under the Federal Reserve.

              Our general regression specification is the following:

                                     ybq = αb + βq + γqSIFIbq + X’bqΘ + εbq

              where b denotes the bank holding company, q denotes the quarter, ybq is
              the dependent variable, αb is a bank holding company-specific intercept,
              βq is a quarter-specific intercept, SIFIbq is an indicator variable that equals
              1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is
              a list of other independent variables, and εbq is an error term. We
              estimated the parameters of the model using quarterly data on top-tier
              bank holding companies for the period from the first quarter of 2006 to
              the second quarter of 2012.

              The parameters of interest are the γq, the coefficients on the SIFI
              indicators in the quarters starting with the treatment start date of the third
              quarter of 2010 through the second quarter of 2012. The Dodd-Frank Act
              was enacted in July 2010 (the third quarter of 2010), so the SIFI indicator
              is equal to zero for all bank holding companies for all quarters from the
              first quarter of 2006 to the second quarter of 2010. The SIFI indicator is
              equal to 1 for all bank holding companies with assets of $50 billion or
              more for the third quarter of 2010 through the second quarter of 2012 and
              the SIFI indicator is equal to zero for all other bank holding companies for
              those quarters. Thus, for quarters from the third of 2010 to the second of
              2012, the parameter γq measures the average difference in the dependent
              variable between bank SIFIs and other bank holding companies in those
              quarters relative to the base quarter.




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We use different dependent variables (ybq) to estimate the impacts of the
new requirements for SIFIs on the cost of credit provided by bank SIFIs
and on various aspects of bank SIFIs’ safety and soundness, including
capital adequacy, asset quality, earnings, and liquidity.

•   Funding cost. A bank holding company’s funding cost is the cost of
    deposits or liabilities that it then uses to make loans or otherwise
    acquire assets. More specifically, a bank holding company’s funding
    cost is the interest rate it pays when it borrows funds. All else being
    equal, the greater a bank holding company’s funding cost, the greater
    the interest rate it charges when it makes loans. We measure funding
    cost as an institution’s interest expense as a percent of interest-
    bearing liabilities.
•   Capital adequacy. Capital absorbs losses, promotes public
    confidence, helps restrict excessive asset growth, and provides
    protection to creditors. We use two alternative measures of capital
    adequacy: tangible common equity as a percent of total assets and
    tangible common equity as a percent of risk-weighted assets.
•   Asset quality. Asset quality reflects the quantity of existing and
    potential credit risk associated with the institution’s loan and
    investment portfolios and other assets, as well as off-balance sheet
    transactions. Asset quality also reflects the ability of management to
    identify and manage credit risk. We measure asset quality as
    performing assets as a percent of total assets, where performing
    assets are equal to total assets less assets 90 days or more past due
    and still accruing interest, assets in non-accrual status, and other real
    estate owned.
•   Earnings. Earnings are the initial safeguard against the risks of
    engaging in the banking business and represent the first line of
    defense against capital depletion that can result from declining asset
    values. We measure earnings as net income as a percent of total
    assets.
•   Liquidity. Liquidity represents the ability to fund assets and meet
    obligations as they become due, and liquidity risk is the risk of not
    being able to obtain funds at a reasonable price within a reasonable
    time period to meet obligations as they become due. We use two
    different variables to measure liquidity. The first variable is liquid
    assets as a percent of volatile liabilities. This variable is similar in spirit
    to the liquidity coverage ratio introduced by the Basel Committee on
    Banking Supervision and measures a bank holding company’s
    capacity to meet its liquidity needs under a significantly severe
    liquidity stress scenario. We measure liquid assets as the sum of cash
    and balances due from depository institutions, securities (less pledged
    securities), federal funds sold and reverse repurchases, and trading


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    assets. We measure volatile liabilities as the sum of federal funds
    purchased and repurchase agreements, trading liabilities (less
    derivatives with negative fair value), other borrowed funds, deposits
    held in foreign offices, and large time deposits held in domestic
    offices. Large time deposits are defined as time deposits greater than
    $100,000 prior to March 2010 and as time deposits greater than
    $250,000 in and after March 2010.
    The second liquidity variable is stable liabilities as a percent of total
    liabilities. This variable measures the extent to which a bank holding
    company relies on stable funding sources to finance its assets and
    activities. This variable is related in spirit to the net stable funding ratio
    introduced by the Basel Committee on Banking Supervision, which
    measures the amount of stable funding based on the liquidity
    characteristics of an institution’s assets and activities over a 1 year
    horizon. We measure stable funding as total liabilities minus volatile
    liabilities as described earlier.

Finally, we include a limited number of independent variables (Xbq) to
control for things that may differentially affect SIFIs and non-SIFIs in the
quarters since the Dodd-Frank Act was enacted. We include these
variables to reduce the likelihood that our estimates of the impact of new
requirements for SIFIs are reflecting something other than the impact of
the Dodd-Frank Act’s new requirements for SIFIs.

•   Nontraditional income. Nontraditional income generally captures
    income from capital market activities. Bank holding companies with
    more nontraditional income are likely to have different business
    models than those with more income from traditional banking
    activities. Changes in capital markets in the period since the Dodd-
    Frank Act was enacted may have had a greater effect on bank holding
    companies with more nontraditional income. If bank SIFIs typically
    have more nontraditional income than other bank holding companies,
    then changes in capital markets in the time since the Dodd-Frank Act
    was enacted may have differentially affected the two groups. We
    measure nontraditional income as the sum of trading revenue;
    investment banking, advisory, brokerage, and underwriting fees and
    commissions; venture capital revenue; insurance commissions and
    fees; and interest income from trading assets less associated interest
    expense, and we express nontraditional income as a percent of
    operating revenue.
•   Securitization income. Bank holding companies with more income
    from securitization are likely to have different business models than
    those with more income from traditional banking associated with an



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    originate-to-hold strategy for loans. Changes in the market for
    securitized products in the period since the Dodd-Frank Act was
    enacted may thus have had a greater effect on bank holding
    companies with more securitization income. If bank SIFIs typically
    have more securitization income than other bank holding companies,
    then changes in the market for securitized products in the time since
    the Dodd-Frank Act was enacted may have differentially affected the
    two groups. We measure securitization income as the sum of net
    servicing fees, net securitization income, and interest and dividend
    income on mortgage-backed securities minus associated interest
    expense, and we express securitization as a percent of operating
    revenue. Operating revenue is the sum of interest income and
    noninterest income less interest expense and loan loss provisions.
•   Foreign exposure. Changes in other countries, such as the
    sovereign debt crisis in Europe, may have a larger effect on bank
    holding companies with more foreign exposure. If bank SIFIs typically
    have more foreign exposure than other bank holding companies, then
    changes in foreign markets may have differentially affected the two
    groups. We measure foreign exposure as the sum of foreign debt
    securities (held-to-maturity and available-for-sale), foreign bank loans,
    commercial and industrial loans to non-U.S. addresses, and foreign
    government loans. We express foreign exposure as a percent of total
    assets.
•   Size. We include size because bank SIFIs tend to be larger than other
    bank holding companies, and market pressures or other forces not
    otherwise accounted for may have differentially affected large and
    small bank holding companies in the time since the Dodd-Frank Act
    was enacted. We measure the size of a bank holding company as the
    natural logarithm of its total assets.
•   TARP participation. We control for whether or not a bank holding
    company participated in the Troubled Asset Relief Program (TARP) to
    differentiate any impact that this program may have had from the
    impact of the Dodd-Frank Act.

