oversight

The Results Act: Observations on Draft Strategic Plans of Five Financial Regulatory Agencies

Published by the Government Accountability Office on 1997-07-29.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Banking and Financial Services
                          House of Representatives




For Release on Delivery
Expected at
10:00 a.m., EDT
                          THE RESULTS ACT
on Tuesday
July 29, 1997

                          Observations on Draft
                          Strategic Plans of Five
                          Financial Regulatory
                          Agencies
                          Statement of Thomas J. McCool
                          Associate Director, Financial Institutions and Markets
                          Issues
                          General Government Division




GAO/T-GGD-97-164
Summary

The Results Act: Observations on Draft
Strategic Plans of Five Financial Regulatory
Agencies
               Under the Government Performance and Results Act (GPRA or Results
               Act), executive agencies are to develop strategic plans in which they
               define their missions, establish results-oriented goals, and identify
               strategies they will use to achieve those goals for the period 1997 through
               2002. The House Committee on Banking and Financial Services asked GAO
               to provide its perspective on the draft plans of the Board of Governors of
               the Federal Reserve System, Federal Deposit Insurance Corporation,
               Office of the Comptroller of the Currency, Office of Thrift Supervision, and
               the National Credit Union Administration.

               On the basis of its review of the draft plans, GAO found that each plan
               contained most of the components required by the Results Act. Three of
               the draft plans had all six components, and two draft plans had five of the
               components.

               GAO’s analysis of individual plan components showed that the plans had
               mission statements that broadly defined the purpose of the agency and
               goals and objectives that were somewhat results-oriented. Some agencies
               had useful discussions of approaches and strategies to achieve the goals
               and objectives, while others could have benefitted from more discussion
               of the resources needed. Each agency discussed key external factors but
               only one discussed how those factors would affect the achievement of its
               goals. None of the draft plans discussed how the external factors would be
               addressed.

               In general, two sections were most in need of improvement. Each agency
               could strengthen its section on the relationship between strategic and
               annual goals by explicitly discussing the link between the two types of
               goals. Also, each agency could improve its section on how program
               evaluations were used and a schedule for future evaluations. Because of
               the complex set of factors that determine regulatory outcomes, measuring
               the impact of a regulatory agency’s programs will be a difficult challenge
               going forward. However, the use of program evaluations both to derive
               results-oriented goals and to measure the extent those goals are achieved
               is an important part of the process.




               Page 1                                                      GAO/T-GGD-97-164
Statement

The Results Act: Observations on Draft
Strategic Plans of Five Financial Regulatory
Agencies
               Mr. Chairman and Members of the Committee:

               I am pleased to be here today to assist the Committee in its review of the
               draft strategic plans of the five federal regulators of depository
               institutions. These consultations are a step in implementing the
               Government Performance and Results Act of 1993 (GPRA or Results Act)
               whose purpose is to reduce the cost and improve the performance of the
               federal government.

               Mr. Chairman, you asked that we provide analyses and observations about
               the agencies’ draft strategic plans, including the strengths and weaknesses
               of each plan, the extent to which the agencies are experiencing particular
               challenges that face regulatory agencies in their attempts to measure
               performance, and any suggestions we might have for improvements in
               these draft plans before they are finalized and submitted to Congress in
               September.

               As its title indicates, the Results Act’s focus is on results. In crafting the
               Act, Congress recognized that congressional and executive branch
               decisionmaking had been severely handicapped in many agencies by the
               absence of the basic underpinnings of well-managed organizations. These
               agencies lacked clear missions; results-oriented performance goals;
               well-conceived agency strategies to meet those goals; and accurate,
               reliable, and timely program performance and cost information to measure
               progress in achieving program results. In recent years, Congress has
               established a statutory framework for addressing these long-standing
               challenges and for helping Congress and the executive branch make the
               difficult trade-offs that are necessary for effective policymaking.1
               Improving management in the federal sector will not be easy, but the
               Results Act can assist in accomplishing this task.

               The Results Act seeks to shift the focus of federal management and
               decisionmaking from a preoccupation with the number of tasks completed
               or services provided to a more direct consideration of the results of
               programs—that is, the real differences those tasks or services make in
               citizen’s lives. As a starting point, the Results Act requires executive
               agencies to complete—no later than September 30 of this year—strategic
               plans in which they define their missions, establish results-oriented goals,
               and identify the strategies they will use to achieve those goals for the

               1
                This framework includes as its essential elements the Chief Financial Officers Act (CFO); information
               technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen
               Act; and the Results Act. The CFO Act was expanded and amended by the Government Management
               Reform Act.



