US GAO Flags Gaps in Bank Disclosure Oversight

A new US Government Accountability Office (GAO) report finds that gaps in federal oversight of bank financial disclosures may be leaving investors exposed, after three of the 30 largest US banks collapsed in spring 2023 shortly after their audits were completed. 

“Independent audits of financial statements and management disclosures of material information are critical to efficient functioning of public markets because they help investors make informed decisions,” GAO writes. “Federal oversight of these audits and disclosures provides additional assurance that companies and auditors are meeting their obligations to investors.”

GAO found that 11 public banks, including two with more than $80 billion in assets, fall outside Securities and Exchange Commission (SEC) review because they lack a bank holding company structure, leaving disclosure oversight to banking regulators instead. Critically, GAO found these regulators’ review processes, unlike the SEC’s, “do not assess disclosures for investors’ benefit.” Two of the three failed banks in spring 2023 operated without a holding company, and shareholders “lost more than $29 billion” in those banks between late 2022 and May 2023.

Reviewing 2021 and 2022 disclosures, GAO found each failed bank described setting interest rate or liquidity risk thresholds but “did not disclose when thresholds were breached or how they addressed the breaches.” GAO recommends Congress consider reassessing disclosure review authority for banks without holding companies, and that SEC issue guidance on materiality for risk-tolerance breaches. The SEC disagreed, citing existing mechanisms for providing post-disclosure feedback, but GAO “maintains SEC should implement the recommendation.”