The US Government Accountability Office (GAO) has urged the Federal Deposit Insurance Corporation (FDIC) to do more to prevent bank examiners from treading lightly in their oversight activity in hopes of winning better-paying jobs at those same firms upon leaving their government post.
The GAO points to a heightened risk of such “regulatory capture,” which it sees as a significant threat to the integrity and efforts of critical federal agencies. “For example, banking regulator employees who are captured may make examination decisions that inappropriately benefit the banks they regulate by overlooking risky practices or not imposing appropriate penalties,” the report argued. The report also suggested implementing policies and procedures to thwart regulatory capture, to include assuring:
• Regulatory decisions and rationale that are transparent to lower-level staff, with appeal rights for lower-level staff who believe a decision is biased
• Documentation of the full decision-making process for consequential decisions, including the retention of divergent views and the rationale or evidence used to resolve any divergent views
• Rotation of staff in key decision-making roles, so as to mitigate the impact of any one employee
• Controls around management to ensure they cannot override internal controls relevant to capture
• Documentation of contacts with the regulated industry (both routine regulation-related contact and unsolicited contact by industry that attempt to influence the regulator
Additionally, the GAO suggests these measures could be effective:
• Prohibiting employees from holding a direct financial interest in a regulated entity, including requiring recusals for those who are exposed to the conflict of interest
• Monitoring employees’ financial holdings through disclosure requirements
• Instituting cooling-off periods—which bar certain employees from employment at or representation before their former agencies for specified periods of time—or other post-employment restrictions
Perception of regulatory capture in Germany featured largely in the collapse of Wirecard, heightening concerns of capture in other jurisdictions. We thus expect to see greater attention to regulatory capture in the US an elsewhere.
In response to the study, Doreen Eberley, FDIC Risk Management Division Supervision Director said the regulator has several effective controls in place that mitigate the risk of regulatory capture. It is unclear why the GAO has questioned the sufficient efficacy of such controls, or whether they are producing desired outcomes as effectively as intended.