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Statement
The Results Act: Observations on Draft
Strategic Plans of Five Financial Regulatory
Agencies




period of 1997 through 2002. The Results Act requires agencies to consult
with Congress and solicit the input of others as they develop these
strategic plans.

Beginning with fiscal year 1999, executive agencies are then to use their
strategic plans to prepare annual performance plans. These performance
plans are to include annual goals linked to the activities displayed in
budget presentations as well as to the indicators the agency will use to
measure performance against the results-oriented goals. Agencies are
subsequently to report each year on the extent to which these goals were
met, provide an explanation if these goals were not met, and present the
actions needed to meet any unmet goals.

Congress can use the Results Act to provide the vital information that it
needs to better make decisions. The congressional consultations on
agencies’ strategic plans provide an important opportunity for Congress
and the executive branch to work together to ensure that agencies’
missions are focused, goals are results-oriented and clearly established,
and strategies and funding expectations are appropriate and reasonable.

One of the reasons we are here today is to provide our perspective on
these plans. We note that, although these strategic plans are not due until
September, each agency we reviewed had prepared a draft plan. Overall,
we found that each agency had made an effort to adhere to the Results
Act, and we recognize that agency officials are still in the process of
updating and revising the draft plans.

In response to your request, we reviewed the draft plans submitted by the
Board of Governors of the Federal Reserve System (Board), the Federal
Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the
Currency (OCC), the Office of Thrift Supervision (OTS), and the National
Credit Union Association (NCUA). For each agency, we specifically
determined whether the draft plan contained each of the six components
required by the Results Act and assessed the components’ strengths and
weaknesses.2 We also determined whether key statutory authorities were
reflected in the agencies’ draft plans and identified whether the plans

2
 The Results Act specifies that agencies’ strategic plans should have the following critical components:
(1) a comprehensive agency mission statement; (2) agencywide long-term goals and objectives for all
major functions and operations; (3) approaches (or strategies) to achieve the goals and objectives and
the various resources needed; (4) the relationship between the long-term goals/objectives and the
annual performance plans required by the Act; (5) an identification of key factors, external to the
agency and beyond its control, that could significantly affect the achievement of the strategic goals;
and (6) a description of how program evaluations were used to establish and revise strategic goals and
a schedule for future program evaluations.



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Statement
The Results Act: Observations on Draft
Strategic Plans of Five Financial Regulatory
Agencies




addressed major management challenges and included indications of
interagency coordination.

On the basis of our review of the draft plans, we found that each plan
contained most of the components required by the Results Act. Three of
the draft plans had all six components, and two draft plans had five of the
components. In general, the draft plans reflected the statutory authorities
and responsibilities of the federal regulators with respect to the
institutions and matters within their jurisdictions. On the whole, the draft
plans showed little evidence of interagency coordination.

Our analysis of individual plan components showed that the draft plans
had mission statements that broadly defined the purpose of the agency
and goals and objectives that were somewhat results-oriented and
appropriate to the agency’s mission. The content of other components
varied across agencies. For example, some agencies had useful
discussions of approaches and strategies to achieve the goals and
objectives, while others could have benefitted from more discussion of the
resources needed. Each agency discussed key external factors but only
one discussed how those factors would affect the achievement of its goals.
None of the plans discussed how the external factors would be addressed.

In general, two sections were most in need of improvement. Each agency
could strengthen its section on the relationship between strategic and
annual goals by explicitly discussing the link between these two types of
goals. Also, each agency could improve its section on how program
evaluations were used and a schedule for future evaluations. Due to the
complex set of factors that determine regulatory outcomes, measuring the
impact of a regulatory agency’s programs will be a difficult challenge going
forward. However, the use of program evaluations both to derive
results-oriented goals and to measure the extent those goals are achieved
is a key part of the process.

Our overall assessment of each agency’s draft plan was generally based on
our knowledge of that agency’s operations and programs, our past and
ongoing reviews of that agency, and other existing information available at
the time of our assessment. Specifically, the criteria we used to determine
whether each draft plan complied with the requirements of the Results Act
were the Results Act itself and the Office of Management and Budget’s
(OMB) guidance on developing the plans (OMB Circular A-11, Part 2). To
make judgments about the overall quality of the draft plans and their




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    Statement
    The Results Act: Observations on Draft
    Strategic Plans of Five Financial Regulatory
    Agencies




    components, we used our May 1997 guidance3 for congressional review of
    the plans as a tool. To determine whether the draft plan contained
    information on interagency coordination and addressed management
    problems we had previously identified, we relied on our general
    knowledge of each agency’s operations and programs and the results of
    our previous work.

    The requirements of the Results Act and OMB guidance indicate that the
    following factors should be addressed within the six components of
    strategic plans:

    (1) The comprehensive mission statement should

•   be brief and define the basic purpose of the agency and
•   focus on core programs and activities.

    (2) The description of general goals and objectives should

•   contain general goals and objectives for the major functions and
    operations of the agency,
•   elaborate on how the agency is carrying out its mission,
•   contain a number of outcome-type goals, and
•   be stated in a manner that allows a future assessment to be made on
    whether the goals are being achieved.

    (3) The description of how the general goals and objectives will be
    achieved is to

•   include discussion of operational processes, staff skills, and technologies
    as well as the human, capital, information, and other resources that are
    needed to achieve the goals and objectives and
•   outline how the agency will communicate strategic goals throughout the
    organization and hold managers and staff accountable for achieving these
    goals.

    (4) A strategic plan is to describe how the performance goals included in
    the agency’s annual performance plans are related to the goals and
    objectives in its strategic plan.




    3
     Agencies’ Strategic Plans Under GPRA: Key Questions to Facilitate Congressional Review
    (GAO/GGD-10.1.16, May 1997).



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                            Statement
                            The Results Act: Observations on Draft
                            Strategic Plans of Five Financial Regulatory
                            Agencies




                            (5) A strategic plan is to identify and discuss key factors external to the
                            agency and beyond its control, which could occur during the time periods
                            covered by the plan and significantly affect the agency’s achievement of its
                            strategic goals. The plan is to

                        •   briefly describe each key external factor,
                        •   indicate its link with a particular strategic goal or goals, and
                        •   describe how the factor could affect the achievement of the goals.

                            (6) Program evaluations—objective and formal assessments of the results,
                            impact, or effects of a program or policy—are to include assessments of
                            the implementation and results of programs, operating policies, and
                            practices. The plan’s program evaluation section should briefly describe

                        •   program evaluations that were used in preparing the strategic plan;
                        •   evaluation methodologies, scopes, and issues addressed; and
                        •   a schedule for future evaluations.


                            As shown in figure 1, each of the agencies’ draft plans that we reviewed
Draft Strategic Plans       contained most of the six required components of the Results Act. Our
Generally Contained         assessment of whether the plans’ components met the requirements of the
Most Major                  Act follows the figure.

Components




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                                            Statement
                                            The Results Act: Observations on Draft
                                            Strategic Plans of Five Financial Regulatory
                                            Agencies




Figure 1: Inclusion of Strategic Plan Components in Selected Agencies’ Draft Plans




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  by the Results Act

  Mission
  statement

  Goals and
  objectives

  Approaches or strategies
  to achieve goals and objectives

  Relationship between
  strategic goals and
  annual performance goals

  Key external factors
  beyond the agencies control

  How program evaluations
  were used to establish or
  revise strategic goals




                                        Present                     Not Present




                                            Source: GAO analysis.




The Board’s Draft Strategic                 The Board developed a plan that had section titles addressing all of the
Plan                                        components required by the Act. The Board did not designate a time frame
                                            for its draft plan.

