Equity Hedging

This report (1) provides information on the process the Office of the Comptroller of the Currency (OCC) used to make its decision to allow banks to acquire equities and (2) discusses whether the decision was consistent with the way in which OCC generally makes and communicates its decisions. The report also contains a legal decision on whether national banks are authorized to buy equity securities to hedge their equity derivative transactions under existing law. OCC has discretion to determine how it will convey its decisions, but the criteria it uses to determine when and whether to publish its decisions are unclear. For the equity hedging decision, OCC first determined that banks may hold equities to hedge equity derivative transactions under the National Bank Act. OCC then decided that the requesting banks would not be allowed to engage in equity hedging without first obtaining supervisory staff approval of their activities and risk management systems. This enabled OCC to ensure that each bank had the necessary risk management systems in place to monitor risks and prevent speculation. OCC did not publish its interpretation until a September 2000 congressional inquiry questioned its decision. In making decisions interpreting the National Bank Act, OCC has published written interpretive letters. OCC has been criticized for using supervisory approval to avoid public scrutiny of its decision and has left itself open to questions not only about the process used in this case but also about the criteria it uses to decide when to publish its interpretive decisions. Helping Congress and other banking regulators understand OCC's criteria could help mitigate these concerns. GAO agrees with OCC's conclusion that the four national banks have authority under the National Bank Act to own equities to hedge their equity derivative transactions. GAO also agrees with OCC's conclusion that those limitations do not prohibit the four banks from maintaining the stock hedges as an incidental activity.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: