WASHINGTON–The General Accounting Office (GAO) has published a list of 10 priority recommendations for the Federal Reserve that it says could “significantly improve the Federal Reserve’s efforts to more effectively oversee risks to consumers and the safety and soundness of the U.S. banking system.”
The GAO letter to Fed Chairman Jay Powell highlights three areas, consumer protection for financial data aggregation services, derisking, and stress testing of banking institutions (with eight of the 10 recommendations related to the latter).
“The purpose of this letter is to provide an update on the overall status of the Board of Governors of the Federal Reserve System’s implementation of GAO’s recommendations and to call your personal attention to areas where open recommendations should be given high priority,” the letter reads. “As of January 24, 2019, the Federal Reserve had 34 open recommendations. Fully implementing these open recommendations could significantly improve the Federal Reserve’s efforts to more effectively oversee risks to consumers and the safety and soundness of the U.S. banking system,” the letter states.
Among the points made by GAO:
- The Federal Reserve’s approach to designing stress test scenarios has not included analysis of whether the current approach, which uses one severe economic scenario rather than several, is sufficient to assess the resilience of the banking system, or proactively considered levels of severity outside of U.S. postwar historical experience.
- GAO said the Fed’s risk management of its stress test models has also not included a focus on the risks associated with the system of models that produce the stress test results, in which the results of component models are combined with assumed or planned capital actions.
- The Federal Reserve has not conducted sensitivity and uncertainty analyses of how its modeling decisions affect overall results, or developed a process for communicating information about uncertainty to the board or a process for the Board and senior staff to articulate tolerance levels for key risks, GAO said.
“We recommended that the Federal Reserve take steps to address the limitations in scenario design and model risk management,” the letter reads.
Under financial data aggregation, the letter points to one “high priority” recommendation, that the Fed engage in “collaborative discussions” with other relevant financial regulators and stakeholders to reach “coordinated public outcomes” on issues surrounding financial account aggregation, particularly through financial technology (fintech) companies.
For the full report, go here.