                                        •   The mission statement was brief and focused on core programs and
                                            activities. The mission statement covered the Board’s responsibilities for




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    Strategic Plans of Five Financial Regulatory
    Agencies




    conducting monetary policy, maintaining the stability of financial markets,
    providing services to financial institutions and government agencies, and
    supervising and regulating banks and bank holding companies.
•   The draft plan’s section of goals and objectives had few outcome-oriented
    goals and objectives, which described the intended result, effect, or
    consequence that will occur from carrying out a program or activity. Some
    goals and objectives were stated in a manner that will not facilitate future
    assessment.
•   The draft plan had a limited description of how the goals and objectives
    are to be achieved. The section referred to another Board document that
    detailed various organizational units and their staffing, budget, and
    objectives. The section also noted that specific organizational divisions are
    oriented toward meeting specific goals and objectives. In spite of this
    detail, the draft plan and associated documents were unclear on how the
    plan’s goals and objectives were to be achieved and also unclear on what
    specific processes, technologies, and resources were to be used. In
    addition, the draft plan did not outline the process for communicating the
    goals and objectives through the agency and for assigning accountability
    to managers and staff for achievement of the goals and objectives.
•   The draft plan had little discussion of the relationship between the
    strategic goals and annual performance goals. Instead of describing the
    type, nature, and scope of performance goals, the draft plan focused on
    information generated by its budget process. Board budget documents
    tended not to include performance goals that target a measurable level of
    performance against which actual achievement can be compared.
•   The draft plan outlined several key external factors and challenges,
    including blurred lines between banks and nonbanks, globalization and
    financial markets, and competition for the provision of payment services.
    The draft plan also highlighted internal challenges, including the need for a
    larger proportion of “knowledge” workers, technological changes, and a
    decentralized organizational structure. However, the draft plan did not
    describe how external factors were linked with particular goals or how
    achievement of a goal could be affected by external factors.
•   The draft plan did not clearly describe how program evaluations were
    used and a schedule for future evaluations. This section referenced Board
    documents developed for various planning, budgeting, and reporting
    purposes—including monetary policy reports to Congress, Inspector
    General reports, annual evaluations of bank plans and programs, and an
    annual performance report covering Board expenses and staffing.
    Although the annual performance report described program
    accomplishments, the report was not outcome-oriented. We did not review
    other documents referred to in the draft plan; therefore, we are unable to



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                                  Statement
                                  The Results Act: Observations on Draft
                                  Strategic Plans of Five Financial Regulatory
                                  Agencies




                                  comment on whether the documents had outcome-oriented measures and
                                  performance goals or whether they could measure achievement of
                                  intended objectives. The draft plan did not include a schedule for future
                                  program evaluations, outlines of methodologies used, descriptions of
                                  evaluation scope, or details about particular issues to be addressed.


FDIC’s Draft Strategic Plan       The FDIC’s draft plan had sections addressing each component required by
                                  the Act. The time frame covered by FDIC’s draft was from 1997 to 2002.

                              •   The draft mission statement briefly defined the basic purpose of FDIC,
                                  which is to maintain stability and public confidence in the nation’s banking
                                  system.
                              •   The goals and objectives set forth in the draft plan were supportive of
                                  FDIC’s mission and were results-oriented. For instance, one of the goals of
                                  FDIC’s draft plan was to identify and address risk to the deposit fund by
                                  (1) reporting current and emerging risks to the deposit fund and
                                  (2) ensuring that the risk-based premium system appropriately reflects
                                  risks to insurance funds.
                              •   FDIC’s presentation of approaches and strategies to achieve the goals and
                                  objectives described the objectives as well as the strategies and major
                                  initiatives that it planned to use to meet each of its goals. However,
                                  although FDIC generally described the processes to implement its strategies
                                  and major initiatives, it provided little discussion of the resources needed.
                                  For instance, under the strategies and major initiatives for the goal to
                                  “minimize costs to the insurance funds from failing financial institutions,”
                                  FDIC discussed its major effort of focusing on “maintaining a highly trained,
                                  mobile staff” but did not state what resources would be needed. FDIC’s
                                  draft plan had a section on resource strategies, but the section was not
                                  specifically linked to the goals.
                              •   The component relationship between strategic goals and annual
                                  performance goals in FDIC’s draft plan did not discuss the relevance and
                                  use of the performance measures in helping to determine the achievement
                                  of the goals and objectives. For instance, under each goal and objective,
                                  FDIC simply listed the annual performance measures that related to the
                                  goals and objectives and did not discuss how the listed performance
                                  measures would demonstrate the progress made in achieving the goals and
                                  objectives.
                              •   FDIC’s draft plan discussed some key external factors that could affect the
                                  achievement of its goals and objectives. These key external factors
                                  included the effect of the following: (1) domestic and international
                                  economic performance and (2) certain legislative initiatives—that is, the