We also conducted several sets of robustness checks:

•   We restricted our sample to the set of institutions with assets that are
    “close” to the $50 billion cutoff for enhanced prudential regulation for
    bank SIFIs. Specifically, we analyzed two restricted samples of bank
    holding companies: (1) bank holding companies with assets between
    $1 billion and $100 billion and (2) bank holding companies with assets
    between $25 billion and $75 billion.




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          Appendix IV: Econometric Analyses of the
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          on SIFIs




          •   We examined different treatment start dates. Specifically, we allowed
              the Dodd-Frank Act’s new requirements for SIFIs to have an impact in
              2009q3, 1 year prior to the passage of the act. We did so to allow for
              the possibility that institutions began to react to the act’s requirements
              in anticipation of the act being passed.
          •   We analyzed alternative measures of capital adequacy, including
              equity capital as a percent of total assets and Tier 1 capital as a
              percent of risk-weighted assets.
          •   We analyzed commercial banks and savings banks (banks). In this
              case, we identified a bank as a SIFI if it is a subsidiary of a SIFI bank
              holding company.

Data      We conducted our analysis using quarterly data on bank holding
          companies from the Federal Reserve Board and SNL Financial for the
          period from the first quarter of 2006 to the second quarter of 2012. We
          also used quarterly data on commercial banks and savings banks from
          the Federal Deposit Insurance Corporation (FDIC), Federal Financial
          Institutions Exanimation Council (FFIEC), and SNL Financial for the same
          time period for one of our robustness checks.


          The Dodd-Frank Act appears to be associated with an increase in bank
Results   SIFIs’ funding costs in the second quarter of 2012, but not in other
          quarters (see table 13). Over the period from the third quarter of 2010 to
          the second quarter of 2012, bank SIFIs’ funding costs ranged from about
          0.02 percentage points lower to about 0.05 percentage points higher than
          they otherwise would have been since the Dodd-Frank Act. As a group,
          the estimates are jointly significant. However, the individual estimates are
          not significantly different from zero for quarters other than the second
          quarter of 2012. These estimates suggest that the Dodd-Frank Act’s new
          requirements for SIFIs have had little effect on bank SIFIs’ funding costs.
          To the extent that borrowing costs are a function of funding costs, the
          new requirements for SIFIs likely have had little effect on the cost of credit
          thus far. 1




          1
           The cost of credit is determined by many factors other than bank SIFIs’ cost of funding,
          including expected credit losses and administrative costs, as well as overall demand for
          credit and the availability of credit from other lenders.




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                                        Appendix IV: Econometric Analyses of the
                                        Impact of Enhanced Regulation and Oversight
                                        on SIFIs




Table 13: Estimated Impacts of the Dodd-Frank Act on Bank SIFIs, from Third Quarter of 2010 through Second Quarter of
2012 (percentage points)

               Cost of credit
                 indicator                                               Safety and soundness indicators
               Funding cost           Capital adequacy                         Asset quality            Earnings                      Liquidity
                       Interest                      Tangible
                      expense        Tangible    common equity                                                                   Liquid
                  (% interest-      common            (% risk-                    Performing                                     assets            Stable
                       bearing         equity        weighted                          assets          Net income           (% volatile         liabilities
                    liabilities)   (% assets)          assets)                     (% assets)           (% assets)           liabilities)   (% liabilities)
2010 Q3                   -0.02        1.16**                   1.70**                     1.04**                  0.14**          3.58             3.64**
                         (0.02)        (0.20)                   (0.30)                     (0.19)                  (0.04)         (6.41)            (0.92)
2010 Q4                   0.00         1.54**                   2.21**                     1.20**                  0.24**          4.19             3.79**
                         (0.02)        (0.23)                   (0.36)                     (0.19)                  (0.05)         (6.55)            (0.97)
2011 Q1                   0.02         1.58**                   2.19**                     1.26**                  0.13**         -4.89             2.82**
                         (0.02)        (0.24)                   (0.39)                     (0.20)                  (0.04)         (6.70)            (1.02)
2011 Q2                   0.03         1.46**                   2.02**                     1.32**                  0.11**         -2.68             3.54**
                         (0.02)        (0.24)                   (0.39)                     (0.21)                  (0.04)         (7.17)            (1.02)
2011 Q3                   0.01         1.42**                   1.96**                     1.30**                  0.10**          2.25             5.22**
                         (0.02)        (0.25)                   (0.38)                     (0.21)                  (0.04)         (8.19)            (1.10)
2011 Q4                   0.02         1.47**                   1.98**                     1.16**                   -0.00         -4.26             5.67**
                         (0.02)        (0.26)                   (0.43)                     (0.22)                  (0.10)         (9.20)            (1.22)
2012 Q1                   0.03         1.66**                   2.17**                     1.19**                   0.03          -2.15             5.14**
                         (0.02)        (0.25)                   (0.41)                     (0.21)                  (0.04)       (10.89)             (1.27)
2012 Q2                 0.05**         1.63**                   2.24**                     1.17**                   -0.01         -2.63             5.29**
                         (0.02)        (0.28)                   (0.50)                     (0.23)                  (0.04)       (10.60)             (1.22)


Number of               25,953        25,953                  25,953                      25,953               25,953           25,953             25,953
observations
Within R-                 0.92           0.06                     0.10                       0.38                   0.16           0.22               0.20
squared
Number of                1,374         1,374                    1,374                       1,374                  1,374          1,374             1,374
bank holding
companies
All impacts                Yes           Yes                       Yes                        Yes                    Yes            Yes               Yes
jointly
significant?
                                        Source: GAO analysis of data from the Federal Reserve and SNL Financial.

                                        Notes: Estimated impacts are on the variable in the column header for the quarter in the row header.
                                        Robust standard errors are in parentheses. We analyzed data for bank holding companies for the
                                        period from the first quarter of 2006 to the second quarter of 2012. We estimated the impact of the
                                        new requirements for bank SIFIs by regressing the variables listed in the table on indicators for each
                                        bank holding company in the sample, indicators for each quarter, indicators for whether or not a bank




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holding company is a SIFI for the period from the third quarter of 2010 to the second quarter of 2012,
and other variables controlling for size, foreign exposure, securitization income, other nontraditional
income, and participation in the Troubled Asset Relief Program. Estimated impacts are the
coefficients on the indicators for whether or not a bank holding company is a SIFI for quarters from
the third of 2010 to the second of 2012. We used an F-test to assess whether the coefficients on the
SIFI indicators for all quarters are jointly significant. We used t-tests to assess whether the coefficient
on the SIFI indicator for a specific quarter is significant. We used the 5 percent level as our criteria
for both joint and individual significance. **=statistically significant at the 5 percent level.


