What GAO Found
The Board of Governors of the Federal Reserve System (Board) has not finalized and implemented its enterprise risk management (ERM) framework, and as a result, it may have limited ability to manage risks across the Large Institution Supervisory Coordinating Committee (LISCC) program. One such risk is regulatory capture, a condition that exists when a regulator acts in service of private interests, such as the interests of the regulated industry, at the expense of the public interest. GAO has previously found that regulators should be independent of inappropriate influence, including undue influence from the industry they are regulating. LISCC is a supervisory program developed by the Board to enhance the oversight of large, complex financial institutions. LISCC takes a cross-cutting approach to supervision, drawing staff from across the Federal Reserve System including the Board and four Federal Reserve Banks, and risks of regulatory capture span various aspects of the LISCC program. To help the Board manage its diverse risks, the Board has recognized the advantages of implementing an ERM, which the Office of Management and Budget (OMB) encourages all federal agencies to do. The Board began to develop an ERM framework in 2017, but it has not yet developed some of OMB’s recommended key elements, such as risk identification and assessment. Completing and implementing the ERM framework should position the Board to better manage regulatory capture risks across the LISCC program.
Agency Comments and Our Evaluation
In its overall comment, the Board noted that we did not find evidence of regulatory capture in our review. However, the scope of this engagement did not include assessing evidence for the presence or absence of regulatory capture. As we noted in the report, regulatory capture is a complex and significant threat to effective regulation that takes many forms and can result in biases in judgment that are difficult to identify definitively. Our review examined the Federal Reserve policies and procedures to identify and manage threats to supervisory independence and risks of regulatory capture across the Federal Reserve LISCC program. We found weaknesses in the Federal Reserve’s mitigation strategies and practices which, if left unaddressed, expose the Federal Reserve to risks of regulatory capture.