GAO urges Congress and SEC to tighten oversight of public bank disclosures

The Government Accountability Office (GAO) issued a report recommending that Congress reconsider the authority to review annual financial disclosures of publicly traded banks that lack a bank-holding company. The recommendation targets the 11 such banks, including two with more than $80 billion in assets, whose disclosures are currently reviewed by banking regulators rather than the Securities and Exchange Commission (SEC).

GAO's analysis of 2021 and 2022 disclosures for the three banks that failed in spring 2023 found that while each described thresholds for interest-rate and liquidity risk, they omitted details on threshold breaches and remedial actions. Shareholders of the two failed banks without holding companies lost more than $29 billion in investments between the end of 2022 and May 2023. GAO noted that SEC staff have not issued public guidance on assessing the materiality of such risk-related breaches, a gap that could impede investors' ability to evaluate bank stability.

In addition to the congressional reassessment, GAO recommends that the SEC Chairman ensure the Director of the Division of Corporation Finance provides informal staff guidance - through Corporation Finance Interpretations or another public source - on how companies should determine whether breaches of interest-rate and liquidity risk tolerances constitute material information for investors, especially amid rising rates. The SEC responded that staff already provide post-disclosure feedback as warranted, but GAO maintains that formal guidance is needed.

The report underscores that banking regulators' review processes differ from the SEC's investor-focused approach, potentially leaving investors without adequate protection. GAO's recommendations aim to align oversight of public-bank disclosures with the standards applied to other public companies, thereby strengthening transparency and market confidence.