Our results suggest that the Dodd-Frank Act is associated with
improvements in most aspects of bank SIFIs’ safety and soundness.
Bank SIFIs appear to be holding more capital than they otherwise would
have held since the Dodd-Frank Act was enacted. The quality of assets
on the balance sheets of bank SIFIs also seems to have improved since
enactment. The act is associated with higher earnings for bank SIFIs in
the first four quarters after enactment. It is also associated with improved
liquidity as measured by the extent to which a bank holding company is
using stable sources of funding. Only liquidity measured by the capacity
of a bank holding company’s liquid assets to cover its volatile liabilities
has not clearly improved since the enactment of the act. Thus, the Dodd-
Frank Act appears to be broadly associated with improvements in most
indicators of safety and soundness for bank SIFIs.

Our approach allows us to partially differentiate changes in funding costs,
capital adequacy, asset quality, earnings, and liquidity associated with the
Dodd-Frank Act from changes due to other factors. However, several
factors make isolating and measuring the impact of the Dodd-Frank Act’s
new requirements for SIFIs challenging. The effects of the Dodd-Frank
Act cannot be differentiated from simultaneous changes in economic
conditions, such as the pace of the recovery from the recent recession, or
regulations, such as those stemming from Basel III, that may differentially
affect bank SIFIs and other bank holding companies. In addition, many of
the new requirements for SIFIs have yet to be implemented. For example,
the Federal Reserve has indicated that it will impose a capital surcharge
and liquidity ratios on at least some SIFIs, but the exact form and scope
of these requirements is not yet known. Nevertheless, our estimates are
suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and
provide a baseline against which to compare future trends.

The results of our robustness checks are as follows:

•    Our results are generally robust to restricting the set of bank holding
     companies we analyze to those with assets of $1 billion-$100 billion.
•    Our results are not generally robust to restricting the set of bank
     holding companies we analyze to those with assets of $25 billion-$75



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    billion, but this is likely to be a result of the small number of bank
    holding companies (29) that fit this criteria.
•   Our results are generally robust to starting the “treatment” in 2009 Q3,
    1 year prior to the passage of the Dodd-Frank Act. In addition, our
    estimates suggest that the impact of new requirements for SIFIs of the
    Dodd-Frank Act may have preceded the enactment of the act itself.
    This finding is consistent with the theory that bank holding companies
    began to change their behavior in anticipation of the act’s
    requirements, perhaps as information about the content of the act
    became available and the likelihood of its passage increased.
    However, there may be other explanations, including anticipation of
    Basel III requirements, reactions to stress tests, and market pressures
    to improve capital adequacy and liquidity.
•   Our results for the impact on capital adequacy are generally similar for
    alternative measures of capital adequacy.
•   Our results for banks’ funding costs, asset quality, earnings, and
    liquidity as measured by liquid assets as a percent of volatile liabilities
    were generally similar to our baseline results for bank holding
    companies, but our results for capital adequacy and liquidity as
    measured by stable liabilities as a percent of total liabilities were not.
    The differences may reflect the impact of nonbank subsidiaries on
    bank holding companies or a number of other factors.




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              Appendix V: Impact Analysis of the Debit Card
              Interchange Fees and Routing Rule



Card Interchange Fees and Routing Rule

              The Federal Reserve’s adoption of Regulation II (Debit Card Interchange
              Fees and Routing), which implements section 1075 of the Dodd-Frank
              Act, generally has reduced debit card interchange fees. 1 However, debit
              card issuers, payment card networks, and merchants are continuing to
              adjust strategically to the rule; thus, the rule’s impact has not yet been
              fully realized. Typically, consumers use debit cards as a cashless form of
              payment that electronically accesses funds from a cardholder’s bank
              account. A consumer using a debit card authenticates and completes a
              transaction by entering a personal identification number (PIN) or a
              signature. The parties involved in a debit card transaction are (1) the
              customer or debit cardholder; (2) the bank that issued the debit card to
              the customer (issuer bank); (3) the merchant; (4) the merchant’s bank
              (called the acquirer bank); and (4) the payment card network that
              processes the transaction between the merchant acquirer bank and the
              issuer bank. In a debit transaction, the merchant receives the amount of
              the purchase minus a fee that it must pay to its acquirer bank. This fee
              includes the debit interchange fee that the acquirer bank pays to the
              issuer bank. 2 Interchange fees generally combine an ad-valorem
              component, which depends on the amount of the transaction, and a fixed-
              fee component. 3 Additionally, before Regulation II was implemented, fees
              varied more widely based on, among other things, the type of merchant. 4

              Although payment card networks do not receive the debit interchange
              fees, they set the fees. Debit cards represent a two-sided market that




              1
               76 Fed. Reg. 43,394 (Jul. 20, 2011).
              2
               Debit interchange fees generally are the same for all issuing banks participating in a
              network. For example, all issuers that use VISA signature as their card network generally
              receive the same interchange fees set by VISA, although the fees can vary based on the
              type of transaction and whether the issuer bank is covered or exempt from the fee cap.
              3
               For example, according to VISA’s fee schedule as of October 2007, one interchange fee
              for a restaurant debit transaction was set at 1.19 percent of the transaction value plus
              $0.10.
              4
               According to VISA’s fee schedule as of October 2007, for example, a $20 debit
              transaction at a restaurant could cost about $0.34 (subject to an interchange fee of 1.19%
              + $0.10), while a $20 transaction at a car rental could cost about $0.42 (subject to an
              interchange fee of 1.36% + $0.15).




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involves cardholders and merchants. 5 Cardholders benefit if their cards
are accepted by a wide range of merchants, and merchants benefit if their
ability to accept cards results in higher sales. In theory, a card network
sets its interchange fees to balance the demand on the two sides of the
market. It sets interchange fees high enough to attract issuers to issue
debit cards processed by the network but low enough for merchants to be
willing to accept the debit cards. 6 Before the enactment of section 1075 of
the Dodd-Frank Act, debit interchange fees had been increasing, creating
controversy in the industry about the appropriate level of debit
interchange fees in the United States, which some have stated were
among the highest in the world. 7 For example, some merchants stated
that network competition led to higher, not lower, interchange fees as
networks strived to attract issuer banks (who ultimately receive
interchange fee revenue).