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                                 The Results Act: Observations on Draft
                                 Strategic Plans of Five Financial Regulatory
                                 Agencies




                                 merger of the Bank Insurance Fund and the Savings Association Insurance
                                 Fund and the resolution of differences in statutory and regulatory rules
                                 governing banking and thrift industries. Also, FDIC’s draft plan reviewed
                                 several internal factors, including those related to financial accountability,
                                 organizational, and human resource issues. However, the link between key
                                 internal and external factors and particular goals and objectives was not
                                 described, and it was unclear whether and how key factors would
                                 influence goal achievement.
                             •   FDIC’s draft plan did not describe how program evaluations were used and
                                 a schedule for future evaluations. FDIC cited a quarterly performance
                                 reporting process, GAO and Inspector General reports, cost-benefit
                                 analyses, surveys of stakeholders, and other processes. However, the
                                 extent to which these reports and processes had been or would be used to
                                 develop or revise goals and objectives is unclear. Also, although the plan
                                 made reference to quarterly and ongoing program evaluation, the draft
                                 plan did not include a schedule for future program evaluations.


OCC’s Draft Strategic Plan       OCC’s draft plan discussed all six components required by the Results Act.
                                 The time frame covered by OCC’s draft plan was from 1997 to 2002.

                             •   The draft plan’s mission statement broadly defined the basic purpose of
                                 the agency, which is to charter, regulate, and supervise national banks.
                             •   The goals and objectives were results-oriented and seemed appropriate to
                                 meet the agency’s mission. For instance, one of OCC’s goals was to improve
                                 the efficiency of bank supervision and reduce the burden on banks by
                                 streamlining supervisory procedures and regulations.
                             •   The approaches and strategies to achieve the goals and objectives, while
                                 not under the section labeled “description of how general goals and
                                 objectives are to be achieved,” were discussed to some extent in the draft
                                 plan under the seven objectives that OCC designed to meet its four goals.
                                 The objectives generally described the processes needed to meet goals.
                                 However, most of the objectives did not include a description of the
                                 resources OCC will need to meet the objectives and goals.
                             •   The draft plan outlined performance goals to be included in the annual
                                 performance plan as an effort to address the component relationship
                                 between strategic goals and annual performance goals. For instance, the
                                 draft plan listed some output-related performance measures. However, the
                                 plan did not relate these measures to the goals. In addition, the plan lacked
                                 specific performance measures for some of the goals, such as promoting
                                 competition and ensuring fair access to financial services.




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                                Statement
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                                Strategic Plans of Five Financial Regulatory
                                Agencies




                            •   The draft plan identified some key external factors that could affect the
                                achievement of the goals and objectives, and also provided a link as to
                                how these factors might affect the achievement of the goals and
                                objectives. These factors included the following: industry consolidation,
                                electronic money and banking activities, and competitive environment
                                changes.
                            •   The draft plan included a section on program evaluation, but the plan
                                neither discussed how evaluations were used nor included a schedule for
                                future evaluations that outlined the general methodology used, a
                                timetable, or the scope of evaluations.


OTS’ Draft Strategic Plan       In its draft plan, OTS discussed five of the six components required by the
                                Results Act. The time frame covered by OTS’ draft plan was from 1997 to
                                2002.

                            •   The draft mission statement stated that OTS was to effectively and
                                efficiently supervise thrift institutions; to maintain the safety, soundness,
                                and viability of the industry; and to support industry efforts to meet
                                housing and other community credit and financial services needs.
                            •   The draft goals and objectives appeared to lay out a general strategy to
                                meet the agency’s overall mission. However, the draft plan did not always
                                state the goals and objectives in a way to allow for a future assessment of
                                whether the goals would be achieved. For instance, OTS stated that one
                                way to meet its goal to “improve credit availability by encouraging safe
                                and sound lending in those areas of greatest need,” was to “measure the
                                degree to which the defined tasks of the OTS Community Affairs Program
                                are met in any given year.”4 Yet, the draft plan neither clearly stated what
                                tasks were to be performed nor linked how the accomplished tasks could
                                ensure that the overall credit availability could be improved in the areas of
                                greatest need.
                            •   Although the draft plan identified general approaches and strategies to
                                achieve the goals and objectives, it did not describe the resources required
                                to achieve each goal and objective. Also, the draft plan did not establish
                                time frames to accomplish each goal and objective.
                            •   The relationship between strategic goals and annual performance goals
                                was not specifically discussed in the draft plan. However, the relationship
                                between strategic goals and annual performance goals was described in a
                                separate performance plan. For instance, to achieve the goal to “maintain
                                and enhance a risk-focused . . . approach to supervising thrift institutions,”

                                4
                                 The Community Affairs Program was established to emphasize community reinvestment,
                                nondiscrimination in lending, and other consumer-oriented goals for thrift institutions.



