The U.S. Government Accountability Office has found that financial regulators discovered risk management weaknesses at financial firms before the financial crisis took hold, but didn’t press hard for companies to correct them.

The GAO reports that the examination materials it reviewed for a limited number of institutions showed that regulators identified numerous weaknesses in the institutions’ risk management systems before the financial crisis began. For example, regulators identified inadequate oversight of institutions’ risks by senior management.

“However, the regulators said that they did not take forceful actions to address these weaknesses, such as changing their assessments, until the crisis occurred because the institutions had strong financial positions and senior management had presented the regulators with plans for change,” it notes.

The GAO says that regulators also identified weaknesses in models used to measure and manage risk but may not have taken action to resolve these weaknesses. And they identified numerous stress testing weaknesses at several large institutions, but the GAO’s limited review “did not identify any instances in which weaknesses prompted regulators to take aggressive steps to push institutions to better understand and manage risks.”

The report notes that some aspects of the regulatory system may have hindered regulators’ oversight of risk management, including the fact that no one regulator systematically looks across institutions to identify factors that could affect the overall financial system. Also, regulators’ oversee risk management at the level of the legal entity within a holding company, while large entities manage risk on an enterprisewide basis or by business lines that cut across legal entities. “As a result, these regulators may have only a limited view of institutions’ risk management or their responsibilities and activities may overlap with those of holding company regulators,” it said.

IE