Section 1075 amends the Electronic Fund Transfer Act (EFTA) by adding
a new section 920 regarding interchange transaction fees and rules for
payment card transactions. As required by EFTA section 920, Regulation
II establishes standards for assessing whether debit card interchange
fees received by issuers are reasonable and proportional to the costs
incurred by issuers for electronic debit transactions. The rule sets a cap
on the maximum permissible interchange fee that an issuer may receive
for an electronic debit transaction at $0.21 per transaction, plus 5 basis
points multiplied by the transaction’s value. 8 An issuer bank that complies


5
 See, for example, Marc Rysman, “The Economics of Two-Sided Markets,” Journal of
Economic Perspectives, vol. 23, no. 3, (summer 2009), pp. 125-143. In general, a two-
sided market is one in which (1) two sets of agents interact through an intermediary or
platform, and 2) the decisions of each set of agents affects the outcomes of the other set
of agents, typically through an externality. In the case of debit cards, the intermediary is
the network, and the two sets of agents are consumers and merchants. Neither
consumers nor merchants will be interested in a network’s debit card if the other party is
not. A successful debit card requires both consumer usage and merchant acceptance,
where both consumers and merchants value each other’s participation.
6
 Debit cards are capable of processing a transaction over one or multiple networks.
Consequently, when consumers present their debit cards to merchants to make
purchases, it may be possible to complete a given transaction over several different debit
card networks.
7
 Terri Bradford and Fumiko Hayashi, Developments in Interchange Fees in the United
States and Abroad, Payments System Research Briefing, Federal Reserve Bank of
Kansas City (April 2008).
8
    76 Fed. Reg. 43,394 (July 20, 2011).




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                              with Regulation II’s fraud-prevention standards may receive no more than
                              an additional 1 cent per transaction. 9 The fee cap became effective on
                              October 1, 2011. However, as required by EFTA section 920, the rule
                              exempts from the fee cap issuers that have, together with their affiliates,
                              less than $10 billion in assets, and transactions made using debit cards
                              issued pursuant to government-administered payment programs or
                              certain reloadable prepaid cards. In addition, Regulation II prohibits
                              issuers and card networks from restricting the number of networks over
                              which electronic debit transactions may be processed to less than two
                              unaffiliated networks. 10 This prohibition became effective on April 1, 2012.
                              The rule further prohibits issuers and networks from inhibiting a merchant
                              from directing the routing of an electronic debit transaction over any
                              network allowed by the issuer. 11 This prohibition became effective
                              October 1, 2011.


Initial Impact on Large and   Thus far, large banks that issue debit cards have experienced a decline in
Small Banks                   their debit interchange fees as a result of Regulation II, but small banks
                              generally have not. As noted above, issuers that, together with their
                              affiliates, have $10 billion or more in assets are subject to the debit card
                              interchange fee cap. According to the Federal Reserve, 568 banks were
                              subject to the fee cap in 2012 (covered issuers). 12 Issuers below the $10
                              billion asset threshold are exempt from the fee cap (exempt issuers).
                              According to the Federal Reserve, over 14,300 banks, credit unions,




                              9
                               77 Fed. Reg. 46,258 (Aug. 3. 2012). EFTA section 920 permits the Federal Reserve to
                              allow for an adjustment to an interchange transaction fee that is reasonably necessary to
                              make allowance for costs incurred by the issuer in preventing fraud in relation to electronic
                              debit transactions, provided the issuer complies with standards established by the Federal
                              Reserve relating to fraud prevention.
                              10
                                76 Fed. Reg. 43,394 (July 20, 2012). EFTA section 920 also requires the Federal
                              Reserve to prescribe rules that prohibit issuers and payment card networks from
                              restricting the number of networks on which an electronic debit transaction may be
                              processed to one such network or two or more affiliated networks.
                              11
                                76 Fed. Reg. 43, 394 (July 20, 2012). EFTA section 920 also requires the Federal
                              Reserve to prescribe rules prohibiting issuers and networks from inhibiting the ability of
                              any person that accepts debit cards from directing the routing of electronic debit
                              transactions over any network that may process such transactions.
                              12
                                These institutions were subject to the fee cap beginning July 1, 2012 because they had
                              consolidated assets of $10 billion or more as of December 31, 2011.




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savings and loans, and savings banks were exempt from the fee cap in
2012. 13

Initial data collected by the Federal Reserve indicate that covered issuers
have experienced a significant decline in their debit interchange fees and
fee income as a result of Regulation II. Data published by the Federal
Reserve show that 15 of 16 card networks provided a lower interchange
fee, on average, to covered issuers after the rule took effect. 14
Specifically, the data show that the average interchange fee received by
covered issuers declined 52 percent, from $0.50 in the first three quarters
of 2011 to $0.24 in the fourth quarter. During the same period, the
interchange fee as a percentage of the average transaction value for
covered issuers declined from 1.29 percent to 0.60 percent.

Our own analysis also suggests that the fee cap is associated with
reduced interchange fee income for covered banks. 15 To further assess
the impact of the fee cap on covered banks, we conducted an
econometric analysis of debit and credit card interchange fee income
earned by banks from the first quarter of 2008 through the second quarter
of 2012. As discussed, Regulation II subjects covered issuers but not
exempt issuers to the fee cap. This allows us to compare the incomes
earned by covered and exempt banks before and after the fee cap’s
effective date in the fourth quarter of 2011. All else being equal, the post-
cap changes in income among the two groups can be inferred as the
effect of the fee cap on interchange fee income earned by covered banks.
Our estimates suggest that interchange fees collected by covered banks,
as a percent of their assets, were about 0.007 to 0.008 percentage points
lower than they otherwise would have been in the absence of the fee cap.
For a bank with assets of $50 billion, this amounts to $3.5 million to $4
million in reduced interchange fee income.




13
  These institutions were exempt from the fee cap in 2012, because they had
consolidated assets of less than $10 billion as of December 31, 2011. Institutions that
qualified for the exemption during 2011 were those institutions that had, together with
affiliates, assets of less than $10 billion as of December 31, 2010.
14
  The Federal Reserve published data on interchange fees for 16 card networks from
January 1, 2011, to December 31, 2011. According to Federal Reserve staff, totals
published include data from two additional networks.
15
 See appendix VI for details on our econometric analysis.




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In comparison, Regulation II’s fee cap appears initially to have had a
limited impact on exempt issuers. As we recently reported, initial data
collected by the Federal Reserve indicate that card networks largely have
adopted a two-tiered interchange fee structure after the implementation of
Regulation II, to the benefit of exempt issuers. 16 Data published by the
Federal Reserve from 16 card networks show 15 of 16 card networks
provided a higher interchange fee, on average, to exempt issuers than
covered issuers after the rule took effect. 17 The data further showed that
the average interchange fee received by exempt issuers declined by
$0.02, or around 5 percent, after the rule took effect—declining from
$0.45 over the first three quarters of 2011 to $0.43 in the fourth quarter of
2011. 18 Over the same period, the interchange fee as a percentage of the
average transaction value for exempt issuers declined from 1.16 to 1.10
percent. 19

Although the fee cap appeared to have a limited impact on exempt
issuers, such issuers remain concerned about the potential for their
interchange fee income to decline over the long term. For example, some
have noted that (1) the prohibition on network exclusivity and routing
restrictions may lead networks to lower their interchange fees, in part to
encourage merchants to route debit card transactions through their
networks; or (2) economic forces may cause networks not to maintain a
two-tiered fee structure that provides a meaningful differential between



16
   GAO, Community Banks and Credit Unions: Impact of the Dodd-Frank Act Depends
Largely on Future Rulemakings, GAO-12-881 (Washington, D.C.: Sept. 13, 2012). A two-
tiered fee structure is one that offers different fee structures for exempt and covered
issuers. For example, VISA USA Consumer Check Card fee schedule as of June 2012 set
the interchange fee at the level of the cap for covered issuers, but kept the previous fee
structure for exempt banks. That is, exempt banks continue to collect a wide variety of
interchange fees determined by, among other things, the merchant type.
17
  As mentioned earlier, the Federal Reserve published data on interchange fees for 16
card networks from January 1, 2011, to December 31, 2011. According to Federal
Reserve staff, totals published include data from two additional networks.
18
  The Federal Reserve published data from 16 payment card networks individually. Eight
networks reported a decline in their average interchange fee per transaction for exempt
issuers—ranging from $0.01 to $0.04—after the rule took effect. Three networks reported
no change in their average interchange fee for exempt issuers. Five networks reported an
increase in their fee for exempt issuers—ranging from $0.01 to $0.03—after the rule took
effect.
19
  The interchange fee as a percentage of the average transaction value is calculated by
dividing the total interchange fees by the value of settled purchase transactions.




