A federal agency responsible for addressing emerging threats to the financial system has no comprehensive approach for identifying those threats, according to a report released Wednesday by the Government Accountability Office.
The Financial Stability Oversight Council (FSOC) was established in 2010 under the Dodd-Frank Act “to monitor the stability of the U.S. financial system and take actions to mitigate risks that might destabilize the system.” To help the agency achieve these goals, the GAO issued a list of recommendations in September 2012. (RELATED: Bernanke: Shut Down Banks if They Threaten System)
However, GAO determined that FSOC has not yet fully developed tools for independently identifying emerging threats, and instead “primarily relies on an approach that begins with suggestions from member agency staff.”
Although this approach might be useful for facilitating interagency discussion, GAO warned that it “may not help to identify new risks or threats that FSOC member agencies have not already identified on their own.” (RELATED: Dodd-Frank a Total Failure, Bipartisan Panel Agrees)
FSOC has taken some steps to meet its statutory responsibilities, notably through the Office of Financial Research (OFR), a subsidiary department also created by the Dodd-Frank Act that is tasked with “support[ing] FSOC by providing financial research and data.”
Since 2012, OFR has worked to develop two tools to help identify systemic risks. One is the Markets Monitor, which “provides an update on financial and economic developments,” and the other is the Financial Stability Monitor, which assesses “vulnerabilities in the financial system.” (RELATED: Dodd-Frank Wall Street Law Still Criticized Three Years Later)
However, according to the GAO, “the Markets Monitor does not appear to be focused on risks to the financial system, and the Financial Stability Monitor remains in a prototype phase.” While the GAO calls progress on developing the tools encouraging, it also claims that neither is sufficient to ensure that the FSOC is “fully informed about critical vulnerabilities in the financial system.”
Even when threats are identified, the FSOC often fails to “explicitly prioritize” them, as is standard practice for organizations like the IMF and the European Central Bank.
Officials at the FSOC told the GAO that, “they had not and did not plan to prioritize the threats they identified in the annual reports,” for fear that doing so might “detract attention and resources from some of the identified threats.”
Moreover, FSOC’s 2014 Annual Report neglected to distinguish “between current known risks and potentially emerging threats,” though FSOC officials protested that such distinctions are made by agency staff, even if they are not identified in annual reports.
GAO warned that unless the FSOC prioritizes threats and differentiates between known and emerging threats in its annual reports, “policymakers and market participants will not have the information they need to develop effective and timely responses to those threats.” (RELATED: Dodd-Frank Makes Future Taxpayer Bailouts More Likely)
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