GAO Issues Report: Priority Open Recommendations – Federal Deposit Insurance Corporation

WASHINGTON, May 22 -- The Government Accountability Office has released a report (GAO-24-107275) on May 7, 2024, entitled "Priority Open Recommendations: Federal Deposit Insurance Corporation."

Here are excerpts of summaries associated with the report:

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What GAO Found

In August 2023, GAO identified two priority recommendations for the Federal Deposit Insurance Corporation (FDIC). These recommendations call for the following:

* Developing a coordination mechanism with other federal financial regulators to identify and address blockchain risks.

* Collaborating with other financial regulators to communicate with banks that have third-party relationships with financial technology lenders about using alternative data in underwriting.

As of May 2024, FDIC had not implemented these priority recommendations. We are not adding any new priority recommendations this year.

Fully implementing these open recommendations could significantly improve FDIC's efforts to oversee more effectively the safety and soundness of the U.S. banking system and risks to consumers.

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Why GAO Did This Study

Priority open recommendations are the GAO recommendations that warrant priority attention from heads of key departments or agencies because their implementation could save large amounts of money; improve congressional and/or executive branch decision-making on major issues; eliminate mismanagement, fraud, and abuse; or ensure that programs comply with laws and funds are legally spent, among other benefits. Since 2015, GAO has sent letters to selected agencies to highlight the importance of implementing such recommendations.

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April 30, 2024

The Honorable Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation, 550 17th St., N.W., Washington, D.C. 20429

Priority Open Recommendations: Federal Deposit Insurance Corporation

Dear Chairman Gruenberg:

The purpose of this letter is to provide an update on the overall status of the Federal Deposit Insurance Corporation's (FDIC) implementation of our recommendations and to call your continued personal attention to areas where open recommendations should be given high priority.1 In November 2023, we reported that, government-wide, 75 percent of our recommendations made 4 years ago were implemented.2 FDIC's recommendation implementation rate was 67 percent. As of April 2024, FDIC had 12 open recommendations. Fully implementing these open recommendations could significantly improve FDIC's efforts to oversee more effectively the safety and soundness of the U.S. banking system and risks to consumers.

In our August 2023 letter, we noted that two of our open recommendations were priority recommendations. Since that time, FDIC has not implemented these recommendations. We ask that you continue to direct your attention to these open priority recommendations, which are related to blockchain technology and financial technology (fintech). We are not adding any new priority recommendations this year. (See the enclosure for the list of recommendations.)

The two priority recommendations fall into the following two areas:

Blockchain technology. Volatility, bankruptcies, and instances of fraud in the crypto asset markets illustrate the harm consumers and investors may suffer without adequate protections. We recommended that FDIC and other financial regulators jointly establish or adapt an existing formal coordination mechanism to identify and address blockchain-related risks. FDIC neither agreed nor disagreed with the recommendation but noted it coordinated through the Financial Stability Oversight Council, the President's Working Group, and other venues. In February 2024, FDIC reiterated that it has continued to participate in coordination mechanisms, domestically and internationally, to address risks of banks engaging in blockchain-based crypto-asset related activities and to provide regulatory responses as needed. However, the regulators' coordination efforts have not always addressed risks posed by crypto assets in a timely manner. By implementing our recommendation, FDIC and other financial regulators would be able to collectively identify risks posed by blockchain-related products and services and develop and implement a regulatory response in a timely manner.

Financial technology. Fintech lenders may analyze large amounts of alternative data on borrower characteristics, such as information from bank accounts, when determining borrowers' creditworthiness. We recommended that the FDIC, other federal banking regulators, and the Consumer Financial Protection Bureau communicate the appropriate use of alternative data in the underwriting process with banks that engage in third-party relationships with fintech lenders. Implementing our priority recommendation in this area could better position federally regulated banks to manage the risks associated with partnering with fintech lenders that use these data.