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                          fees for exempt and covered issuers. However, some merchants and
                          others have noted that major card networks have adopted a two-tiered
                          fee structure and have an incentive to maintain that structure to attract
                          exempt issuers. 20


Impact on Merchants and   Regulation II’s fee cap generally has reduced debit card interchange fees,
Consumers                 which likely has resulted or will result in savings for merchants. According
                          to the Federal Reserve and industry experts, the merchant acquirer
                          market is competitive. Thus, the decrease in interchange fees likely has
                          translated or will translate into lower merchant acquirer fees. Some noted
                          that large merchants likely reaped immediate benefits from the fee cap,
                          because their acquirer fees probably were reduced when interchange
                          fees declined. In contrast, they noted that smaller merchants often opt for
                          blended fee structures under which, for example, the merchants may be
                          charged a flat fee per electronic payment transaction and, thus, not
                          immediately receive the benefit of decreases in interchange fees because
                          merchants may still be locked into contracts that have these fee
                          structures. 21 In either case, competition in the supply of acquirer services
                          is expected to cause acquirer banks to adjust the fees they charge to
                          merchants and pass on any savings to avoid losing merchant business.

                          In its final rule, the Federal Reserve noted that merchants could be
                          negatively affected if large issuers were able to persuade their customers
                          to pay with credit cards rather than debit cards, since credit cards
                          generally have higher interchange fees. 22 While issuers can take this
                          strategy, merchants also can provide incentives to consumers to
                          encourage them to use debit cards instead of credit cards. The Dodd-


                          20
                            A number of merchant associations have brought a lawsuit against the Federal Reserve,
                          alleging that it failed to follow the intent of Congress regarding the amount of an
                          interchange fee that an issuer could charge or receive. As of December 12, 2012, the suit
                          had not been resolved.
                          21
                            According to the Federal Reserve, merchant discount fees generally follow two forms:
                          interchange-plus pricing and blended. If an acquirer is charging an interchange-plus
                          merchant discount, the acquirer passes through the exact amount of the interchange fee
                          for each transaction. If an acquirer is charging a blended merchant discount, the acquirer
                          charges the same discount regardless of the interchange fee that applies to each
                          transaction. Depending on the fee structure, it may take some time before an acquirer
                          bank passes on savings from lower debit card interchange fees.
                          22
                            For example, banks could try to eliminate debit card reward programs and offer
                          relatively more attractive credit card rewards programs.




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Frank Act requires networks to allow merchants to offer discounts to
consumers based on whether they pay by cash, check, debit card, or
credit card. 23 In addition, a recent report stated that an antitrust settlement
between the Department of Justice and VISA and MasterCard requires
the networks to loosen past restrictions on merchants’ ability to offer
discounts to consumers based on the payment method, brand, and
product. This allows merchants accepting cards by those networks to
provide incentives to encourage customers to complete their debit
transactions using their PIN rather than signature. 24 GAO did not identify
data on whether issuers or merchants are engaging in such strategies.

Some types of merchants may be adversely affected by Regulation II. As
mentioned earlier, the fee cap generally led payment card networks to set
their debit interchange fees at the level of the cap for covered issuers.
However, the interchange fee for small-ticket transactions, or transactions
that are generally under $15, was sometimes below the fee cap before
Regulation II became effective. For example, according to the
International Franchise Association and the National Council of Chain
Restaurants, before Regulation II a $5 transaction could incur 11.75 cents
in debit interchange fees. 25 Under the current fee cap of 21 cents plus


23
  EFTA Section 920(b)(2) prohibits a card network from establishing rules that prevent
merchants from offering discounts or in-kind incentives based on the method of payment
tendered to the extent that such discounts or incentives do not differentiate on the basis of
the issuer or card network. According to a report by the Federal Reserve Bank of Kansas
City, before the act, merchants were allowed by the Cash Discount Act to offer a discount
to customers who pay with cash or check instead of credit cards, but networks did not
allow merchants to offer a discount for paying with a debit card rather than a credit card.
See Fumiko Hayashi, Discounts and Surcharges: Implications for Consumer Payment
Choice, Payments System Research Briefing, Federal Reserve Bank of Kansas City (June
2012).
24
  Fumiko Hayashi, Discounts and Surcharges: Implications for Consumer Payment
Choice, Payments System Research Briefing, Federal Reserve Bank of Kansas City (June
2012). According to the Federal Reserve, data collected from card networks in 2009
showed that the interchange fee per signature debit transaction was, on average, about
2.4 times that for a PIN debit transaction (2.6 times if calculated using the interchange fee
as a percentage of the average transaction value).
25
  According to the International Franchise Association and National Council of Chain
Restaurants, these would have been the resulting interchange fees under the VISA and
MasterCard small-ticket transaction fees published about 7 months prior to the effective
date of the fee cap, both set at 1.55 percent and 4 cents. See comments to the proposed
rule by the International Franchise Association & National Council of Chain Restaurants
available at
http://www.federalreserve.gov/apps/foia/ViewAllComments.aspx?doc_id=R-1404&doc_ver
=1.




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0.05 percent of the transaction value, the interchange fee for a $5
covered transaction is 21.25 cents, about 80 percent higher. As a result,
merchants that have a high volume of small value transactions, such as
quick serving restaurants, transit authorities, and self-service and vending
operators, could be worse off after the adoption of Regulation II.

