The government's top internal watchdog wants the Federal Reserve to step up its regulatory analysis practices.
In a report released late last week, the Government Accountability Office noted that the Fed has not updated its analytics protocol in 30 years and falls short of what are generally considered best practices. In particular, it flagged disclosure shortcomings related to stress testing reforms enacted by the central bank since 2017.
The GAO also noted that both the Fed and the Office of the Comptroller of the Currency could improve their retrospective reviews of regulatory changes.
The Bank Policy Institute, a trade group representing the nation's largest banks, echoed the report's findings, noting that regulators could stand to improve their data analytics practices.
"Not only are transparency and cost-benefit analysis of rules essential to prevent government agencies from needlessly harming the economy, they are also required by law," BPI said in a written statement. "As we have emphasized in our comments on the Basel endgame proposal, the inadequate analysis underpinning regulators' proposed capital increases is a failure of both law and policy."
For the report, investigators combed through 22 capital and liquidity reforms implemented by Washington's top bank oversight agencies — the Fed, OCC and Federal Deposit Insurance Corp. — between 2012 and 2022. They also interviewed agency officials, bank leaders, industry groups and public advocacy organizations.
While the FDIC and OCC have revised their policies around data disclosures in recent years, aligning themselves with "leading practices," the Fed has not changed its formal approach since 1994, the report notes.
The top concern raised is the Fed's track record on sharing the data underlying its rule changes and the methodology behind them. In three of the 21 Fed-involved regulatory processes examined, the GAO said the agency issued "little or no documentation of its analyses." In the other 18 rules, the documentation "did not consistently discuss methods and data used and how conclusions were reached."
The GAO notes that practices at all three regulatory agencies began to improve in 2019. They began including a dedicated impact analysis section to their rule proposals — a change implemented in response to public calls for more transparency.
"Nearly all the notices we reviewed for rules issued after October 2019 had a dedicated impact analysis section," the GAO report states. "These sections often discussed potential overall effects of the changes to capital and liquidity requirements on subject banking organizations, with notices also separately addressing comments from associated proposed rules."
Still, banking groups have continued to be frustrated by what they view as a lack of meaningful statistical analysis in recent rulemaking notices. This was a
The GAO, in its concluding statement, urged regulators to be mindful of the importance of substantial impact analysis.
"Regulatory analysis is a key tool for helping banking regulators ensure their rules are sound and cost-effective. The capital adequacy rules for large banking organizations are critical to maintaining the safety and soundness of the U.S. financial system," the report states. "As banking regulators continue to propose rules to finish implementing the Basel framework, it is important that they consistently assess the potential and actual effects of their rules."
The report also touches on another perennial concern for banking trade groups: the Fed's annual stress test.
The GAO notes that the banks and industry groups it spoke to say the changes implemented in recent years have made the stress testing process better, but the lack of transparency around the modeling and methodology used in the tests remains a point of frustration.
The Fed told investigators that it has a duty to balance transparency with the effectiveness of the test, but the banking trade groups say the central bank could stand to share more.
"This is a false dichotomy," BPI said in its statement. "Transparency is not the enemy of effective stress testing; it is the only way to improve it."
The GAO has asked the Fed to develop and implement policies and procedures for conducting data analyses that adhere to best practice standards. It also wants the Fed and OCC to improve their retrospective reviews. Both agencies agreed to meet these expectations.
