This story appeared in Bank Digest.
The Government Accountability Office has issued a report on risks of regulatory capture and threats to supervisory independence in the Large Institution Supervisory Coordinating Committee program, which was created by the Federal Reserve Board in 2010 to strengthen supervision of the largest U.S. financial institutions that pose the greatest risk to the economy. Regulatory capture occurs when a regulator acts in service of private interests, such as the interests of the regulated industry, at the expense of the public interest.
According to the report, the Fed has not finalized and implemented its enterprise risk management framework and therefore may have limited ability to manage risks across the LISCC program, including regulatory capture. The GAO also found weaknesses in the implementation of policies designed to mitigate threats to independence for supervisory staff and conflict-of-interest and other ethics policies for supervisory employees.
The GAO made six recommendations to help improve the Fed's implementation of enterprise risk management and to strengthen internal controls to more effectively mitigate risks of regulatory capture and threats to supervisory independence across the LISCC program.
In response to the report, House Financial Services Committee Ranking Member Maxine Waters (D-Calif) issued a statement, saying, "This report is yet more evidence that the Federal Reserve and other prudential regulators need to take the supervision of large banks much more seriously. Regulators must strengthen the independence of their large bank supervisory programs and fully enforce the law when it comes to wrongdoing by megabanks."