It is not practical to measure the extent to which consumers in the many
markets where debit transactions are possible have been affected by
Regulation II. 26 First, one probable outcome is that at least a fraction of
the merchants have passed some of their cost savings onto consumers.
As noted by the Federal Reserve, whether merchants reduce their prices
as a result of lower interchange fees will depend on the competitiveness
of the various retail markets. In a competitive market with low margins,
merchants likely have to pass on at least part of their cost savings to
consumers. On the other hand, the loss in debit interchange fee income
by large banks may lead them to seek ways to recover that lost income.
As mentioned by the Federal Reserve, banks may try to recoup lost
interchange fee income by introducing new bank service and product
fees, possibly making banking services too costly for at least some
customers. Our analysis (discussed previously) suggests that covered
banks have recovered some of their lost interchange fee revenue, such
as through increased revenue from service charges on deposit
accounts. 27



26
  As the Federal Reserve indicated in its final rulemaking, it is not practical to measure the
extent to which changes in interchange fees translate into changes in merchant prices
because of the many other factors that also influence those prices.
27
  These service charges include amounts charged to depositors in domestic offices (1) for
account maintenance, (2) for failure to maintain specified minimum deposit balances, (3)
based on the number of checks drawn on and deposits made, (4) for checks drawn on so-
called "no minimum balance" deposit accounts, (5) for withdrawals from nontransaction
deposit accounts, (6) for the closing of savings accounts before a specified minimum
period of time has elapsed, (7) for accounts which have remained inactive for extended
periods of time or which have become dormant, (8) for deposits to or withdrawals from
deposit accounts through the use of automated teller machines or remote service units,
(9) for the processing of checks drawn against insufficient funds, (10) for issuing stop
payment orders, (11) for certifying checks, and (12) for the accumulation or disbursement
of funds deposited to Individual Retirement Accounts or Keogh Plan accounts when not
handled by the bank's trust department. Our analysis also suggests that covered issuer
banks’ total income has not changed significantly after Regulation II’s fee cap became
effective. Total income earned by covered banks, as a percent of assets, ranged from
0.10 percentage points lower to 0.05 percentage points higher after October 1, 2011, but
these estimates are not statistically significant at the 5 percent level. See appendix VI for
details of our econometric analysis.




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Impact on Competition   Historically, issuers have determined which and how many signature and
and Interchange Fees    PIN networks may process their debit card transactions. Before and after
                        Regulation II, issuers generally use only one signature network (e.g.,
                        VISA or MasterCard) to process their debit card transactions that are
                        completed using a signature. Additionally, as stated in the final rule,
                        before Regulation II issuer banks, or in some cases, networks controlled
                        the merchant routing of debit transactions. For example, an issuer bank
                        could require a PIN transaction to be routed over a particular network,
                        even if other PIN networks were available to route the transaction. The
                        rule also states that, prior to Regulation II, issuer banks were able to limit
                        the networks enabled on their cards through exclusive contracts with
                        networks. For example, some issuers had agreed to restrict their cards’
                        signature debit functionality to a single signature debit network and their
                        PIN debit functionality to the signature network’s affiliated PIN network.
                        According to the Federal Reserve’s 2009 survey data of large issuers,
                        most debit cards from large bank issuers carried only one PIN network,
                        and the cards’ PIN and signature networks typically were affiliated with
                        each other. 28

                        Regulation II contains two provisions that serve to provide merchants with
                        the option of selecting the network to process their debit card transactions
                        and a greater number of network options. First, the rule prohibits all
                        issuers and networks from inhibiting a merchant from directing the routing
                        of a transaction over any network allowed by the issuer. This provision
                        became effective on October 1, 2011. For example, if an issuer’s debit
                        card has two or more PIN networks, the merchant rather than the issuer
                        can chose which network processes a PIN transaction, such as the one
                        charging the lowest interchange fee. Second, the rule prohibits all issuers
                        and networks from restricting the number of networks over which debit
                        transactions may be processed to fewer than two unaffiliated networks.
                        This provision became effective on April 1, 2012. As a result, issuers no
                        longer may allow only VISA’s or MasterCard’s signature and affiliated PIN
                        networks to process their debit card transactions. Instead, such issuers




                        28
                          According to the survey, about 131.1 million out of 174.2 million debit cards that
                        processed PIN transactions (or about 75 percent) carried only one PIN network.
                        Additionally, about 105.5 million of the debit cards with one PIN network, or 80 percent,
                        had a signature network that was affiliated with the PIN network. The final rule states that
                        the Federal Reserve surveyed bank issuers that would be subject to the interchange fee
                        standards (that is, banks with consolidated assets of $10 billion or more).




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would need to add an unaffiliated signature or PIN network if they do not
already have an unaffiliated network. 29

Regulation II’s prohibitions may have a limited impact on increasing
competition and, in turn, lowering interchange fees, because issuers
largely control which networks may process their debit card transactions.
For example, issuers did not likely comply with Regulation II by adding a
second unaffiliated signature network because, according to the final rule,
networks and issuers stated it would be too costly to reconfigure cards
and merchant equipment to enable the processing of two signature
networks associated with one card. 30 Consequently, merchants generally
have only one network option for transactions completed by signature.
Additionally, issuers can comply by having an unaffiliated signature
network and PIN network, which means that merchants may have only
one network routing choice once a customer decides to use her signature
or her PIN. Therefore, even though Regulation II provides merchants with
the authority to choose the network over which to route debit card
transactions, merchants may not have a choice about which network to
route the debit card transaction.

Going forward, issuers may be able to act strategically to limit competition
over debit card interchange fees through their control over which
networks may process their debit card transactions. First, for covered
transactions subject to the fee cap, both signature and PIN networks have
an incentive to set their interchange fees at the fee cap. 31 If a network
lowered its fees below the cap, such as to attract merchant routing
business, issuers using that network could replace it with a network that
sets its fees at the cap. With networks charging similar interchange fees



29
  Data from the Federal Reserve’s survey of large issuer banks in 2009 showed that of
almost 159 million of the banks’ debit cards that carried both signature and PIN
networks,105.5 million (or 66 percent) of them enabled only one signature network and its
affiliated PIN network. Such banks likely added another PIN network to their cards to
comply with Regulation II.
30
  In its rule proposal, the Federal Reserve considered requiring issuers to allow at least
two unaffiliated signature networks and two unaffiliated PIN networks to process their
debit card transactions. 75 Fed. Reg. 81,722 (Dec. 28, 2010). The Federal Reserve
rejected this possibility in the final rule.
31
  According to their published interchange fee schedules as of October 29, 2012, both
VISA and MasterCard have set debit interchange fees for covered transactions at the
mandated cap.




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                     for covered transactions, merchants may not be able to use their network
                     routing decisions to put downward pressure on such fees. Second, for
                     exempt PIN transactions, merchants may be able to exert downward
                     pressure on fees when issuers use two or more PIN networks to process
                     their transactions. 32 In this case, merchants can choose the network with
                     the lowest fees and possibly induce the other networks to lower their fees.
                     However, exempt issuers may be able to counter such pressure by
                     dropping a network whose fees are too low or allowing only the PIN
                     network (along with an unaffiliated signature network) with the highest
                     fees to process their transactions. As discussed, merchants may be able
                     to provide incentives to customers using cards issued by exempt banks to
                     conduct a PIN rather than a signature transaction, so as to allow
                     themselves more routing options. 33


Impact on Networks   In response to Regulation II, VISA is undertaking strategies intended to
                     attract merchant routing. First, VISA recently imposed a new monthly
                     fixed acquirer fee that merchants must pay to accept VISA debit and
                     credit cards. VISA also plans to reduce merchants’ variable fees so that
                     merchants’ total fees associated with VISA transactions likely would be
                     lower after the new fee structure’s implementation. 34 Under its new fee
                     structure, VISA could, for example, lower the interchange fees for VISA’s
                     PIN network, Interlink, to attract merchant routing and make up at least
                     some of its lost revenue by collecting the fixed fees. 35 However, the