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                             Strategic Plans of Five Financial Regulatory
                             Agencies




                             the performance plan suggested ways in which OTS could improve the
                             value and consistency of examinations. The performance plan also
                             identified measures to accomplish these tasks.
                         •   The draft plan discussed three key external factors that could affect OTS’
                             accomplishment of its goals: (1) the performance of the U.S. economy,
                             (2) the status of legislation to modernize the financial services industry,
                             and (3) major interindustry consolidations. However, OTS did not link each
                             factor to a particular goal or discuss how each factor might affect OTS’
                             success in meeting its goals and objectives.
                         •   The draft plan discussed how program evaluations were used in preparing
                             the strategic plan. Program evaluations were used to establish goals and
                             objectives, but there was no schedule for future evaluations.


NCUA’s Draft Strategic       NCUA’s draft plan contained sections on all but one of the six components.
Plan                         The time frame covered by NCUA’s draft plan was from 1997 to 2002.

                         •   The mission statement of the draft plan was concise and defined the core
                             responsibilities of the agency, which included maintaining the safety and
                             soundness of the nation’s credit unions.
                         •   The goals and objectives section of the draft plan set forth six strategic
                             goals and objectives that appeared to be generally supportive of the
                             agency’s mission statement and were stated in a results-oriented manner.
                             For example, one of the goals was to “protect member savings in federally
                             insured credit unions, thus preserving federal taxpayer funds.”
                         •   The draft plan provides a detailed description of the agency’s approaches
                             and strategies to achieve the goals and objectives as well as a discussion
                             of the resources needed to accomplish the goals and objectives. For
                             instance, NCUA planned to use the Community Development Revolving
                             Loan Program5 to achieve its goal to “promote the availability of financial
                             services to people of small means.”
                         •   The draft plan did not have a specific section on the relationship between
                             strategies and annual performance goals. However, the program
                             evaluation section identifies specific performance measures and lists them
                             under the goals and the objectives in the strategic plan. There is no
                             discussion of the relationship between the measures and the goals.
                         •   The draft plan identified several key external factors that could affect the
                             achievement of NCUA’s mission. The four factors cited were future
                             economic downturns, the effects that rapid technological advancement
                             could have on the credit union industry, a legal challenge before the

                             5
                              The Community Development Revolving Loan Program consists of congressional appropriated funds
                             that are to be made available to qualifying credit unions serving predominately low-income members
                             and those financially underserved.



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                            Strategic Plans of Five Financial Regulatory
                            Agencies




                            United States Supreme Court facing NCUA, and the possibility that credit
                            unions may lose their congressionally mandated tax-exempt status. The
                            draft plan stated that a dramatic downturn in the economy could have a
                            negative impact on components of its annual performance plan, although
                            it did not explain how key external factors could specifically affect NCUA’s
                            achievement of its goals and objectives. Finally, the draft plan indicated
                            that a loss in its court challenge or a loss of its tax-exempt status could
                            have a negative impact on the safety and soundness of the nation’s credit
                            unions.
                        •   Although the draft plan had a section entitled “Program Evaluations,” it
                            neither discussed how program evaluations were used to develop the
                            strategic plan nor did it contain a schedule for future program evaluations.
                            Instead, the section contained information on the performance measures
                            linked to the strategic goals and objectives.


                            Generally speaking, each draft plan reflected the statutory authorities and
Statutory Authorities       responsibilities of the federal regulator with respect to institutions and
and Responsibilities        matters within its jurisdiction. This reflected the comprehensive nature of
Generally Were              federal regulation of insured depository institutions and the nation’s
                            financial system. The federal regulatory agencies are charged with
Reflected in the            chartering or otherwise certifying the fitness of an institution to conduct
Federal Regulators’         business and (1) examining, (2) supervising, and (3) otherwise regulating
                            institutions with respect to a broad range of complicated matters that
Strategic Plans             include safety and soundness, consumer protection, and credit access. In
                            addition, the Board is responsible for monetary policy and the nation’s
                            payments system.


