August 11, 2022

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Macroprudential Oversight: Principles for Evaluating Policies to Assess and Mitigate Risks to Financial System Stability

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<div>GAO is providing a framework for evaluating macroprudential policy—that is, activities designed to assess and mitigate risks to financial system stability. The framework presents six general components of macroprudential policy and 18 principles (see table), as well as related standards, for establishing the foundation of such policy and putting it into operation. Government actors—such as the Financial Stability Oversight Council (FSOC) and its member agencies—are responsible for meeting or contributing to framework principles as they relate to the actors' individual areas of macroprudential responsibility or authority. GAO refers to government actors with collective macroprudential policy responsibilities as the macroprudential entity. GAO Framework for Evaluating Macroprudential Policy Component Principles The macroprudential entity should: Mandate and scope Have a clear mandate Have a scope of responsibilities that extends across the financial system Establish measurable and specific intermediate objectives reflecting the full scope of its responsibilities Governance Have a governance structure promoting willingness to mitigate risks to financial stability in a timely manner Have authorities promoting ability to act consistent with mandate and scope Have transparency requirements promoting the effectiveness, legitimacy, and predictability of macroprudential policy Risk assessment Establish a risk-assessment program corresponding to the scope of the financial system and the entity’s intermediate objectives Identify and analyze potential sources of systemic risk Develop criteria to evaluate significance of risk Establish policies and procedures to conduct systematic risk assessments Risk mitigation Develop a range of macroprudential tools consistent with mandate and scope of responsibilities Develop policies and procedures for conducting risk-mitigation activities Evaluation Evaluate effectiveness of its efforts Document and communicate evaluation findings and promptly remediate issues Data and information Use quality data Develop useful information for decision-making Document information appropriately Establish policies and procedures for sharing data and information Source: GAO. | GAO 21 230SP The Dodd-Frank Wall Street Reform and Consumer Protection Act established FSOC to identify and respond to threats to financial stability in the United States. Other countries have created similar entities, and a growing body of research has developed around these macroprudential structures and approaches. This report presents a principles-based framework to serve as criteria for assessing the financial stability efforts of FSOC and its member agencies. It is intended as a resource for GAO and other auditors, FSOC and its member agencies, and Congress. It also may be useful to others, both domestically and internationally. In developing this framework, GAO reviewed literature on macroprudential policy, prior GAO reports, relevant laws and regulations, and international risk-management guidelines. GAO also interviewed or held discussion groups with representatives of FSOC and its member agencies; international financial stability entities, supreme audit institutions, and international organizations; public interest and industry groups; former regulators and civil servants; and academic and regulatory experts. For more information, contact Michael E. Clements at (202) 512-8678 or ClementsM@gao.gov.</div>

What GAO Found

GAO is providing a framework for evaluating macroprudential policy—that is, activities designed to assess and mitigate risks to financial system stability. The framework presents six general components of macroprudential policy and 18 principles (see table), as well as related standards, for establishing the foundation of such policy and putting it into operation. Government actors—such as the Financial Stability Oversight Council (FSOC) and its member agencies—are responsible for meeting or contributing to framework principles as they relate to the actors’ individual areas of macroprudential responsibility or authority. GAO refers to government actors with collective macroprudential policy responsibilities as the macroprudential entity.

GAO Framework for Evaluating Macroprudential Policy

Component

Principles

The macroprudential entity should:

Mandate and scope
  • Have a clear mandate
  • Have a scope of responsibilities that extends across the financial system
  • Establish measurable and specific intermediate objectives reflecting the full scope of its responsibilities
Governance
  • Have a governance structure promoting willingness to mitigate risks to financial stability in a timely manner
  • Have authorities promoting ability to act consistent with mandate and scope
  • Have transparency requirements promoting the effectiveness, legitimacy, and predictability of macroprudential policy
Risk assessment
  • Establish a risk-assessment program corresponding to the scope of the financial system and the entity’s intermediate objectives
  • Identify and analyze potential sources of systemic risk
  • Develop criteria to evaluate significance of risk
  • Establish policies and procedures to conduct systematic risk assessments
Risk mitigation
  • Develop a range of macroprudential tools consistent with mandate and scope of responsibilities
  • Develop policies and procedures for conducting risk-mitigation activities
Evaluation
  • Evaluate effectiveness of its efforts
  • Document and communicate evaluation findings and promptly remediate issues
Data and information
  • Use quality data
  • Develop useful information for decision-making
  • Document information appropriately
  • Establish policies and procedures for sharing data and information

Source: GAO. | GAO 21 230SP

Why GAO Did This Study

The Dodd-Frank Wall Street Reform and Consumer Protection Act established FSOC to identify and respond to threats to financial stability in the United States. Other countries have created similar entities, and a growing body of research has developed around these macroprudential structures and approaches. This report presents a principles-based framework to serve as criteria for assessing the financial stability efforts of FSOC and its member agencies. It is intended as a resource for GAO and other auditors, FSOC and its member agencies, and Congress. It also may be useful to others, both domestically and internationally.

In developing this framework, GAO reviewed literature on macroprudential policy, prior GAO reports, relevant laws and regulations, and international risk-management guidelines. GAO also interviewed or held discussion groups with representatives of FSOC and its member agencies; international financial stability entities, supreme audit institutions, and international organizations; public interest and industry groups; former regulators and civil servants; and academic and regulatory experts.

For more information, contact Michael E. Clements at (202) 512-8678 or ClementsM@gao.gov.

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