                     32
                        An issuer bank could choose to allow one signature and one unaffiliated PIN network on
                     its cards and still be in compliance with Regulation II. In this case, Regulation II provides
                     only one choice for routing once the customer decides to conduct a PIN or a signature
                     transaction.
                     33
                       As mentioned earlier, the recent antitrust settlement between the Department of Justice
                     and VISA and MasterCard requires the card networks to allow merchants accepting cards
                     by those networks to offer a discount to customers to completing their debit transactions
                     using their PIN rather than signature.
                     34
                       VISA representatives have explained publicly that this new fee structure is a strategic
                     response to Regulation II. They said that VISA’s PIN network, Interlink, lost significant
                     transaction volume due to Regulation II, and the new fee structure is one of the company’s
                     strategies to regain some of the lost market share. VISA representatives stated that on
                     March 13, 2012, the Department of Justice Antitrust Division issued a civil investigative
                     demand requesting additional information about the company’s debit strategies, including
                     this fixed acquirer fee.
                     35
                       According to experts, merchants likely will pay the new fixed fee since most will not want
                     to refuse customer payments made with VISA cards.




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extent to which VISA will be able to lower PIN debit interchange fees and
gain transaction volume is limited. As with any network, if Interlink
reduces its interchange fees too much, issuers could replace Interlink with
another PIN network that offers higher fees.

Second, according to VISA representatives, VISA’s signature network
also is able to process PIN transactions, in essence automatically offering
an additional PIN routing choice to merchants for cards that carry VISA
signature. 36 For example, in the past, a debit card that carried the VISA
signature and two other PIN networks usually would process a PIN
transaction through one of the PIN networks. Now, the VISA check card
signature network can continue to be the only option for routing signature
debit transactions on that card but also become a third option for routing
PIN debit transactions. For VISA to gain PIN transaction volume through
VISA check cards, however, it must set the associated interchange fees
at or below the fees set by the other available PIN networks. However,
the extent to which VISA can do this is not yet clear. If issuers
experienced declining interchange fee revenue from their use of VISA,
they could switch signature networks, for example, to MasterCard.




36
  Representatives from VISA said this move was a strategic response to their loss of
market share associated with Regulation II. VISA representatives stated that on March 13,
2012, the Department of Justice Antitrust Division issued a civil investigative demand
requesting additional information about the company’s debit strategies, including
information about the VISA signature debit network’s ability to authenticate PIN
transactions.




Page 110                                          GAO-13-101 Dodd-Frank Act Regulations
Appendix VI: Econometric Analysis of the
              Appendix VI: Econometric Analysis of the
              Impact the Debit Interchange Fee Standard on
              Issuer Banks’ Income


Impact the Debit Interchange Fee Standard
on Issuer Banks’ Income
              We conducted an econometric analysis to assess the impact of the Dodd-
Methodology   Frank Act’s debit interchange fee standard on covered banks. 1 Our
              multivariate econometric model used a difference-in-difference design
              that exploits the fact that some banks are automatically covered by the
              debit interchange fee requirements but others are not, so we can view
              covered banks as the treatment group and exempt banks as the control
              group. We then compared changes in various types of income earned by
              covered banks over time to changes in those types of income earned by
              exempt banks over time. All else being equal, the difference in the
              differences is the impact of the new debit interchange fee requirements.

              Our regression specification is the following:

                                 ybq = αb + βq + γqCOVEREDbq + X’bqΘ + εbq,

              where b denotes the bank, q denotes the quarter, ybq is the dependent
              variable, αb is an institution-specific intercept, βq is a quarter-specific
              intercept, COVEREDbq is an indicator variable that equals 1 if bank b is
              covered by the debit interchange standard in quarter q and 0 otherwise,
              Xbq is a list of other independent variables, and εbq is an error term. We
              estimate the parameters of the model using quarterly data for banks for
              the period from the first quarter of 2008 to the second quarter of 2012.

              The parameters of interest are the γq, the coefficients on the covered
              bank indicators in the quarters after the treatment start date of the fourth
              quarter of 2011. The debit interchange standard was effective October 1,
              2011, (the fourth quarter of 2011), so the covered bank indicator is equal
              to zero for all banks for all quarters from the first quarter of 2008 to the
              third quarter of 2011. For all quarters from the fourth quarter of 2011 to
              the second quarter of 2012, the covered bank indicator is equal to one for
              all covered banks and equal to zero for all exempt banks. Thus, for
              quarters from the fourth of 2011 to the second of 2012, all else being
              equal, the parameter γq measures the average difference in the
              dependent variable between covered and exempt banks in that quarter
              relative to the base quarter.




              1
               The interchange fee standard provides that a covered issuer bank may not receive or
              charge an interchange transaction fee in excess of the sum of a 21-cent base component
              and 5 basis points of the transaction’s value. 76 Fed. Reg. 43,394.




              Page 111                                        GAO-13-101 Dodd-Frank Act Regulations
          Appendix VI: Econometric Analysis of the
          Impact the Debit Interchange Fee Standard on
          Issuer Banks’ Income




          We used lists of covered institutions provided by the Federal Reserve to
          identify which banks in our sample are required to comply with debit card
          interchange fee standards in each quarter and which are not. We
          assumed that any institution not explicitly identified as a covered
          institution was exempt.

          We used different dependent variables (ybq) in order to estimate the
          impacts of the debit interchange standard on various sources of income
          earned by covered banks, including

          •   bank card and credit card interchange fees,
          •   service charges on deposit accounts in domestic offices,
          •   total non-interest income,
          •   total interest income, and
          •   total income.

          Finally, we included size as an independent variable (Xbq) to control for
          factors correlated with size that may differentially affect exempt and
          covered banks in the quarters since debit interchange standard went into
          effect. We measured the size of a bank as the natural logarithm of its
          total assets. We included this variable to reduce the likelihood that our
          estimates of the impact of the debit interchange standard are reflecting
          something else.


Data      To assess the impact of debit interchange fee regulation on covered
          institutions, we analyzed commercial banks and savings banks (banks)
          for the period from the first quarter of 2008 to the second quarter of 2012
          using data from the Federal Reserve, the Federal Deposit Insurance
          Corporation (FDIC), and the Federal Financial Institutions Examination
          Council (FFIEC). We excluded savings associations and credit unions
          from our analysis, even though they are subject to the debit card
          interchange fee standards. For much of the period we analyzed, savings
          associations filed quarterly Thrift Financial Reports, but these filings did
          not include the information we required for our analysis, such as income
          earned from bank card and credit card interchange fees, for every
          quarter. Similarly, credit union filings also do not include the information
          we required for our analysis.


          Table 14 shows the estimated differences in fees and income as a
Results   percent of assets for covered banks relative to what they would have




          Page 112                                       GAO-13-101 Dodd-Frank Act Regulations
                                           Appendix VI: Econometric Analysis of the
                                           Impact the Debit Interchange Fee Standard on
                                           Issuer Banks’ Income




                                           earned in the absence of the debit interchange fee standard, all else
                                           being equal.