                            There is a potential for various coordination problems among the Board,
Draft Agency Plans          FDIC, OCC, OTS, and NCUA, yet only one of the draft plans indicated that
Rarely Discussed            coordination issues had been considered. All of these agencies have
Interagency                 similar oversight responsibilities for developing and implementing
                            regulations, conducting examinations and off-site monitoring, and taking
Coordination Efforts        enforcement actions for those institutions that are under their respective
                            purview. We previously have reported that regulators, banking officials,
                            and analysts believe that the multiplicity of regulators has resulted in
                            inconsistent treatment of banking and thrift institutions in examinations,
                            enforcement actions, and regulatory decisions.6



                            6
                             Bank Oversight Structure: U.S. and Foreign Experience May Offer Lessons for Modernizing U.S.
                            Structure (GAO/GGD-97-23, Nov. 1996).



                            Page 13                                                                       GAO/T-GGD-97-164
                        Statement
                        The Results Act: Observations on Draft
                        Strategic Plans of Five Financial Regulatory
                        Agencies




                        In our November 1996 report, we also noted that Congress and regulatory
                        agencies have taken some actions to improve interagency coordination.
                        For instance, Congress created the Federal Financial Institutions
                        Examination Council (FFIEC) in 1979—comprised of the Board, FDIC, OCC,
                        OTS, and NCUA—to promote consistency among these agencies, primarily in
                        the area of financial examinations. In addition, since June 1993, the Board,
                        FDIC, OCC, and OTS have operated under a joint policy statement that was
                        designed to improve coordination and minimize duplication in
                        examination.

                        However, the regulatory agencies’ draft plans that we reviewed did not
                        discuss how they planned to coordinate with each other in the future and
                        only one mentioned the need for future coordination. Moreover, the draft
                        plans did not refer to the possibility of future coordination activities
                        involving FFIEC.


                        Although mentioned in the draft plans of some of the affected regulators,
External Factors Will   there are a number of common external factors that will present issues to
Present Issues for      these agencies. Because these issues are significant and likely to affect
Regulators              each of the agencies to some extent, their strategic plans could be more
                        useful to the agencies, Congress, and other stakeholders if these
                        challenges were more fully discussed in the plans. The issues include
                        electronic innovation, new approaches to supervisory oversight, pending
                        legislation on financial modernization, and consolidation in the financial
                        services industry.

                        For example, electronic innovation, both in the way transactions are
                        conducted and in the way information is transmitted, represents a
                        regulatory challenge for all five regulators. The regulators have generally
                        adopted a wait-and-see approach to this policy because they do not want
                        to interfere with the pace or determine the direction of change. However,
                        deciding if and when this policy should be altered and how regulation
                        might be applied to electronic “banking” represents a major challenge.

                        The Board, FDIC, OCC, and OTS have all announced the intention of shifting
                        their supervisory focus toward early detection of unsafe and unsound
                        practices, rather than simply reacting to what the institutions do. OCC and
                        the Board have announced new examination procedures to better monitor
                        and control bank risk-taking by evaluating an institution’s risk exposure
                        and the quality of its risk management systems. In addition, FFIEC has
                        revised the rating system used for examining financial institutions by



                        Page 14                                                     GAO/T-GGD-97-164
                         Statement
                         The Results Act: Observations on Draft
                         Strategic Plans of Five Financial Regulatory
                         Agencies




                         adding an additional risk factor and increasing the emphasis on the quality
                         of risk management.

                         Another issue facing all three bank regulators and OTS is the potential
                         impact of legislation currently being considered to modernize the financial
                         services industry. Provisions currently being considered by Congress
                         could have far-ranging impact on each of the regulators. For example, the
                         elimination of the federal thrift charter and merger of OTS with OCC could
                         affect all three bank regulators and OTS in terms of (1) workload, if thrifts
                         are allowed to choose between a federal or state charter, and
                         (2) supervisory focus, if the balance sheet structure of thrifts remains
                         different from that of banks.