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In April 2023, we issued our biennial update to our High-Risk List. This list identifies government operations with greater vulnerabilities to fraud, waste, abuse, and mismanagement. It also identifies the need for transformation to address economy, efficiency, or effectiveness challenges.3 One of our high-risk areas--modernizing the U.S. financial regulatory system--relates directly to FDIC. Specifically, we urge your attention to the effective and efficient oversight of financial institutions and activities.

In addition, several other government-wide high-risk areas also have direct implications for FDIC and its operations. These areas include (1) improving the management of IT acquisitions and operations, (2) strategic human capital management, (3) managing federal real property, (4) ensuring the cybersecurity of the nation, and (5) government-wide personnel security clearance process.

We urge your attention to these government-wide, high-risk issues related to FDIC. Progress on high-risk issues has been possible through the concerted actions and efforts of Congress, the Office of Management and Budget, and the leadership and staff in agencies, including within FDIC. In March 2022, we issued a report on key practices to successfully address high-risk areas, which can be a helpful resource as your agency continues to make progress to address high-risk issues.4

In addition to your continued attention on these issues, Congress plays a key role in providing oversight and maintaining focus on our recommendations to ensure they are implemented and produce their desired results. Legislation enacted in December 2022 includes a provision for GAO to identify any additional congressional oversight actions that can help agencies implement priority recommendations and address any underlying issues relating to such implementation.5

Congress can use various strategies to address our recommendations, such as incorporating them into legislation. Congress can also use its oversight processes to incentivize FDIC to act on our recommendations and monitor its progress. For example, Congress can hold hearings focused on FDIC's progress in implementing GAO's priority recommendations or take other actions to provide incentives for FDIC to act. As relevant here, Congress held hearings in 2023 during which federal banking regulators testified about crypto asset and fintech issues, which are topic areas related to GAO's priority recommendations. Congress also plays a key role in addressing any underlying issues related to the implementation of these recommendations. For example, Congress can pass legislation providing the FDIC explicit authority to implement a recommendation or requiring FDIC to take certain actions to implement a recommendation.

Copies of this report are being sent to the Director of the Office of Management and Budget and the appropriate congressional committees. In addition, the report will be available on the GAO website at Priority Open Recommendation Letters | U.S. GAO.

I appreciate FDIC's continued commitment to these important issues. If you have any questions or would like to discuss any of the issues outlined in this letter, please do not hesitate to contact me or Daniel Garcia-Diaz, Managing Director, Financial Markets and Community Investment, at [email protected] or 202-512-8678. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Our teams will continue to coordinate with your staff on all 12 open recommendations, as well as those recommendations in the high-risk areas for which FDIC has a leading role. Thank you for your attention to these matters.

Sincerely,

Gene L. Dodaro, Comptroller General of the United States

Enclosure

cc: The Honorable Shalanda Young, Director, Office of Management and Budget

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1/ Priority recommendations are those that we believe warrant priority attention from heads of key departments or agencies. They are highlighted because, upon implementation, they may significantly improve government operations--for example, by realizing large dollar savings; eliminating mismanagement, fraud, and abuse; or making progress toward addressing a high-risk or duplication issue.

2/ GAO, Performance and Accountability Report: Fiscal Year 2023, GAO-24-900483 (Washington, D.C.: Nov. 15, 2023).

3/ GAO, High-Risk Series: Efforts Made to Achieve Progress Need to Be Maintained and Expanded to Fully Address All Areas, GAO-23-106203 (Washington, D.C.: Apr. 20, 2023).

4/ GAO, High-Risk Series: Key Practices to Successfully Address High-Risk Areas and Remove Them from the List, GAO-22-105184 (Washington, D.C.: Mar. 3, 2022).

5/ James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, Pub. L. No. 117-263, Sec. 7211(a)(2), 136 Stat. 2395, 3668 (2022); H.R. Rep. No. 117-389 (2022) (accompanying Legislative Branch Appropriations Act, H.R. 8237, 117th Cong. (2022)).

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Chart, footnotes and the full text of the GAO report are posted at: https://www.gao.gov/assets/gao-24-107275.pdf

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