Table 14: Estimated Impact of the Debit Interchange Fee Standard on Covered Banks, from Fourth Quarter of 2011 through
Second Quarter of 2012 (percentage points)

                         Bank card and Service charges on
                             credit card  deposit accounts                            Non-interest
                       interchange fees in domestic offices                                income                Interest income            Total income
Covered in:                (% of assets)      (% of assets)                          (% of assets)                  (% of assets)           (% of assets)
2011 Q4                         -0.007**                       0.004**                          -0.094                       0.027**               -0.074
                                 (0.001)                       (0.001)                         (0.085)                       (0.014)              (0.086)
2012 Q1                         -0.007**                       0.007**                          -0.125                       0.026**               -0.101
                                 (0.001)                       (0.001)                         (0.073)                       (0.013)              (0.074)
2012 Q2                         -0.008**                       0.007**                           0.029                        0.022                0.049
                                 (0.001)                       (0.002)                         (0.089)                       (0.014)              (0.090)


Observations                    128,059                       128,059                         128,059                       128,059              128,059
Within R-squared                  0.054                          0.196                           0.003                        0.608                0.171
Number of banks                   7,815                          7,815                           7,815                        7,815                7,815
All impacts jointly
significant?                        Yes                             Yes                              No                          No                   No
                                           Source: GAO analysis of data from FDIC, FFIEC, and the Federal Reserve.

                                           Note: Estimated impacts are of the debit fee standard on (1) bank card and credit card interchange
                                           fees, (2) service charges on deposit accounts in domestic offices, (3) noninterest income, (4) interest
                                           income, and (5) total income, as a percent of assets, for covered banks after the effective date of the
                                           debit interchange regulation. Robust standard errors are in parentheses. We obtained the estimates
                                           using regressions of bank card and credit card interchange fees, service charges on deposit accounts
                                           in domestic offices, noninterest income, interest income, and total income, as a percent of assets, on
                                           the natural logarithm of assets, indicators for each bank, indicators for each quarter, and indicators for
                                           covered banks in each quarter after the effective date of the debit interchange regulation. We used
                                           F-tests to determine whether the indicators for covered banks in each quarter are jointly significant.
                                           We used t-tests to determine whether the indicators for covered banks in each quarter are individually
                                           significant. We used the 5 percent level as our criteria for statistical significance. **=statistically
                                           significant at the 5 percent level.


                                           Our estimates suggest that the debit interchange fee standard is
                                           associated with:

                                           •     Lower bank card and credit card interchange fees collected by
                                                 covered banks. After the effective date, interchange fees collected by
                                                 covered banks, as a percent of assets, were about 0.007-0.008
                                                 percentage points lower than they otherwise would have been. For a
                                                 bank with assets of $50 billion, this amounts to $3.5 million-4 million in
                                                 reduced bank card and credit card interchange fees.




                                           Page 113                                                                  GAO-13-101 Dodd-Frank Act Regulations
Appendix VI: Econometric Analysis of the
Impact the Debit Interchange Fee Standard on
Issuer Banks’ Income




•   Higher service charges on deposit accounts in domestic offices for
    covered banks. After the effective date, service charges collected by
    covered banks, as a percent of assets, were about 0.004-0.007
    percentage points higher than they otherwise would have been. For a
    bank with assets of $50 billion, this amounts to $2 million-3.5 million in
    additional service charges.
•   No significant change in overall non-interest income for covered
    banks. Non-interest income—of which both interchange fees and
    service charges are components—earned by covered banks was
    about 0.09-0.13 percentage points lower as a percent of assets than it
    would have been in the first two quarters after the effective date and
    about 0.03 percentage points higher in the third quarter after the
    effective date. However, these estimates are not statistically
    significant at the 5-percent level.
•   Increased interest income in the first two quarters after the effective
    date but no significant increase since. Interest income earned by
    covered banks, as a percent of assets, was about 0.03 percentage
    points higher than it would have been in the first two quarters after the
    effective date. It was 0.02 percentage points higher in the third quarter
    after the effective date, but this estimate is not statistically significant
    at the 5-percent level.
•   No significant change in total income. Total income—which is
    composed of interest and non-interest income—earned by covered
    banks after the effective date, as a percent of assets, ranges from
    0.10 percentage points lower to 0.05 percentage points higher, but
    these estimates are not statistically significant at the 5-percent level.

To assess the robustness of our estimates, we examined different
treatment start dates. Specifically, we allowed the debit fee standard to
have an impact starting in the fourth quarter of 2010—1 year prior to the
rule’s effective date—on banks that were covered in the fourth quarter of
2011. We did so to allow for the possibility that institutions began to react
to the debit fee standard in anticipation of the rule being passed. Our
estimates suggest that changes in covered banks’ interchange fee
income and service charge income generally did not occur until after the
effective date and also that significant changes in non-interest income,
interest income, and total income for covered banks generally did not
precede the rule’s effective date.

Our approach allows us to partially differentiate changes in various types
of income earned by covered banks associated with the debit interchange
fee cap from changes due to other factors. However, several factors
make isolating and measuring the impact of the cap for covered banks



Page 114                                       GAO-13-101 Dodd-Frank Act Regulations
Appendix VI: Econometric Analysis of the
Impact the Debit Interchange Fee Standard on
Issuer Banks’ Income




challenging. In particular, the effects of the cap cannot be differentiated
from simultaneous changes in economic conditions, regulations, or other
changes that may differentially affect covered banks. Nevertheless, our
estimates are suggestive of the initial effects of the cap on covered banks
and provide a baseline against which to compare future trends.




Page 115                                       GAO-13-101 Dodd-Frank Act Regulations
Appendix VII: Comments from the Securities
              Appendix VII: Comments from the Securities
              and Exchange Commission



and Exchange Commission




              Page 116                                     GAO-13-101 Dodd-Frank Act Regulations
Appendix VII: Comments from the Securities
and Exchange Commission




Page 117                                     GAO-13-101 Dodd-Frank Act Regulations
Appendix VIII: Comments from the
             Appendix VIII: Comments from the Department
             of the Treasury



Department of the Treasury




             Page 118                                      GAO-13-101 Dodd-Frank Act Regulations
Appendix IX: GAO Contact and Staff
                  Appendix IX: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  A. Nicole Clowers, (202) 512-8678, clowersa@gao.gov
GAO Contact

                  In addition to the contact named above, Richard Tsuhara (Assistant
Staff             Director), Silvia Arbelaez-Ellis, Bethany Benitez, William R. Chatlos,
Acknowledgments   Philip Curtin, Rachel DeMarcus, Timothy Guinane, Courtney LaFountain,
                  Thomas McCool, Marc Molino, Patricia Moye, Susan Offutt, Robert
                  Pollard, Christopher Ross, Jessica Sandler, and Joseph Weston, made
                  key contributions to this report.




(250648)
                  Page 119                               GAO-13-101 Dodd-Frank Act Regulations
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