                         Ongoing financial consolidation, in part related to interstate banking and
                         branching could also have important implications for the structure of the
                         bank regulators. Each of these regulators has traditionally had a regional
                         structure that has more or less evolved over time. As more and more
                         banks become multiregional or even national institutions, the old regional
                         structure may become less relevant and a fundamental shift in
                         geographical focus may be in order. OCC has recently announced a
                         reorganization, which is at least partially due to the anticipated effects of
                         interstate banking.

                         The Federal Reserve System, due to its broader mandate and unique
                         structure, faces its own set of challenges. For example, an increased use of
                         electronic payments in services provided to the Department of the
                         Treasury and other agencies may result in realignments or reductions in
                         certain staff at particular reserve banks. These and other challenges may,
                         in turn, raise questions about the structure of the Federal Reserve System,
                         such as the size, number, and location of the Federal Reserve banks.


                         In enacting the Results Act, Congress realized that the transition to
Challenges Faced by      results-oriented management would not be easy. The difficulties in moving
Other Regulatory         to results orientation could be especially difficult for a regulatory agency.
Agencies Also Apply      We analyzed a set of barriers facing certain regulatory agencies in their
                         efforts to implement the Results Act in a June 1997 report.7 These barriers
to Depository            included the following: (1) problems collecting performance data,
Institution Regulators   (2) complexity of interactions and lack of federal control over outcomes,
                         and (3) results realized only over long time frames.

                         7
                          Managing for Results: Regulatory Agencies Identified Significant Barriers to Focusing on Results
                         (GAO/GGD-97-83, June 24, 1997).



                         Page 15                                                                          GAO/T-GGD-97-164
Statement
The Results Act: Observations on Draft
Strategic Plans of Five Financial Regulatory
Agencies




At least to some extent, each of these barriers is also applicable to federal
regulators of depository institutions. For example, in focusing on the
safety and soundness of depository institutions any measure (such as the
average capital to risk-based asset ratio or the number of failed
institutions) would be largely determined by overall economic conditions,
rather than any particular regulatory intervention strategy. Finding
approaches that could effectively disentangle regulatory intervention from
the myriad of other forces influencing outcomes represents a difficult
challenge for all of these agencies as they pursue results-oriented
measurement.

Long time lags between actions and possible results could also be an issue
for regulators of depository institutions. Historically, there has been a
considerable time lag between the time that a financial institution makes a
questionable underwriting decision and the time that a loan goes bad and
finally affects earnings and eventually bank capital, thereby potentially
threatening the institution’s existence. Effective intervention by a
regulator may also not show a result, at least not by many standard
measures, for an extended period. This argues for constructing
sophisticated measures that can account for long time lags and that are
evaluated over a period longer than a year.

Mr. Chairman, one of the most difficult challenges facing these agencies,
as implementation of the Results Act proceeds, will be separating a
program’s impact on the agency’s objectives from the impact of external
factors that are often outside the program or agency’s control. Although
developing performance measures or evaluating program impact is
difficult in these situations, it is important that agencies make efforts
toward that end. We note that all the agencies’ plans we reviewed had one
section that consistently was in need of development: the discussion of
how program evaluations were used to establish goals and how such
evaluations might be used in the future.

In a recent report on the agencies that piloted the use of the Results Act
and their use of program evaluations, we found that almost all had access
to staff trained or experienced in performance measurement or program
evaluation and that this training and experience proved very helpful in the
agencies’ attempts to implement performance measurement.8 Most of the
agencies whose draft plans we reviewed have research capability and in
some cases a substantial research staff. Such analytical resources provide

8
Managing for Results: Analytic Challenges in Measuring Performance (GAO/HEHS/GGD-97-138,
May 30, 1997).



Page 16                                                                   GAO/T-GGD-97-164
           Statement
           The Results Act: Observations on Draft
           Strategic Plans of Five Financial Regulatory
           Agencies




           a potential source for researching and developing innovative methods for
           measuring results. Any new methods or research approaches developed by
           one agency could also be useful to others because, at least in the areas of
           supervision and regulation, there are many similarities in the activities
           undertaken by these agencies.


           This concludes my prepared statement. I would be pleased to respond to
           any questions you or other members of the Committee may have.




(233530)   Page 17                                                    GAO/T-GGD-97-164
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