Dive Brief:
- The Government Accountability Office suggests Congress reassess the authority for reviewing annual financial disclosures for public banks that don’t have holding companies, the watchdog said Thursday.
- In a report to the House Financial Services Committee, the GAO said banks that operate without a holding company aren’t subject to review by the Securities and Exchange Commission, and the regulators overseeing those banks don’t assess their disclosures for investors’ benefit.
- Such a reassessment “could help Congress determine whether changes are needed to strengthen investor protection,” the GAO said in its report.
Dive Insight:
Of lenders that failed in spring 2023, First Republic Bank and Signature Bank operated without a holding company, the GAO noted. Shareholders lost some $29 billion in investments in those two banks between the end of 2022 and May 2023.
Those failures occurred shortly after the banks’ financial statement audits were completed. “Some observers raised questions about whether auditors had properly fulfilled their roles and whether the banks had clearly disclosed material information,” the congressional watchdog said.
The House committee asked the GAO to review oversight of public banks’ and bank holding companies’ disclosures of material information and their external auditors’ role.
Eleven public banks – including two with more than $80 billion in assets – are not subject to SEC review because they operate without a bank holding company, the GAO said.
For banks without a holding company, Congress endowed banking regulators with certain functions and duties. But those agencies’ review processes don’t assess disclosures for investors’ benefit, unlike the SEC, the GAO said.
Public companies are required to disclose information “that investors would find important when making investment decisions,” including an annual audited financial statement and descriptions of risk factors and financial performance, the GAO said.
When accounting firms audit public companies, “certain auditor responsibilities – such as evaluating a company’s accounting estimates and ability to continue as a going concern – can be particularly challenging in bank audits,” according to Public Company Accounting Oversight Board staff and auditors, the GAO said.
Bank regulatory agencies don’t assess whether disclosures provide sufficient detail to investors or are materially misleading, the GAO determined. “As a result, investors may have less information available for evaluating risk.”
And investors flagged shortcomings in bank disclosures, such as those related to allowances for credit losses and liquidity, according to the GAO.
The watchdog also recommended the SEC offer guidance to help companies determine whether information related to interest rate and liquidity risks is material. But the SEC “disagreed with the recommendation, noting that staff provides post-disclosure feedback as warranted.”
“GAO maintains SEC should implement the recommendation,” the report said.
Facts Only
* The Government Accountability Office suggested Congress reassess the authority for reviewing annual financial disclosures for public banks without holding companies.
* Banks operating without a holding company are not subject to review by the Securities and Exchange Commission.
* Regulators overseeing banks without a holding company do not assess disclosures for investor benefit.
* Eleven public banks, including two with over $80 billion in assets, are not subject to SEC review due to operating without a bank holding company.
* Banking regulators do not assess whether disclosures provide sufficient detail or are materially misleading to investors.
* Investors flagged shortcomings in bank disclosures related to credit loss allowances and liquidity.
* Public companies must disclose information investors need for investment decisions, including audited financial statements and risk factors.
* Auditor responsibilities in bank audits can be challenging, particularly regarding accounting estimates and going concern.
* The GAO recommended the SEC offer guidance on whether interest rate and liquidity risk information is material to companies.
Executive Summary
The Government Accountability Office suggested that Congress reassess the authority for reviewing annual financial disclosures for public banks that do not have holding companies. The GAO reported that banks operating without a holding company are currently not subject to review by the Securities and Exchange Commission, and the regulators overseeing these banks do not assess disclosures for investor benefit. This assessment could help Congress determine if changes are necessary to strengthen investor protection.
The observation is contextualized by the fact that two lenders that failed in spring 2023, First Republic Bank and Signature Bank, operated without a holding company, and shareholders lost approximately $29 billion in investments in those institutions between late 2022 and May 2023. Observers raised questions regarding whether auditors properly fulfilled their roles or whether banks disclosed material information.
The House Financial Services Committee requested the GAO to review the oversight of disclosures for public banks and bank holding companies, as well as the role of external auditors. While public companies are required to disclose information relevant to investment decisions, including audited financial statements and risk factors, banking regulatory agencies do not assess whether these disclosures contain sufficient detail or are materially misleading regarding investor risk.
Full Take
The structural gap identified by the GAO reveals a fundamental divergence in regulatory philosophy between securities oversight (SEC) and banking supervision. The system relies on dual layers of accountability: one focused on investor protection via disclosure, and another focused on systemic financial stability via bank regulation. When banks lack a holding company structure, this separation leads to an information vacuum where financial stability review exists without the comprehensive investor-centric scrutiny applied by the SEC.
The pattern suggests that regulatory expertise is siloed. While public companies face scrutiny regarding what they disclose to investors—requiring detailed risk factor disclosures and audited statements—the regulators overseeing bank operations do not share the mandate to evaluate whether that information adequately serves the end investor. This divergence allowed critical issues, such as those related to credit loss allowances and liquidity flagged by investors following bank failures, to remain inadequately assessed by banking agencies.
The recommendation for the SEC to implement guidance on materiality concerning interest rate and liquidity risks highlights a specific area where information asymmetry harms agency. The system is designed around distinct mandates; if the intent is holistic investor protection, the jurisdictional separation based on holding company status creates a vulnerability where critical risk signals are filtered or missed by the agencies responsible for day-to-day banking oversight. This challenges the assumption that separating structural entities inherently separates regulatory oversight effectively.
Bridge Questions: If regulators lack the mandate to assess disclosures for investor benefit, what specific mechanisms can bridge the gap between prudential regulation and securities disclosure standards? How might a unified framework address auditor responsibilities across both banking and public company contexts? What historical precedents exist where such jurisdictional splits have led to demonstrable failures in risk assessment following financial distress?
Sentinel — Human
The text functions as a factual summary of a government report concerning bank disclosure oversight, characterized by dense, official sourcing and a clear focus on regulatory mechanisms.